ACM Research, Inc. 10-K

Item 8. Financial Statements and Supplementary Data INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Consolidated Financial Statements 68 Report of Independent Registered Public Accounting Firm 69 Consolidated Balance Sheets as of December 31, 2020 and 2019 72 Consolidated Statements of Operations and Comprehensive Income for the Years ended December 31, 2020, 2019 and 2018 73 Consolidated Statements of Changes in Stockholders’ Equity for the Years ended December 31, 2020, 2019 and 2018 74 Consolidated Statements of Cash Flows for the Years ended December 31, 2020, 2019 and 2018 75 Notes to Consolidated Financial Statements 76 68 Table of Contents Report of Independent Registered Public Accounting Firm Shareholders and Board of Directors ACM Research, Inc. Fremont, California Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of ACM Research, Inc. and subsidiaries (the “Company”) as of December 31, 2020 and 2019, the related consolidated statements of operations and comprehensive income, changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2020, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020 , in conformity with accounting principles generally accepted in the United States of America. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company's internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and our report dated March 1, 2021 expressed an unqualified opinion thereon. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. 69 Table of Contents Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Revenue recognition on sale of single-wafer wet cleaning equipment As described in Note 2 and Note 3 to the consolidated financial statements, the Company derives revenue principally from the sale of single-wafer wet cleaning equipment. Revenue of sale of single-wafer wet cleaning equipment is recognized when the Company satisfies performance obligations by transferring the control over products promised in the contract with customer, which is the point of time when the equipment has been demonstrated to meet the customer’s predetermined specifications and is accepted by the customer. For revenue contracts that provide for a lapsing customer acceptance period, the Company recognizes revenue as of the earlier of the expiration of the lapsing acceptance period or customer acceptance. We identified the timing of revenue recognition as a critical audit matter because the Company’s revenue contracts have a variety of specifications, payment terms and customer acceptance clauses. Auditing these elements involved especially challenging auditor judgment in evaluating the appropriateness of the Company’s revenue recognition. 70 Table of Contents The primary procedures we performed to address this critical audit matter included: • Testing the design and operating effectiveness of controls over revenue recognition including management’s assessment of revenue contract terms. • Evaluating management’s accounting policies and practices including the reasonableness of management’s judgments and assumptions relating to the Company’s revenue recognition including evaluation of customer acceptance clauses. • Testing a sample of revenue contracts and underlying order documents to evaluate appropriateness of management’s revenue recognition including assessment of customer acceptance clauses. Accounting for Financial Liability As described in Note 16 to the consolidated financial statements, in preparation for the STAR IPO, the Company entered into two agreements relating to outstanding obligations and agreed to deliver certain consideration. The Company accounted for this consideration as a financial liability and applied fair value option to measure the consideration. On July 29, 2020 the Company entered into an amended agreement under which, in settlement of the financial liability, the Company issued a warrant to purchase shares of Class A common stock. The financial liability was remeasured to fair value as of July 29, 2020 and was retired with the issuance of the warrant. We identified the accounting and measurement of the financial liability as a critical audit matter. Auditing the Company’s accounting assessment of the financial liability involved especially challenging and complex auditor judgment due to the nature and extent of specialized skill and knowledge required. The primary procedures we performed to address this critical audit matter included: • Testing the design and operating effectiveness of controls over management’s assessment of accounting and measurement of the financial liability. • Evaluating the reasonableness of management’s assumptions in determining the fair value of the financial liability. • Utilizing personnel with specialized knowledge and skill in accounting to evaluate the appropriateness of management’s application of accounting guidance for complex financial instruments. BDO China Shu Lun Pan Certified Public Accountants LLP We have served as the Company's auditor since 2015. Shenzhen, The People’s Republic of China March 1, 2021 71 Table of Contents ACM RESEARCH, INC. Consolidated Balance Sheets (In thousands, except per share data) December 31, 2020 2019 Assets Current assets: Cash and cash equivalents $ 71,766 $ 58,261 Restricted cash - 59,598 Trading securities (note 15) 28,239 - Accounts receivable, less allowance for doubtful accounts of $ 0 as of December 31, 2020 and December 31, 2019 (note 4) 56,441 31,091 Other receivables 9,679 2,603 Inventories (note 5) 88,639 44,796 Prepaid expenses 5,892 2,047 Total current assets 260,656 198,396 Property, plant and equipment, net (note 6) 8,192 3,619 Land use right, net (note 7) 9,646 - Operating lease right-of-use assets, net (note 11) 4,297 3,887 Intangible assets, net 554 344 Deferred tax assets (note 21) 11,076 5,331 Long-term investments (note 14) 6,340 5,934 Other long-term assets (note 8) 40,496 192 Total assets 341,257 217,703 Liabilities, Redeemable Non-controlling Interests and Stockholders’ Equity Current liabilities: Short-term borrowings (note 9) 26,147 13,753 Current portion of long-term borrowings (note 12) 1,591 - Accounts payable 35,603 13,262 Advances from customers 17,888 9,129 Deferred revenue 1,343 - Income taxes payable (note 21) 31 3,129 FIN-48 payable (note 21) 83 - Other payables and accrued expenses (note 10) 18,805 12,874 Current portion of operating lease liability (note 11) 1,417 1,355 Total current liabilities 102,908 53,502 Long-term borrowings (note 12) 17,979 - Long-term operating lease liability (note 11) 2,880 2,532 Deferred tax liability (note 21) 1,286 - Other long-term liabilities (note 13) 8,034 4,186 Total liabilities 133,087 60,220 Commitments and contingencies (note 23) Redeemable non-controlling interests (note 19) - 60,162 Stockholders’ equity: Common stock – Class A, par value $ 0.0001 : 50,000,000 shares authorized as of December 31, 2020 and December 31, 2019; 16,896,693 shares issued and outstanding as of December 31, 2020 and 16,182,151 shares issued and outstanding as of December 31, 2019 (note 18) 2 2 Common stock–Class B, par value $ 0.0001 : 2,409,738 shares authorized as of December 31, 2020 and December 31, 2019; 1,802,606 shares issued and outstanding as of December 31, 2020 and 1,862,608 shares issued and outstanding as of December 31, 2019 (note 18) - - Additional paid in capital 102,004 83,487 Accumulated surplus 34,287 15,507 Accumulated other comprehensive income (loss) 4,857 ( 1,675 ) Total ACM Research, Inc. stockholders’ equity 141,150 97,321 Non-controlling interests 67,020 - Total stockholders’ equity 208,170 97,321 Total liabilities, redeemable non-controlling interests, and stockholders’ equity $ 341,257 $ 217,703 The accompanying notes are an integral part of these consolidated financial statements. 72 Table of Contents ACM RESEARCH, INC. Consolidated Statements of Operations and Comprehensive Income (In thousands, except per share data) Year Ended December 31, 2020 2019 2018 Revenue (note 3) $ 156,624 $ 107,524 $ 74,643 Cost of revenue 87,025 56,870 40,194 Gross profit 69,599 50,654 34,449 Operating expenses: Sales and marketing 16,773 11,902 9,611 Research and development 19,119 12,900 10,380 General and administrative 12,215 8,061 7,987 Total operating expenses, net 48,107 32,863 27,978 Income from operations 21,492 17,791 6,471 Interest income 897 333 29 Interest expense ( 982 ) ( 745 ) ( 498 ) Change in fair value of financial liability (note 16) ( 11,964 ) - - Unrealized gain on trading securities 12,574 - - Other income (expense), net ( 3,377 ) 1,393 1,255 Equity income in net income of affiliates 655 168 123 Income before income taxes 19,295 18,940 7,380 Income tax benefit (expense) (note 21) 2,382 518 ( 806 ) Net income 21,677 19,458 6,574 Less: Net income attributable to non-controlling interests and redeemable non-controlling interests 2,897 564 - Net income attributable to ACM Research, Inc. $ 18,780 $ 18,894 $ 6,574 Comprehensive income: Net income 21,677 19,458 6,574 Foreign currency translation adjustment 10,493 ( 899 ) ( 979 ) Comprehensive Income 32,170 18,559 5,595 Less: Comprehensive income attributable to non-controlling interests and redeemable non-controlling interests 6,858 483 - Comprehensive income attributable to ACM Research, Inc. $ 25,312 $ 18,076 $ 5,595 Net income attributable to ACM Research, Inc. per common share (note 2): Basic $ 1.03 $ 1.12 $ 0.42 Diluted $ 0.89 $ 0.99 $ 0.37 Weighted average common shares outstanding used in computing per share amounts (note 2): Basic 18,233,361 16,800,623 15,788,460 Diluted 21,183,469 19,135,497 17,912,105 The accompanying notes are an integral part of these consolidated financial statements. 73 Table of Contents ACM RESEARCH, INC. Consolidated Statement of Changes in Stockholders’ Equity (In thousands, except per share data) Common Stock Class A Common Stock Class B Shares Amount Shares Amount Additional Paid- in Capital Accumulated Surplus (Deficit) Accumulated Other Comprehensive Income (Loss) Non-controlling interests Total Stockholders’ Equity Balance at December 31, 2017 12,935,546 $ 1 2,409,738 $ - $ 49,695 $ ( 9,961 ) $ 122 $ - $ 39,857 Net income attributable to ACM Research, Inc. - - - - - 6,574 - - 6,574 Foreign currency translation adjustment - - - - - - ( 979 ) - ( 979 ) Exercise of stock options 265,952 - - - 528 - - - 528 Stock-based compensation - - - - 3,363 - - - 3,363 Conversion of Class B common stock to Class A common stock 511,315 - ( 511,315 ) - - - - - - Exercise of stock warrants issued to SMC 397,502 - - - 2,981 - - - 2,981 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. - - - - - 18,894 - - 18,894 Foreign currency translation adjustment - - - - - - ( 818 ) - ( 818 ) Exercise of stock options 195,297 - - - 317 - - - 317 Cancellation of stock options ( 576 ) - ( 576 ) Stock-based compensation - - - - 3,572 - - - 3,572 Issuance of Class A common stock in connection with public offering 2,053,572 1 - - 26,434 - - - 26,435 Share repurchase ( 214,286 ) ( 2,827 ) - ( 2,827 ) Conversion of Class B common stock to Class A common stock 35,815 - ( 35,815 ) - - - - - - Exercise of stock warrants issued to HFG 1,438 - - - - - - - - Balance at December 31, 2019 16,182,151 $ 2 1,862,608 $ - $ 83,487 $ 15,507 $ ( 1,675 ) $ - $ 97,321 Net income - - - - - 18,780 - 2,254 21,034 Foreign currency translation adjustment - - - - - - 6,532 4,808 11,340 Exercise of stock options 832,504 - - - 2,745 - - - 2,745 Stock-based compensation - - - - 5,628 - - - 5,628 Conversion of class B common shares to Class A common shares 60,002 - ( 60,002 ) - - - - - - Share cancellation (note 16) ( 242,681 ) - - - ( 9,715 ) - - - ( 9,715 ) Issuance of warrants (note 16) - - - - 19,859 - - - 19,859 Exercise of stock warrants 64,717 - - - - - - - Reclassification of redeemable non-controlling interest - - - - - - - 59,958 59,958 Balance at December 31, 2020 16,896,693 2 1,802,606 - 102,004 34,287 4,857 67,020 208,170 The accompanying notes are an integral part of these consolidated financial statements. 74 Table of Contents ACM RESEARCH, INC. Consolidated Statements of Cash Flows (In thousands) Year Ended December 31, 2020 2019 2018 Cash flows from operating activities: Net income $ 21,677 $ 19,458 $ 6,574 Adjustments to reconcile net income from operations to net cash used in operating activities Depreciation and amortization 1,055 788 417 Loss on disposals of property, plant and equipment 25 294 - Equity income in net income of affiliates ( 655 ) ( 168 ) ( 123 ) Unrealized gain on trading securities ( 12,574 ) - - Deferred income taxes ( 4,085 ) ( 3,719 ) ( 405 ) Stock-based compensation 5,628 3,572 3,363 Change in fair value of financial liability 11,964 - - Net changes in operating assets and liabilities: Accounts receivable ( 22,085 ) ( 6,961 ) 883 Other receivables ( 6,882 ) 891 ( 1,171 ) Inventory ( 40,768 ) ( 6,658 ) ( 24,083 ) Prepaid expenses ( 3,518 ) ( 83 ) ( 1,494 ) Other long-term assets ( 99 ) ( 151 ) 44 Accounts payable 21,275 ( 3,058 ) 9,825 Advances from customers 8,578 705 8,316 Income tax payable ( 3,137 ) 1,952 1,149 FIN-48 payable ( 83 ) - - Other payables and accrued expenses 5,236 2,865 4,954 Deferred revenue 1,343 - - Other long-term liabilities 3,558 ( 324 ) ( 1,340 ) Net cash flow (used in) provided by operating activities ( 13,547 ) 9,403 6,909 Cash flows from investing activities: Purchase of property and equipment ( 5,211 ) ( 971 ) ( 1,830 ) Purchase of intangible assets ( 324 ) ( 154 ) ( 241 ) Purchase of land-use-right ( 9,744 ) - - Purchase of trading securities ( 15,020 ) - - Prepayment for property ( 40,206 ) - - Investments in unconsolidated affiliates - ( 4,406 ) - Dividends from unconsolidated affiliates 555 - - Net cash used in investing activities ( 69,950 ) ( 5,531 ) ( 2,071 ) Cash flows from financing activities: Proceeds from short-term borrowings 32,573 18,423 17,726 Repayments of short-term borrowings ( 20,234 ) ( 14,005 ) ( 13,131 ) Proceeds from long-term borrowings 19,699 - - Repayments of long-term borrowings ( 129 ) - - Repayments of notes payable ( 1,820 ) - - Proceeds from stock option exercise to common stock 2,745 317 528 Proceeds from issuance of Class A common stock in connection with public offering, net of direct issuance expenses of $ 2,287 - 26,434 - Payment for repurchase of Class A common stock - ( 2,827 ) - Payment for cancellation of stock option - ( 576 ) - Proceeds from issuance of common stock to redeemable Non-controlling interest - 59,679 - Net cash provided by financing activities 32,834 87,445 5,123 Effect of exchange rate changes on cash, cash equivalents and restricted cash $ 4,570 $ ( 582 ) $ ( 518 ) Net increase (decrease) in cash, cash equivalents and restricted cash $ ( 46,093 ) $ 90,735 $ 9,443 Cash, cash equivalents and restricted cash at beginning of period 117,859 27,124 17,681 Cash, cash equivalents and restricted cash at end of period $ 71,766 $ 117,859 $ 27,124 Supplemental disclosure of cash flow information: Interest paid $ 982 $ 745 $ 498 Cash paid for income taxes $ 4,971 $ 1,156 $ - Reconciliation of cash, cash equivalents and restricted cash in condensed consolidated statements of cash flows: Cash and cash equivalents 71,766 58,261 27,124 Restricted cash - 59,598 - Cash, cash equivalents and restricted cash $ 71,766 $ 117,859 $ 27,124 Non-cash financing activities: Warrant conversion to common stock $ 399 $ 9 $ 3,079 Share cancellation, (note 16) $ 9,715 $ - $ - Issuance of warrant for settlement of financial liability, (note 16) $ 19,859 $ - $ - The accompanying notes are an integral part of these consolidated financial statements. 75 Table of Contents ACM RESEARCH, INC. Notes to Consolidated Financial Statements (in thousands, except share and per share data) NOTE 1 – DESCRIPTION OF BUSINESS ACM Research, Inc. (“ACM”) and its subsidiaries (collectively with ACM, the “Company”) develop, manufacture and sell single-wafer wet cleaning equipment used to improve the manufacturing process and yield for advanced integrated chips. The Company markets and sells its single-wafer wet-cleaning equipment, under the brand name “Ultra C,” based on the Company’s proprietary Space Alternated Phase Shift (“SAPS”) and Timely Energized Bubble Oscillation (“TEBO”) technologies. These tools are designed to remove random defects from a wafer surface efficiently, without damaging the wafer or its features, even at increasingly advanced process nodes. ACM was incorporated in California in 1998, and it initially focused on developing tools for manufacturing process steps involving the integration of ultra low-K materials and copper. The Company’s early efforts focused on stress-free copper-polishing technology, and it sold tools based on that technology in the early 2000s. In 2006 the Company established its operational center in Shanghai in the People’s Republic of China (the “PRC”), where it operates through ACM’s subsidiary ACM Research (Shanghai), Inc. (“ACM Shanghai”). ACM Shanghai was formed to help establish and build relationships with integrated circuit manufacturers in the PRC, and the Company initially financed its Shanghai operations in part through sales of non-controlling equity interests in ACM Shanghai. In 2007 the Company began to focus its development efforts on single-wafer wet-cleaning solutions for the front-end chip fabrication process. The Company introduced its SAPS megasonic technology, which can be applied in wet wafer cleaning at numerous steps during the chip fabrication process, in 2009. It introduced its TEBO technology, which can be applied at numerous steps during the fabrication of small node two-dimensional conventional and three-dimensional patterned wafers, in March 2016. The Company has designed its equipment models for SAPS and TEBO solutions using a modular configuration that enables it to create a wet-cleaning tool meeting the specific requirements of a customer, while using pre-existing designs for chamber, electrical, chemical delivery and other modules. In August 2018, the Company introduced its Ultra-C Tahoe wafer cleaning tool, which can deliver high cleaning performance with significantly less sulfuric acid than typically consumed by conventional high-temperature single-wafer cleaning tools. Based on its electro-chemical plating (“ECP”) technology, the Company introduced in March 2019 its Ultra ECP AP, or “Advanced Packaging,” tool for bumping, or applying copper, tin and nickel to semiconductor wafers at the die-level, and its Ultra ECP MAP, or “Multi-Anode Partial Plating,” tool to deliver advanced electrochemical copper plating for copper interconnect applications in front-end wafer fabrication processes. The Company also offers a range of custom-made equipment, including cleaners, coaters and developers, to back-end wafer assembly and packaging factories, principally in the PRC. In 2011 ACM Shanghai formed a wholly owned subsidiary in the PRC, ACM Research (Wuxi), Inc. (“ACM Wuxi”), to manage sales and service operations. In November 2016 ACM redomesticated from California to Delaware pursuant to a merger in which ACM Research, Inc., a California corporation, was merged into a newly formed, wholly owned Delaware subsidiary, also named ACM Research, Inc. In June 2017 ACM formed a wholly owned subsidiary in Hong Kong, CleanChip Technologies Limited (“CleanChip”), to act on the Company’s behalf in Asian markets outside the PRC by, for example, serving as a trading partner between ACM Shanghai and its customers, procuring raw materials and components, performing sales and marketing activities, and making strategic investments. In August 2017 ACM purchased 18.77 % of ACM Shanghai’s equity interests held by Shanghai Science and Technology Venture Capital Co., Ltd. On November 8, 2017, ACM purchased the remaining 18.36 % of ACM Shanghai’s equity interest held by third parties, Shanghai Pudong High-Tech Investment Co., Ltd. (“PDHTI”) and Shanghai Zhangjiang Science & Technology Venture Capital Co., Ltd. (“ZSTVC”). At December 31, 2017, ACM owned all of the outstanding equity interests of ACM Shanghai, and indirectly through ACM Shanghai, owned all of the outstanding equity interests of ACM Wuxi. 76 Table of Contents ACM RESEARCH, INC. Notes to Consolidated Financial Statements (in thousands, except share and per share data) On September 13, 2017, ACM effectuated a 1-for-3 reverse stock split of Class A and Class B common stock. Unless otherwise indicated, all share numbers, per share amount, share prices, exercise prices and conversion rates set forth in these notes and the accompanying consolidated financial statements have been adjusted retrospectively to reflect the reverse stock split. On November 2, 2017, the Registration Statement on Form S-1 (File No. 333- 220451) for ACM’s initial public offering of Class A common stock (the “IPO”) was declared effective by the U.S. Securities and Exchange Commission. Shares of Class A common stock began trading on the Nasdaq Global Market on November 3, 2017, and the closing for the IPO was held on November 7, 2017. In December 2017 ACM formed a wholly owned subsidiary in the Republic of Korea, ACM Research Korea CO., LTD. (“ACM Korea”), to serve customers based in Republic of Korea and perform sales, marketing, research and development activities for new products and solutions. In March 2019 ACM Shanghai formed a wholly owned subsidiary in the PRC, Shengwei Research (Shanghai), Inc., to manage activities related to addition of future long-term production capacity. 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 19). In preparation for the STAR IPO, ACM 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 ACM’s consolidated financial statements. The Company has direct or indirect interests in the following subsidiaries: Place and date of Effective interest held as at December 31, Name of subsidiaries incorporation 2020 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 % 77 Table of Contents ACM RESEARCH, INC. Notes to Consolidated Financial Statements (in thousands, except share and per share data) NOTE 2 – SUMMARY OF 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. 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 Dece mber 31, 2020 the Company did not experience significant negative impact of COVID-19 on its operations, capital and financial resources, including overall liquidity position. The Company conducts substantially all of its 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 ACM Shanghai’s 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. The Company cannot assure that further closures or reductions of its PRC operations or production may not be necessary in upcoming months as the result of business interruptions arising from protective measures being taken by the PRC and other governmental agencies or of other consequences of the COVID-19 outbreak. The Company’s corporate headquarters are located in San Mateo County in the San Francisco Bay Area. In order to attempt to mitigate the COVID-19 pandemic, in March 2020 (a) the State of California declared a state of emergency related to the spread of COVID-19, (b) the San Francisco Department of Public Health announced aggressive recommendations to reduce the spread of the disease, (c) the health officers of six San Francisco Bay Area counties, including San Mateo County, issued shelter-in-place orders, which (i) direct all individuals living in those counties to shelter at their places of residence (subject to limited exceptions), (ii) direct all businesses and governmental agencies to cease non-essential operations at physical locations in those counties, (iii) prohibit all non-essential gatherings of any number of individuals, and (iv) order cessation of all non-essential travel, and (d) the Governor of California and the State Public Health Officer and Director of the California Department of Public Health ordered all individuals living in the State of California to stay at their place of residence for an indefinite period of time (subject to limited exceptions). The effects of these types of actions in the future may negatively impact productivity, disrupt the business of the Company and delay timelines, the magnitude of which will depend, in part, on the length and severity of the restrictions and other limitations on the Company’s ability to conduct its business in the ordinary course. The prolonged and broad-based shift to a remote working environment continues to create inherent productivity, connectivity, and oversight challenges and could affect our ability to enhance, develop and support existing products and services, detect and prevent spam and problematic content, hold product sales and marketing events, and generate new sales leads, among others. In addition, the changed environment under which the Company is operating could have an effect on its internal controls over financial reporting as well as our ability to meet a number of its compliance requirements in a timely or quality manner. Additional and/or extended, governmental lockdowns, restrictions or new regulations could significantly impact the ability of our employees and vendors to work productively. Governmental restrictions have been globally inconsistent and it remains unclear when a return to worksite locations or travel will be permitted or what restrictions will be in place in those environments. As the Company prepares to return its workforce in more locations back to the office in 2021, it may experience increased costs as it prepares its facilities for a safe return to work environment and experiment with hybrid work models, in addition to potential effects on its ability to compete effectively and maintain its corporate culture. 78 Table of Contents ACM RESEARCH, INC. Notes to Consolidated Financial Statements (in thousands, except share and per share data) Extended periods of interruption to our corporate, development or manufacturing facilities due to the COVID-19 outbreak could cause the Company to lose revenue and market share, which would depress its financial performance and could be difficult to recapture. The Company’s business may also be harmed if travel to or from the PRC or the United States continues to be restricted or inadvisable or if members of management and other employees are absent because they contract the coronavirus, they elect not to come to work due to the illness affecting others in the Company’s office or laboratory facilities, or they are subject to quarantines or other governmentally imposed restrictions. Use of Estimates The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the balance sheet date and the reported revenues and expenses during the reported period in the 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 fair value of trading securities, stock-based compensation arrangements and warrant liability, realization of deferred tax assets, assessment for impairment of long-lived assets, allowance for doubtful accounts, inventory valuation for excess and obsolete inventories, lower of cost and market value or net realizable value of inventories, depreciable lives of property and equipment and useful life of intangible assets. Management evaluates these estimates and assumptions on a regular basis. Actual results could differ from those estimates and assumptions. Reclassifications Certain prior year amounts in the notes to the Consolidated Financial Statements, have been reclassified to conform with the current year presentation. These classifications within the statements had no impact on the Company’s results of operations. Cash and Cash Equivalents Cash and cash equivalents consist of cash on hand, bank deposits that are unrestricted as to withdrawal and use, and highly liquid investments with an original maturity date of three months or less at the date of purchase. At times, cash deposits may exceed government-insured limits. Restricted cash Restricted cash represents deposits not readily available to ACM. Restricted cash as of December 31, 2019 represented cash hold in reserve, all of the proceeds received from issuance of common stock to redeemable non-controlling interest in segregated cash and cash-equivalent accounts. There was no restricted cash as of December 31, 2020, as the redemption feature of these proceeds was terminated during the second quarter of 2020 and the Company released restrictions on the cash as described in note 19. Accounts Receivable Accounts receivable are presented net of an allowance for doubtful accounts. The Company reviews its accounts receivable on a periodic basis and makes general and specific allowances when there is doubt as to the collectability of individual balances. In evaluating the collectability of individual receivable balances, the Company considers many factors, including the age of the balance, a customer’s historical payment history and credit worthiness, current economic trends and reasonable and supportable forecasts. Accounts are written off after all collection efforts have been exhausted. At December 31, 2020, and 2019, the Company, based on a review of its outstanding balances and its customers, determined the allowance for doubtful accounts in the amount of $ 0 and $ 0 respectively. 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 year ended December 31, 2020. The Company classifies the land use right as non-current assets on the consolidated balance sheets (note 7). 79 Table of Contents ACM RESEARCH, INC. Notes to Consolidated Financial Statements (in thousands, except share and per share data) 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. Inventory Inventory consists of raw materials and related goods, work-in-progress, finished goods, and other consumable materials such as spare parts. Finished goods typically are shipped from the Company’s warehouse within one month of completion. Inventory was recorded at the lower of cost or net realizable value at December 31, 2020 and 2019. ● The cost of a general inventory item is determined using the weighted moving average method. Under the weighted moving average method, the Company calculates the new average price of all items of a particular inventory stock each time one or more items of that stock are purchased. The then-current average price of the stock is used for purposes of determining cost of inventory or cost of revenue. The cost of an inventory item purchased specifically for a customized product is determined using the specific identification method. Low-cost consumable materials and packaging materials are expensed as incurred. ● Net realizable value is the estimated selling price, in the ordinary course of business, less estimated costs to complete or dispose. The Company assesses the recoverability of all inventories quarterly to determine if any adjustments are required. Potential excess or obsolete inventory is written off based on management’s analysis of inventory levels and estimates of future 12-month demand and market conditions. Property, Plant and Equipment, Net Property, plant and equipment are recorded at cost less accumulated depreciation and any provision for impairment in value. Depreciation begins when the asset is placed in service and is calculated by using the straight-line method over the estimated useful life of an asset (or, if shorter, over the lease term). Betterments or renewals are capitalized when incurred. Plant, property and equipment is reviewed each year to determine whether any events or circumstances indicate that the carrying amount of the assets may not be recoverable. Estimated useful lives of assets in the United States are as follows: Computer and office equipment 3 to 5 years Furniture and fixtures 5 years Leasehold improvements shorter of lease term or estimated useful life ACM’s subsidiaries follow regulations for depreciation of fixed assets implemented under the PRC’s Enterprise Income Tax Law, which state that the minimum useful lives used for calculating depreciation for fixed assets are as follows: Manufacturing equipment for small to medium-sized equipment, 5 years; for large equipment, estimated by purchasing department at time of acceptance Furniture and fixtures 5 years Transportation equipment 4 to 5 years Electronic equipment 3 to 5 years Leasehold improvements remaining lease term for improvements on leased fixed assets or, for large improvements, estimated useful life; not less than 3 years for non-fixed asset repairs Expenditures for maintenance and repairs that neither materially add to the value of the property nor appreciably prolong the life of the property are charged to expense as incurred. Upon retirement or sale of an asset, the cost of the asset and the related accumulated depreciation are eliminated from the accounts and any resulting gain or loss is credited or charged to income. Intangible Assets, Net Intangible assets consist of software used for finance, manufacturing, and research and development purposes. Assets are valued at cost at the time of acquisition and are amortized over their beneficial periods. If a contract specifies a beneficial period, then the intangible asset is amortized over a term not exceeding the beneficial period. If the contract does not specify a beneficial period, then the intangible asset is amortized over a term not exceeding the valid period specified by local law. If neither the contract nor local law specifies a beneficial period, then the intangible asset is amortized over a period of up to 10 years. Currently, the software that the Company uses is amortized for between two and ten-years , based on its functionality and useful life in accordance with the policy described above. 80 Table of Contents ACM RESEARCH, INC. Notes to Consolidated Financial Statements (in thousands, except share and per share data) Investments The Company uses the equity method of accounting for its investment in, and earning or loss of, companies that it does not control but over which it does exert significant influence. The Company considers whether the fair value of its equity method investment has declined below its carrying value whenever adverse events or changes in circumstances indicate that recorded value may not be recoverable. The Company reviews its investments for other-than-temporary impairment whenever events or changes in business circumstances indicate that the carrying value of the investment may not be fully recoverable. Investments identified as having an indication of impairment are subject to further analysis to determine if the impairment is other-than-temporary and this analysis requires estimating the fair value of the investment. The determination of fair value of the investment involves considering factors such as current economic and market conditions, the operating performance of the entities including current earnings trends and forecasted cash flows, and other company and industry specific information. If the Company considers any decline to be other than temporary (based on various factors, including historical financial results and the overall health of the investee), then a write-down would be recorded to estimated fair value. See note 10 for discussion of equity method investment. All marketable securities are classified as trading securities and trading securities and are stated at fair market value, less a discount applied to reflect the remaining lock-up period when the securities are subject to lock-up period. Fair market value is determined by the most recently traded price of the security at the balance sheet date. Net realized and unrealized gains and losses on trading securities are included in the consolidated statement of operations. The cost of investments sold is based on the average cost method. Interest and dividend income earned are included in other income (expense), net. Valuation of Long-Lived Assets Long-lived assets are evaluated for impairment whenever events or changes in circumstance indicate that the carrying value of the assets may not be fully recoverable or that the useful life of the assets is shorter than the Company had originally estimated. When these events or changes occur, the Company evaluates the impairment of the long-lived assets by comparing the carrying value of the assets to an estimate of future undiscounted cash flows expected to be generated from the use of the assets and their eventual disposition. If the sum of the expected future undiscounted cash flow is less than the carrying value of the assets, the Company recognizes an impairment loss based on the excess of the carrying value over the fair value. No impairment charge was recognized for either of the periods presented. Leases The Company determines if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets, other current liabilities and operating lease liabilities in the consolidated balance sheets. ROU assets represent the Company’s right to use an underlying asset for the lease term, and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the 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 commencement date in determining the present value of lease payments. It uses the implicit rate when readily determinable. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term. Redeemable Non-controlling Interests The Company recorded initial carrying amount of redeemable non-controlling interests at fair value on the date of issuance, and presented in temporary equity on the consolidated balance sheets. As the non-controlling interests would be redeemable at a fixed purchase price, it is classified as common-share non-controlling interests redeemable at other than fair value. The Company applied the entire adjustment method (income classification) for subsequent measurement in accordance with Financial Accounting Standards Board (the “FASB”) Accounting Standards Classification (“ASC”) ASC 480-10-S99. 81 Table of Contents ACM RESEARCH, INC. Notes to Consolidated Financial Statements (in thousands, except share and per share data) Revenue Recognition The Company derives revenue principally from the sale of single-wafer wet cleaning equipment. Revenue from contracts with customers is recognized using the following five steps pursuant ASC Topic 606, Revenue from Contracts with Customers : 1. Identify the contract(s) with a customer; 2. Identify the performance obligations in the contract; 3. Determine the transaction price; 4. Allocate the transaction price to the performance obligations in the contract; and 5. Recognize revenue when (or as) the entity satisfies a performance obligation. A contract contains a promise (or promises) to transfer goods or services to a customer. A performance obligation is a promise (or a group of promises) that is distinct. The transaction price is the amount of consideration a company expects to be entitled from a customer in exchange for providing the goods or services. The unit of account for revenue recognition is a performance obligation (a good or service). A contract may contain one or more performance obligations. Performance obligations are accounted for separately if they are distinct. A good or service is distinct if the customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer, and the good or service is distinct in the context of the contract. Otherwise performance obligations are combined with other promised goods or services until the Company identifies a bundle of goods or services that is distinct. Promises in contracts which do not result in the transfer of a good or service are not performance obligations, as well as those promises that are administrative in nature, or are immaterial in the context of the contract. The Company has addressed whether various goods and services promised to the customer represent distinct performance obligations. The Company applied the guidance of ASC Topic 606-10-25-16 through 18 in order to verify which promises should be assessed for classification as distinct performance obligations. The Company’s contracts with customers include more than one performance obligation. For example, the delivery of a piece of equipment generally includes the promise to install the equipment in the customer’s facility. The Company’s performance obligations in connection with a sale of equipment generally include production, delivery and installation, together with the provision of a warranty. The transaction price is allocated to all the separate performance obligations in an arrangement. It reflects the amount of consideration to which the Company expects to be entitled in exchange for transferring goods or services, which may include an estimate of variable consideration to the extent that it is probable of not being subject to significant reversals in the future based on the Company’s experience with similar arrangements. The transaction price excludes amounts collected on behalf of third parties, such as sales taxes. This is done on a relative selling price basis using standalone selling prices (“SSP”). The SSP represents the price at which the Company would sell that good or service on a standalone basis at the inception of the contract. Given the requirement for establishing SSP for all performance obligations, if the SSP is directly observable through standalone sales, then such sales should be considered in the establishment of the SSP for the performance obligation. The Company does not have observable SSPs for most performance obligations as the obligations are not regularly sold on a standalone basis. Production, delivery and installation of a product, together with provision of a warranty, are a single unit of accounting. Revenue is recognized when the Company satisfies each performance obligation by transferring control of the promised goods or services to the customer. Goods or services can transfer at a point in time (upon the acceptance of the products or upon the arrival at the destination as stipulated in the shipment terms) in a sale arrangement. In general, the Company recognizes revenue when a tool has been demonstrated to meet the customer’s predetermined specifications and is accepted by the customer. If terms of the sale provide for a lapsing customer acceptance period, the Company recognizes revenue as of the earlier of the expiration of the lapsing acceptance period and customer acceptance. In the following circumstances, however, the Company recognizes revenue upon shipment or delivery, when legal title to the tool is passed to a customer as follows: ● When the customer has previously accepted the same tool with the same specifications and the Company can objectively demonstrate that the tool meets all of the required acceptance criteria; ● When the sales contract or purchase order contains no acceptance agreement or lapsing acceptance provision and the Company can objectively demonstrate that the tool meets all of the required acceptance criteria; ● When the customer withholds acceptance due to issues unrelated to product performance, in which case revenue is recognized when the system is performing as intended and meets predetermined specifications; or ● When the Company’s sales arrangements do not include a general right of return. 82 Table of Contents ACM RESEARCH, INC. Notes to Consolidated Financial Statements (in thousands, except share and per share data) The Company offers post-warranty period services, which consist principally of the installation and replacement of parts and small-scale modifications to the equipment. The related revenue and costs of revenue are recognized when parts have been delivered and installed, risk of loss has passed to the customer, and collection is probable. The Company does not expect revenue from extended maintenance service contracts to represent a material portion of its revenue in the future. The Company incurs costs related to the acquisition of its contracts with customers in the form of sales commissions. Sales commissions are paid to third party representatives and distributors. Contractual agreements with these parties outline commission structures and rates to be paid. Generally speaking, the contracts are all individual procurement decisions by the customers and are not for significant periods of time, nor do they include renewal provisions. As such, all contracts have an economic life of significantly less than a year. Accordingly, the Company expenses sales commissions when incurred. These costs are recorded within sales and marketing expenses. The Company does not incur any costs to fulfill the contracts with customers that are not already reported in compliance with another applicable standard (for example, inventory or plant, property and equipment). Cost of Revenue Cost of revenue primarily consists of: direct materials, comprised principally of parts used in assembling equipment, together with crating and shipping costs; direct labor, including salaries and other labor related expenses attributable to the Company’s manufacturing department; and allocated overhead cost, such as personnel cost, depreciation expense, and allocated administrative costs associated with supply chain management and quality assurance activities, as well as shipping insurance premiums. Research and Development Costs Research and development costs relating to the development of new products and processes, including significant improvements and refinements to existing products or to the process of supporting customer evaluations of tools, including the development of new tools for evaluation by customers during the product demonstration process, are expensed as incurred. Shipping and Handling Costs Shipping and handling costs, which relate to transportation of products to customer locations, are charged to selling and marketing expense. For the years ended December 31, 2020, 2019 and 2018, shipping and handling costs included in sales and marketing expenses were $ 76 , $ 172 and $ 146 , respectively. Borrowing Costs Borrowing costs attributable directly to the acquisition, construction or production of qualifying assets that require a substantial period of time to be ready for their intended use or sale are capitalized as part of the cost of those assets. Income earned on temporary investments of specific borrowings pending their expenditure on those assets is deducted from borrowing costs capitalized. All other borrowing costs are recognized in interest expenses in the consolidated statements of operations and comprehensive income in the period in which they are incurred. No borrowing costs were capitalized for the year ended December 31, 2020, 2019 or 2018. Warranty For each of its products, the Company generally provides a standard warranty ranging from 12 to 36 months and covering replacement of the product during the warranty period. The Company accounts for the estimated warranty costs as sales and marketing expenses at the time revenue is recognized. Warranty obligations are affected by historical failure rates and associated replacement costs. Utilizing historical warranty cost records, the Company calculates a rate of warranty expenses to revenue to determine the estimated warranty charge. The Company updates these estimated charges on a regular basis. Warranty obligations are included in other payables and accrued expenses in the consolidated balance sheets. The following table shows changes in the Company’s warranty obligations for the years ended December 31, 2020 and 2019, respectively. Year Ended December 31, 2020 2019 2018 Balance at beginning of period $ 2,811 $ 1,710 $ 839 Additions 3,101 2,105 1,412 Utilized ( 1,937 ) ( 1,004 ) ( 541 ) Balance at end of period $ 3,975 $ 2,811 $ 1,710 83 Table of Contents ACM RESEARCH, INC. Notes to Consolidated Financial Statements (in thousands, except share and per share data) Government Subsidies 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 the Company is 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 the Company is not required to return any funds it receives. Grant amounts are recognized in our statements of operations and comprehensive income as follows: ● Government subsidies relating to current expenses are recorded as reductions of those expenses in the periods in which the current expenses are recorded. For the years ended December 31, 2020, 2019 and 2018, related government subsidies recognized as reductions of relevant expenses in the consolidated statements of operations and comprehensive income were $ 2,658 , $ 3,195 and $ 1,486 , respectively. ● Government subsidies related to depreciable assets are credited to income over the useful lives of the related assets for which the grant was received. For the years ended December 31, 2020, 2019 and 2018, related government subsidies recognized as other income in the consolidated statements of operations and comprehensive income were $ 149 , $ 147 and $ 144 , respectively. Unearned government subsidies received are deferred for recognition and recorded as other long-term liabilities (note 13) in the balance sheet until the criteria for such recognition are satisfied. Stock-based Compensation ACM grants stock options to employees and non-employee consultants and directors and accounts for those stock-based awards in accordance with FASB ASC Topic 718, Compensation – Stock Compensation. Stock-based awards granted to employees and non-employee consultants and directors are measured at the fair value of the awards on the grant date and are recognized as expenses either (a) immediately on grant, if no vesting conditions are required or (b) using the graded vesting method, net of estimated forfeitures, over the requisite service period. The fair value of stock options is determined using the Black-Scholes valuation model when there is only service condition attached or the Monte Carlo valuation model when there is performance condition attached. Stock-based compensation expense, when recognized, is charged to the category of operating expense corresponding to the service function of the employees and non-employee consultants and directors. Income Taxes The Company accounts for income taxes using the liability method whereby deferred tax asset and liability account balances are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company provides a valuation allowance, if necessary, to reduce deferred tax assets to their estimated realizable values. In evaluating the ability to recover its deferred income tax assets, the Company considers all available positive and negative evidence, including its operating results, ongoing tax planning and forecasts of future taxable income on a jurisdiction-by-jurisdiction basis. In the event the Company determines that it would be able to realize its deferred income tax assets in the future in excess of their net recorded amount, it would make an adjustment to the valuation allowance that would reduce the provision for income taxes. Conversely, in the event that all or part of the net deferred tax assets are determined not to be realizable in the future, an adjustment to the valuation allowance would be charged to earnings in the period such determination is made. 84 Table of Contents ACM RESEARCH, INC. Notes to Consolidated Financial Statements (in thousands, except share and per share data) Tax benefits related to uncertain tax positions are recognized when it is more likely than not that a tax position will be sustained during an audit. Interest and penalties related to unrecognized tax benefits are included within the provision for income tax. Basic and Diluted Net Income per Common Share Basic and diluted net income per common share are calculated as follows: Year Ended December 31, 2020 2019 2018 Numerator: Net income $ 21,677 $ 19,458 $ 6,574 Net income attributable to non-controlling interests and redeemable non-controlling interests 2,897 564 - Net income available to common stockholders, basic and diluted $ 18,780 $ 18,894 $ 6,574 Weighted average shares outstanding, basic 18,233,361 16,800,623 15,788,460 Effect of dilutive securities 2,950,108 2,334,874 2,123,645 Weighted average shares outstanding, diluted 21,183,469 19,135,497 17,912,105 Net income per common share: Basic 1.03 1.12 0.42 Diluted $ 0.89 $ 0.99 $ 0.37 Basic and diluted net income per common share are presented using the two-class method, which allocates undistributed earnings to common stock and any participating securities according to dividend rights and participation rights on a proportionate basis. Under the two-class method, basic net income per common share is computed by dividing the sum of distributed and undistributed earnings attributable to common stockholders by the weighted average number of shares of common stock outstanding during the period. ACM did not have any participating securities outstanding during the three-year period ending December 31, 2020. 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 years ended December 31, 2020, 2019 and 2018, the net income per common share attributable to each class is the same under the “two-class” method. As such, the two classes of common stock have been presented on a combined basis in the consolidated statements of operations and comprehensive income and in the above computation of net income per common share. Diluted and diluted net income per common share are presented using the two-class method, which allocates undistributed earnings to common stock and any participating securities according to dividend rights and participation rights on a proportionate basis. Under the two-class method, basic net income (per common share is computed by dividing the sum of distributed and undistributed earnings attributable to common stockholders by the weighted average number of shares of common stock outstanding during the period. ACM did not have any participating securities outstanding during the three-year period ending December 31, 2020. 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 years ended December 31, 2020, 2019 and 2018, the net income per common share attributable to each class is the same under the “two-class” method. As such, the two classes of common stock have been presented on a combined basis in the 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, including stock options and issued warrants, that could share in ACM’s earnings. Certain potential dilutive securities were excluded from the net income per share calculation because the impact would be anti-dilutive. The number of potentially dilutive shares that were not included in the calculation of diluted net income per share in the periods presented where their inclusion would be anti-dilutive were 78,000 , 606,000 and 241,700 for the years ended December 31, 2020, 2019 and 2018, respectively. Comprehensive Income Attributable to the Company The Company applies FASB ASC Topic 220, Comprehensive Income , which establishes standards for the reporting and display of comprehensive income or loss, requiring its components to be reported in a financial statement with the same prominence as other financial statements. The comprehensive income attributable to the Company was $ 25,312 , $ 18,076 and $ 5,595 for the years ended December 31, 2020, 2019 and 2018, respectively. 85 Table of Contents ACM RESEARCH, INC. Notes to Consolidated Financial Statements (in thousands, except share and per share data) Statutory reserves The income of ACM’s PRC subsidiaries is distributable to their shareholders after transfers to reserves as required under relevant PRC laws and regulations and the subsidiaries’ Articles of Association. As stipulated by the relevant laws and regulations in the PRC, the PRC subsidiaries are required to maintain reserves, including reserves for statutory surpluses and public welfare funds that are not distributable to shareholders. A PRC subsidiary’s appropriations to the reserves are approved by its board of directors. At least 10% of annual statutory after-tax profits, as determined in accordance with PRC accounting standards and regulations, is required to be allocated to the statutory surplus reserves. If the cumulative total of the statutory surplus reserves reaches 50% of a PRC subsidiary’s registered capital, any further appropriation is optional. Statutory surplus reserves may be used to offset accumulated losses or to increase the registered capital of a PRC subsidiary, subject to approval from the relevant PRC authorities, and are not available for dividend distribution to the subsidiary’s shareholders. The PRC subsidiaries are prohibited from distributing dividends unless any losses from prior years have been offset. Except for offsetting prior years’ losses, however, statutory surplus reserves must be maintained at a minimum of 25% of share capital after such usage. ACM Shanghai estimated a statutory surplus reserve of $ 3,065 and $ 1,427 based on an accumulated profit as of December 31, 2020 and 2019, respectively, which is included in the accumulated surplus in the consolidated balance sheets. Fair Value of Financial Instruments Under the FASB’s authoritative guidance on fair value measurements, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In determining the fair value, the Company uses various methods including market, income and cost approaches. Based on these approaches, the Company often utilizes certain assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated or generally unobservable inputs. The Company uses valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. Based on observability of the inputs used in the valuation techniques, the Company is required to provide the following information according to the fair value hierarchy. The fair value hierarchy ranks the quality and reliability of the information used to determine fair values. Financial assets and liabilities carried at fair value are classified and disclosed in one of the following three categories: Level 1: Valuations for assets and liabilities traded in active exchange markets. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities. Level 2: Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained from third party pricing services for identical or similar assets or liabilities. Level 3: Valuations for assets and liabilities that are derived from other valuation methodologies, including option pricing models, discounted cash flow models and similar techniques, and not based on market exchange, dealer or broker traded transactions. Level 3 valuations incorporate certain unobservable assumptions and projections in determining the fair value assigned to such assets. All transfers between fair value hierarchy levels are recognized by the Company at the end of each reporting period. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement in its entirety requires judgment, and considers factors specific to the investment. The inputs or methodology used for valuing financial instruments are not necessarily an indication of the risks associated with investment in those instruments. Fair Value Measured or Disclosed on a Recurring Basis Trading securities - The fair value of trading securities derives from the on quoted prices for identical securities in active markets at the balance sheet date, less a discount applied to reflect the remaining lock-up period. The Company classifies the valuation techniques that use these inputs as Level 2 fair value measurement (note 15). Financial liability – The fair value of financial liability are classified within Level 3 as the fair values are measured based on the inputs linked to the choice of settlement by the counter party that are unobservable in the market. Other financial items for disclosure purpose —The fair value of other financial items of the Company, other than long-term borrowings for disclosure purpose, including cash and cash equivalents, accounts receivable, other receivables, short-term borrowings, accounts payable, advances from customers, and other payables and accrued expenses, approximate their carrying value due to their short-term nature. The carrying value of the long-term borrowings which are subject to fixed interest rate approximates its fair value as the market interest rate did not significantly change from the borrowing date to December 31, 2020. 86 Table of Contents ACM RESEARCH, INC. Notes to Consolidated Financial Statements (in thousands, except share and per share data) Operating and Financial Risks Concentration of Credit Risk Financial instruments that potentially subject the Company to credit risk consist principally of cash and cash equivalents, restricted cash and accounts receivable. The Company deposits and invests its cash with financial institutions that management believes are creditworthy. The Company is potentially subject to concentrations of credit risks in its accounts receivable. In each of the years ended December 31, 2020 and 2019, a total of three customers individually accounted for greater than ten percent of the Company’s revenue: December 31, 2020 2019 Customer A 36.93 % 26.46 % Customer B * 19.84 % Customer C 26.77 % 27.50 % Customer D 12.10 % * Total 75.80 % 73.79 % Interest Rate Risk As of December 31, 2020 and 2019, the balance of the Company’s short term bank borrowings (note 9), matured at various dates within the following year and did not expose the Company to interest rate risk. As of December 31, 2020, the balance of the Company’s long-term borrowings (note 12) carried a fixed interest rate and the Company may have been exposed to fair value interest rate risk. Liquidity Risk The Company’s working capital at December 31, 2020 and 2019 was sufficient to meet its then-current requirements. The Company may, however, require additional cash due to changing business conditions or other future developments, including any investments or acquisitions the Company decides to pursue. In the long run, the Company intends to rely primarily on cash flows from operations and additional borrowings from financial institutions in order to meet its cash needs. If those sources are insufficient to meet cash requirements, the Company may seek to issue additional debt or equity. Country Risk The Company has significant investments in the PRC. The operating results of the Company may be adversely affected by changes in the political and social conditions in the PRC and by changes in PRC government policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things. Foreign Currency Risk and Translation The Company’s consolidated financial statements are presented in U.S. dollars, which is the Company’s reporting currency, while the functional currency of ACM’s subsidiaries is the Chinese Renminbi (“RMB”), and the Korean Won. Changes in the relative values of U.S. dollars and RMB affect the Company’s reported levels of revenues and profitability as the results of its operations are translated from RMB into U.S. dollars for reporting purposes. Because the Company has not engaged in any hedging activities, it cannot predict the impact of future exchange rate fluctuations on the results of its operations and it may experience economic losses as a result of foreign currency exchange rate fluctuations. Transactions of ACM’s subsidiaries involving foreign currencies are recorded in functional currency according to the rate of exchange prevailing on the date when the transaction occurs. The ending balances of the Company’s foreign currency accounts are converted into functional currency using the rate of exchange prevailing at the end of each reporting period. Net gains and losses resulting from foreign exchange fluctuations as marked to market at year-end are included in the consolidated statements of operations and comprehensive income. Total foreign currency translation adjustment was $ 10,493 , ($ 899 ) and ($ 979 ) for the years ended December 31, 2020, 2019 and 2018, respectively. 87 Table of Contents ACM RESEARCH, INC. Notes to Consolidated Financial Statements (in thousands, except share and per share data) In accordance with FASB ASC Topic 830, Foreign Currency Matters , the Company translates assets and liabilities into U.S. dollars from RMB or Korean Won using the rate of exchange prevailing at the applicable balance sheet date and the consolidated statements of operations and comprehensive income and consolidated statements of cash flows are translated at an average rate during the reporting period. Adjustments resulting from the translation are recorded in stockholders’ (deficit) equity as part of accumulated other comprehensive income (loss). Any differences between the initially recorded amount and the settlement amount are recorded as a gain or loss on foreign currency transaction in the consolidated statements of operations and comprehensive income. Translations of amounts from RMB and Korean Won into U.S. dollars were made at the following exchange rates for the respective dates and periods: At December 31, 2020 2019 2018 Consolidated balance sheets: RMB to $1.00 6.5232 6.9784 6.8634 KRW to $1.00 1,088.14 1,156.07 1,114.83 Year Ended December 31, 2020 2019 2018 Consolidated statements of operations and comprehensive income: RMB to $1.00 6.8966 6.8966 6.6181 KRW to $1.00 1,179.25 1,165.50 1,100.11 Recently Adopted Accounting Pronouncements On March 27, 2020, the U.S. Coronavirus Aid, Relief and Economic Security (“CARES”) Act was enacted and signed into law. Certain provisions of the CARES Act impact the 2019 income tax provision computations of the Company and were reflected in 2020, or the period of enactment. The CARES Act contains modifications on the limitation of business interest for tax years beginning in 2019 and 2020. The modifications to §163(j) increase the allowable business interest deduction from 30% of adjusted taxable income to 50% of adjusted taxable income. The modification to the interest expense limitation did not have an impact on the Company’s taxable income or net operating losses for the year ended December 31, 2020. In August 2018, 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 (“SRC”) as defined by the Securities and Exchange Commission (“SEC”) to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. 88 Table of Contents ACM RESEARCH, INC. Notes to Consolidated Financial Statements (in thousands, except share and per share data) Since the Company was eligible to be an SRC based on the Company’s most recent SRC determination as of November 15, 2019 (which is the issuance date of ASU 2019-10) in accordance with SEC regulations, the Company will adopt the standards for the year beginning 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 No. 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 Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. ASU 2019-12 will be effective for the Company in the first quarter of 2021. The Company does not expect the adoption of the new accounting rules to have a material impact on the Company’s financial condition, results of operations, cash flows or disclosures. In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting . ASU 2020-04 provide optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform. The amendments in this standard can be applied anytime between the first quarter of 2020 and the fourth quarter of 2022. The Company is currently in the process of evaluating the impact of adoption of the new rules on the Company’s financial condition, results of operations, cash flows and disclosures. NOTE 3 – REVENUE FROM CONTRACTS WITH CUSTOMERS The Company assesses revenues based upon the nature or type of goods or services it provides and the geographic location of the related businesses. The following tables present disaggregated revenue information: Year Ended December 31, 2020 2019 2018 Single Wafer Cleaning, Tahoe and Semi-Critical Cleaning Equipment $ 131,248 $ 90,501 $ 68,341 ECP (front-end and packaging), Furnace and Other Technologies 13,343 6,900 - Advanced Packaging (exclude ECP), Services & Spares 12,033 10,124 6,302 Total Revenue By Product Category $ 156,624 $ 107,524 $ 74,643 Wet cleaning and other front-end processing tools 136,317 90,935 68,366 Advanced packaging, other back-end processing tools, services and spares 20,307 16,590 6,277 Total Revenue Front-End and Back-End $ 156,624 $ 107,524 $ 74,643 Year Ended December 31, 2020 2019 2018 Mainland China $ 154,359 $ 103,467 $ 69,866 Other Regions 2,265 4,057 4,777 $ 156,624 $ 107,524 $ 74,643 89 Table of Contents ACM RESEARCH, INC. Notes to Consolidated Financial Statements (in thousands, except share and per share data) NOTE 4 – ACCOUNTS RECEIVABLE At December 31, 2020 and 2019, accounts receivable consisted of the following: December 31, 2020 2019 Accounts receivable $ 56,441 $ 31,091 Less: Allowance for doubtful accounts - - Total $ 56,441 $ 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 December 31, 2020 and 2019. At December 31, 2020 and 2019, accounts receivable of $ 0 and $ 1,433 , respectively, were pledged as collateral for borrowings from financial institutions (note 9). NOTE 5 – INVENTORIES At December 31, 2020 and 2019, inventory consisted of the following: December 31, 2020 2019 Raw materials $ 32,391 $ 15,105 Work in process 23,871 10,407 Finished goods 32,377 19,284 Total inventory $ 88,639 $ 44,796 At December 31, 2020 and 2019, the Company held an inventory reserve of $ 1,140 and $ 0 , respectively. 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 6 – PROPERTY, PLANT AND EQUIPMENT, NET At December 31, 2020 and 2019, property, plant and equipment consisted of the following: December 31, 2020 2019 Manufacturing equipment $ 5,966 $ 3,902 Office equipment 1,047 627 Transportation equipment 216 124 Leasehold improvement 2,398 1,442 Total cost 9,627 6,095 Less: Total accumulated depreciation ( 3,745 ) ( 3,077 ) Construction in progress 2,310 601 Total property, plant and equipment, net $ 8,192 $ 3,619 Depreciation expense was $ 826 , $ 713 and $ 350 for the years ended December 31, 2020, 2019 and 2018, respectively. During the years ended December 31, 2020 and 2019, the Company retired certain fully depreciated manufacturing equipment with cost of $ 446 and $ 5,824 , respectively. 90 Table of Contents ACM RESEARCH, INC. Notes to Consolidated Financial Statements (in thousands, except share and per share data) NOTE 7 – LAND USE RIGHT, NET A summary of land use right is as follows: December 31, 2020 2019 Land use right purchase amount $ 9,744 $ - Less: Accumulated amortization ( 98 ) - Land use right, net $ 9,646 $ - In 2020 ACM Shanghai, through its wholly owned subsidiary Shengwei Research (Shanghai), Inc., entered into an agreement for a 50-year 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 new manufacturing systems and automation technologies, and will provide floor space to support significantly increase production capacity and related research and development activities. The amortization for the year ended December 31, 2020 was $ 98 . The annual amortization of land use right for each of the five succeeding years is as follows: Year ending December 31, 2021 $ 195 2022 195 2023 195 2024 195 2025 195 NOTE 8 – OTHER LONG-TERM ASSETS At December 31, 2020 and 2019, other long-term assets consisted of the following: December 31, 2020 2019 Prepayment for property $ 39,450 $ - Security deposit for land use right 756 - Others 290 192 Total other long-term assets $ 40,496 $ 192 The prepayment for property is for the housing in Lingang, Shanghai. The property is pledged for a long-term loan from China Merchants Bank (note 12). 91 Table of Contents ACM RESEARCH, INC. Notes to Consolidated Financial Statements (in thousands, except share and per share data) NOTE 9 – SHORT-TERM BORROWINGS At December 31, 2020 and December 31, 2019, short-term and long-term borrowings consisted of the following: December 31, 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 % . It was fully repaid on January 23, 2020 . *1 - 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 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, 1)due on January 18, 2020 with an annual interest rate of 5.66 % and fully repaid on January 19, 2020 . - 1,433 2)due on January 22, 2020 with an annual interest rate of 5.66 % and fully repaid on January 22, 2020 . - 717 3)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, 1)due on March 25, 2020 with an annual interest rate of 4.94 % and fully repaid on March 24, 2020 . *2 - 3,250 2)due on April 17, 2020 with an annual interest rate of 5.66 % and fully repaid on April 2, 2020 . *2 - 1,146 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 % . *2 4,599 - 2)due on June 27, 2021 with an annual interest rate of 4.25 % . *2 1,380 - 3)due on April 29, 2021 with an annual interest rate of 2.80 % . *2 820 - 4)due on June 27, 2021 with an annual interest rate of 2.70 % . *2 2,080 - 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 %. 1,533 - 2)due on May 24, 2021 with an annual interest rate of 3.65 %. 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 % . *1 2,575 - 2)due on June 27, 2021 with an annual interest rate of 4.68 % . *1 1,380 - 3)due on May 28, 2021 with an annual interest rate of 3.48 % . *1 2,442 - 4)due on June 7, 2021 with an annual interest rate of 3.50 % . *1 1,521 - 5)due on June 16, 2021 with an annual interest rate of 3.50 % . *1 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 %. 1,380 - 2)due on August 25, 2021 with annual interest rate of 3.85 %. 3,066 - Total $ 26,147 $ 13,753 *1 guaranteed by ACM’s Chief Executive Officer and Cleanchip Technologies Limited *2 guaranteed by ACM’s Chief Executive Officer For the years ended December 31, 2020, 2019 and 2018, interest expense related to short-term borrowings amounted to $ 897 , $ 745 and $ 498 , respectively. 92 Table of Contents ACM RESEARCH, INC. Notes to Consolidated Financial Statements (in thousands, except share and per share data) NOTE 10 – OTHER PAYABLE AND ACCRUED EXPENSES At December 31, 2020 and 2019, other payable and accrued expenses consisted of the following: December 31, 2020 2019 Accrued commissions $ 7,127 $ 4,082 Accrued warranty 3,975 2,811 Accrued payroll 3,068 2,092 Accrued professional fees 384 165 Accrued machine testing fees 1,595 1,456 Others 2,656 2,268 Total $ 18,805 $ 12,874 NOTE 11 – 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: Year Ended December 31, 2020 2019 Operating lease cost $ 1,541 $ 1,432 Short-term lease cost 236 165 Lease cost $ 1,777 $ 1,597 Supplemental cash flow information related to operating leases was as follows for the years ended December 31, 2020 and 2019: Year Ended December 31, 2020 2019 Cash paid for amounts included in the measurement of lease liabilities: Operating cash outflow from operating leases $ 1,777 $ 1,597 Maturities of lease liabilities for all operating leases were as follows as of December 31, 2020: December 31, 2021 $ 1,642 2022 1,617 2023 912 2024 872 2025 22 Total lease payments 5,065 Less: Interest ( 768 ) Present value of lease liabilities $ 4,297 93 Table of Contents ACM RESEARCH, INC. Notes to Consolidated Financial Statements (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 December 31, 2020 and 2019: December 31, 2020 2019 Remaining lease term and discount rate: Weighted average remaining lease term (years) 2.11 3.02 Weighted average discount rate 5.14 % 5.43 % NOTE 12 – LONG-TERM BORROWINGS At December 31, 2020 and 2019, long-term borrowings consisted of the following: December 31, 2020 2019 Loan from China Merchants Bank $ 19,570 $ - Less: Current portion ( 1,591 ) - $ 17,979 $ - The loan from China Merchants Bank is for the purpose of purchasing property in Lingang, Shanghai. The loan is repayable in 120 installments with the last installment due in November 2030 , with an annual interest rate of 4.65 %. The loan is pledged by the property of Shengwei Research (Shanghai) Inc. and guaranteed by ACM Research (Shanghai) Inc. As of December 31, 2020, the right certificate of the pledged property has not been obtained and the procedures of the formal pledge registration in the bank had not been completed. Scheduled principal payments for the outstanding long-term loan as of December 31, 2020 are as follows: Year ending December 31, 2021 $ 1,591 2022 1,666 2023 1,745 2024 1,828 2025 and onwards 12,740 $ 19,570 For the year ended December 31, 2020, interest expense related to long-term borrowings amounted to $ 72 . NOTE 13 – OTHER LONG-TERM LIABILITIES Other long-term liabilities represent government subsidies received from PRC governmental authorities for development and commercialization of certain technology but not yet recognized (note 2). As of December 31, 2020 and 2019, other long-term liabilities consisted of the following unearned government subsidies: December 31, 2020 2019 Subsidies to Stress Free Polishing project, commenced in 2008 and 2017 $ 1,266 $ 1,251 Subsidies to Electro Copper Plating project, commenced in 2014 2,156 2,666 Subsidies to Polytetrafluoroethylene, commenced in 2018 130 135 Subsidies to Tahoe-Single Bench Clean, commenced in 2020 1,544 - Subsidies to Backside Clean-YMTC National Project, commenced in 2020 2,591 - Other 347 134 Total $ 8,034 $ 4,186 94 Table of Contents ACM RESEARCH, INC. Notes to Consolidated Financial Statements (in thousands, except share and per share data) NOTE 14 – LONG-TERM INVESTMENT On September 6, 2017, ACM and Ninebell Co., Ltd. (“Ninebell”), a Korean company that is one of the Company’s principal material suppliers, entered into an ordinary share purchase agreement, effective as of September 11, 2017, pursuant to which Ninebell issued to ACM ordinary shares representing 20 % of Ninebell’s post-closing equity for a purchase price of $ 1,200 , and a common stock purchase agreement, effective as of September 11, 2017, pursuant to which ACM issued 133,334 shares of Class A common stock to Ninebell for a purchase price of $ 1,000 at $ 7.50 per share. The investment in Ninebell is accounted for under the equity method. On June 27, 2019, ACM Shanghai and Shengyi Semiconductor Technology Co., Ltd. (“Shengyi”), a company based in Wuxi, China that is one of the Company’s component 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), a Chinese limited partnership based in Hefei, China. Pursuant to such Partnership Agreement, on September 30, 2019, ACM Shanghai invested RMB 30,000 ($ 4,200 ), which represented 10 % of the partnership’s total subscribed capital. The investment in Hefei Shixi Chanheng Integrated Circuit Industry Venture Capital Fund Partnership (LP) is accounted for under the equity method in accordance with ASC 323-30-S99-1. The Company treats the equity investment in the consolidated financial statements under the equity method. Under the equity method, the investment is initially recorded at cost, adjusted for any excess of the Company’s share of the incorporated-date fair values of the investee’s identifiable net assets over the cost of the investment (if any). Thereafter, the investment is adjusted for the post incorporation change in the Company’s share of the investee’s net assets and any impairment loss relating to the investment. For the years ended December 31, 2020 and 2019, the Company’s share of equity investees’ net income was $ 655 and $ 168 , respectively, which was included in income on equity method investment in the accompanying consolidated statements of operations and comprehensive income. For the year ended December 31, 2020, dividends received from its equity investee was $ 555 , which was offsetting in part the carrying value of the Company’s share of equity investees’ net income. December 31, 2020 2019 Ninebell $ 1,666 $ 1,538 Shengyi 134 107 Hefei Shixi 4,540 4,289 Total $ 6,340 $ 5,934 95 Table of Contents ACM RESEARCH, INC. Notes to Consolidated Financial Statements (in thousands, except share and per share data) NOTE 15 – 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. As SMIC was listed on the STAR Market in July 2020, ACM Shanghai’s investment is accounted for as trading securities and is stated at fair market value, which is classified as Level 2 of the hierarchy established under ASC 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: December 31, 2020 2019 Trading securities listed in Shanghai Stock Exchange Cost $ 15,020 $ - Market value $ 28,239 $ - Unrealized gain on trading securities, net of exchange difference amounted to $ 12,574 for the year ended December 31, 2020 . NOTE 16 – 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 bore interest at a rate of 3.01 % per annum and matured 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 . The SMC Note and SMC Investment are offsetting items in the Company’s consolidated balance sheet in accordance with ASC 210-20-45-1 up to April 30, 2020. 96 Table of Contents ACM RESEARCH, INC. Notes to Consolidated Financial Statements (in thousands, except share and per share data) 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 ASC 825-10-15-4a. On April 30, 2020, the SMC Consideration was $ 9,715 which was for cancellation of the Warrant shares and recorded in the equity. 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 $ 11,964 for the year ended December 31, 2020, which was reflected in the consolidated statement of operations. The Company recorded the difference of $ 19,859 between the SMC 2020 Warrant of $ 21,679 and the SMC Note of $ 1,820 into the equity. The SMC 2020 Warrant was initially measured at fair value at the issuance date and classified as equity permanently in accordance with ASC 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: July 29, 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. 97 Table of Contents ACM RESEARCH, INC. Notes to Consolidated Financial Statements (in thousands, except share and per share data) NOTE 17 – RELATED PARTY BALANCES AND TRANSACTIONS Prepaid expenses December 31, 2020 December 31, 2019 Ninebell $ 1,607 $ 348 Accounts payable December 31, 2020 December 31, 2019 Ninebell $ 2,898 $ 727 Shengyi 1,195 488 Total $ 4,093 $ 1,215 Year Ended December 31 Purchase of materials 2020 2019 2018 Ninebell $ 15,251 $ 8,572 $ 7,785 Shengyi 2,300 856 - Total $ 17,551 $ 9,428 $ 7,785 Year Ended December 31 Service fee charged by 2020 2019 2018 Shengyi $ 322 $ - $ - Ninebell 22 - - Total 344 - - NOTE 18 – 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 stock holders. On March 30, 2018, SMC exercised the SMC Warrant in full (note 16) to purchase 397,502 shares of Class A common stock. During the year ended December 31, 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 16 ). During the year ended December 31, 2020 , ACM issued 832,504 shares of Class A common stock upon option exercises by employees and non-employees and an additional 60,002 shares of Class A common stock upon conversion of an equal number of shares of Class B common stock. During the year ended December 31, 2019, ACM issued 195,297 shares of Class A common stock upon option exercises by employees and non-employees and an additional 35,815 shares of Class A common stock upon conversion of an equal number of shares of Class B common stock. During the year ended December 31, 2018, the Company issued 265,952 shares of Class A common stock upon options exercises by certain employees and non-employees and an additional 511,315 shares of Class A common stock upon conversion of an equal number of shares of Class B common stock. During the year ended December 31, 2020 , ACM issued 64,717 shares of Class A common stock upon cashless warrant exercises by non-employees. During the year ended December 31, 2019 , ACM issued 1,438 shares of Class A common stock upon cashless warrant exercises by non-employees. In August 2019, ACM sold a total of 2,053,572 shares of Class A common stock to the public at a price of $ 14.00 per share for aggregate gross proceeds of $ 28,750 . Net proceeds to ACM excluded an underwriting discount and offering expenses totaling $ 2,287 . ACM repurchased outstanding shares from certain directors, employees and SMC upon the exercise of the underwriters’ over-allotment option using a portion of ACM’s net proceeds from the public offering for the purpose of share constructive retirement. A total of 214,286 repurchased shares were accounted for share retirement during the year ended December 31, 2019. At December 31, 2020 and 2019 , the number of shares of Class A common stock issued and outstanding was 16,896,693 , and 16,182,151 , respectively. At December 31, 2020 and 2019 , the number of shares of Class B common stock issued and outstanding was 1,802,606 and 1,862,608 , respectively. 98 Table of Contents ACM RESEARCH, INC. Notes to Consolidated Financial Statements (in thousands, except share and per share data) NOTE 19 – REDEEMABLE NON-CONTROLLING INTERESTS As discussed in note 1, during the quarter ended September 30, 2019, ACM Shanghai issued to certain private placement investors (the “First Tranche Investors”) equity in the form of redeemable non-controlling interests, representing 4.2 % of the outstanding shares of ACM Shanghai. Two of the First Tranche Investors were entities owned by certain employees of ACM Shanghai (the “Employee Entities”), and the purchase price paid by the Employee Entities represented a discount of 20 % from the purchase price paid by the other First Tranche Investors. The discount granted to the Employee Entities is classified as stock-based compensation, as further discussed in note 20. In addition to the capital increase agreement with the First Tranche Investors, ACM Shanghai entered into a supplemental agreement (a “First Tranche Supplemental Agreement”) with each of the First Tranche Investors. Under each First Tranche Supplemental Agreement, ACM Shanghai and the First Tranche Investor party thereto agreed to use their respective best efforts to facilitate the completion of the STAR Listing and the STAR IPO within three years from the date on which ACM Shanghai shares were issued to the First Tranche Investors. If, by the end of such three-year period, the STAR Listing and the STAR IPO have not been completed and the China Securities Regulatory Commission has not otherwise approved the registration of the STAR Listing registration application, each First Tranche Investor and ACM Shanghai would have the right to require that ACM Shanghai repurchase the First Tranche Investor’s shares for a price equal to the initial purchase price paid by the First Tranche Investor, without interest. The Supplemental Agreements automatically terminated on the date that ACM Shanghai formally submitted the STAR Listing registration application document to the Shanghai Stock Exchange. In the quarter ended December 31, 2019, ACM Shanghai issued to certain private placement investors (the “Second Tranche Investors”) equity in the form of redeemable non-controlling interests. Following the issuance of shares to the Second Tranche Investors, 91.7 % of the outstanding shares of ACM Shanghai was owned by ACM, 3.8 % was owned by the First Tranche Investors, and 4.5 % was owned by the Second Tranche Investors. In addition to the capital increase agreement with the Second Tranche Investors, ACM Shanghai entered into a supplemental agreement (a “Second Tranche Supplemental Agreement”) with each of the Second Tranche Investors. Under each Second Tranche Supplemental Agreement, if ACM Shanghai did not officially submit application documents for the STAR Listing to the Shanghai Stock Exchange by December 31, 2022, each Second Tranche Investor would have the right to require that ACM Shanghai repurchase, and ACM Shanghai will have the right to require that each Second Tranche Investor sell to ACM Shanghai, such Second Tranche Investor’s ACM Shanghai shares for a price equal to the initial purchase price paid by the Second Tranche Investor, without interest. The Second Tranche Supplemental Agreements automatically terminated on the date that ACM Shanghai formally submitted the STAR Listing registration application document to the Shanghai Stock Exchange. Because the First Tranche Investors and the Second Tranche Investors had the right to require ACM Shanghai to repurchase their ownership interests in ACM Shanghai at a fixed purchase price, those ownership interests were classified as redeemable non-controlling interests under ASC 480 Distinguishing Liabilities From Equity. The Company had elected to apply the entire adjustment method (income classification) for subsequent measurement in accordance with ASC 480-10-S99. 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. 99 Table of Contents ACM RESEARCH, INC. Notes to Consolidated Financial Statements (in thousands, except share and per share data) The components of the change in the redeemable non-controlling interests for the year ended December 31, 2020 and 2019 are presented in the following table: Balance at January 1, 2019 $ - Increase in redeemable non-controlling interests due to issuance of common stock Tranche 1: 27,264 Tranche 2: 32,415 Net income attributable to redeemable non-controlling interests 564 Effect of foreign currency translation loss attributable to redeemable non-controlling interests ( 81 ) 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 December 31, 2020 $ - NOTE 20 – 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 twelve months ended December 31, 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: Year Ended December 31, 2020 2019 2018 Stock-Based Compensation Expense: Cost of revenue $ 175 $ 250 $ 71 Sales and marketing expense 1,199 328 120 Research and development expense 763 1,093 255 General and administrative expense 3,491 1,901 2,917 $ 5,628 $ 3,572 $ 3,363 100 Table of Contents ACM RESEARCH, INC. Notes to Consolidated Financial Statements (in thousands, except share and per share data) Year Ended December 31, 2020 2019 2018 Stock-based compensation expense by type: Employee stock purchase plan $ 4,900 $ 2,265 $ 712 Non-employee stock purchase plan 396 1,307 2,651 Subsidiary option grants 332 - - $ 5,628 $ 3,572 $ 3,363 Employee Awards The following table summarizes the Company’s employee share option activities during the years ended December 31, 2018, 2019 and 2020: Number of Option Share Weighted Average Grant Date Fair Value Weighted Average Exercise Price Weighted Average Remaining Contractual Term Outstanding at December 31, 2017 2,045,616 $ 0.66 $ 2.46 7.57 years Granted 745,700 1.52 8.12 Exercised ( 151,650 ) 0.53 2.06 Expired ( 4,622 ) 0.55 3.00 Forfeited ( 131,639 ) 0.97 3.87 Outstanding at December 31, 2018 2,503,405 0.91 4.09 7.30 years Granted 656,000 6.29 16.21 Exercised ( 106,768 ) 0.60 2.09 Expired ( 2,757 ) 3.34 8.16 Forfeited/cancelled ( 55,817 ) 2.38 6.23 Outstanding at December 31, 2019 2,994,063 2.59 6.77 7.05 years Granted 786,399 12.17 29.17 Exercised ( 547,189 ) 1.34 3.78 Forfeited/cancelled ( 41,862 ) 4.80 12.65 Outstanding at December 31, 2020 3,191,411 $ 5.13 $ 12.73 7.13 years Vested and exercisable at December 31, 2020 1,959,387 As of December 31, 2020 and 2019, $ 8,733 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 1.89 years and 1.47 years, respectively. Total recognized compensation cost may be adjusted for future changes in estimated forfeitures. 101 Table of Contents ACM RESEARCH, INC. Notes to Consolidated Financial Statements (in thousands, except share and per share data) Non-employee Awards The following table summarizes the Company’s non-employee share option activities during the years ended December 31, 2018, 2019 and 2020: Number of Option Shares Weighted Average Grant Date Fair Value Weighted Average Exercise Price Weighted Average Remaining Contractual Term Outstanding at December 31, 2017 1,326,676 $ 0.78 $ $ 2.52 7.54 years Granted - - - Exercised ( 114,302 ) 0.43 1.92 Expired - - - Forfeited - - - Outstanding at December 31, 2018 1,212,374 0.78 2.57 6.66 years Granted - - - Exercised ( 88,529 ) 0.45 1.06 Expired - - - Forfeited/cancelled ( 22,232 ) 0.55 3.00 Outstanding at December 31, 2019 1,101,613 0.82 2.69 5.85 years Granted 20,000 10.29 25.60 Exercised ( 285,315 ) 0.88 3.17 Expired - - - Forfeited/cancelled ( 260 ) 0.30 0.75 Outstanding at December 31, 2020 836,038 $ 1.02 $ 3.07 4.92 years Vested and exercisable at December 31, 2020 806,677 As of December 31, 2020 and 2019, $ 195 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 0.09 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: Year Ended December 31, 2020 2019 2018 Fair value of common share(1) $ 25.60 $ 18.45 $ 10.88 Expected term in years(2) 6.25 1.58 - 3.60 2.58 - 5.36 Volatility(3) 42.17 % 40.24 %- 45.48 % 40.24 %- 45.48 % Risk-free interest rate(4) 0.78 % 2.39 %- 2.94 % 2.39 %- 2.94 % Expected dividend(5) 0 .00 % 0 .00 % 0 .00 % (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. 102 Table of Contents ACM RESEARCH, INC. Notes to Consolidated Financial Statements (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: Year Ended December 31, 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 year ended December 31, 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 0.23 1.89 Exercised - - - Expired - - - Forfeited/cancelled ( 446,154 ) 0.23 1.89 Outstanding at December 31, 2020 5,423,654 $ 0.23 $ 1.89 3.50 years Vested and exercisable at December 31, 2020 - During the year ended December 31, 2020, the Company recognized stock-based compensation expense of $ 332 , related to stock option grants of ACM Shanghai. As of December 31, 2020, $ 822 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 2.5 years. Total recognized compensation cost may be adjusted for future changes in estimated forfeitures. 103 Table of Contents ACM RESEARCH, INC. Notes to Consolidated Financial Statements (in thousands, except share and per share data) NOTE 21 – INCOME TAXES The following represent components of the income tax benefit (expense) for the years ended December 31, 2020, 2019 and 2018: Year Ended December 31, 2020 2019 2018 Current: U.S. federal $ ( 61 ) $ - $ - U.S. state ( 2 ) - - Foreign ( 2,014 ) ( 3,176 ) ( 1,149 ) Total current tax expense ( 2,077 ) ( 3,176 ) ( 1,149 ) Deferred: U.S. federal 7,325 3,728 - U.S. state - - - Foreign ( 2,866 ) ( 34 ) 343 Total deferred tax benefit 4,459 3,694 343 Total income tax benefit (expense) $ 2,382 $ 518 $ ( 806 ) Tax effects of temporary differences that give rise to significant portions of the Company’s deferred tax assets at December 31, 2020 and 2019 are presented below: Year Ended December 31, 2020 2019 Deferred tax assets: Net operating loss carry forwards (offshore) $ 323 $ 216 Net operating loss carry forwards (U.S.) and credit 9,981 3,218 Deferred revenue (offshore) 556 1,181 Accruals (U.S.) 22 15 Reserves and other (offshore) 884 426 Stock-based compensation (U.S.) 1,599 1,168 Property and equipment (U.S.) 164 3 Lease liability 659 - Total gross deferred tax assets 14,188 6,227 Less: valuation allowance ( 848 ) ( 896 ) Total deferred tax assets 13,340 5,331 Deferred tax liabilities: Fixed assets ( 697 ) - Deferred revenue (offshore) ( 967 ) - Unrealized gain on trading securities ( 1,886 ) - Total deferred tax liabilities ( 3,550 ) - Translation difference - - Deferred tax assets, net $ 9,790 $ 5,331 The Company considers all available evidence to determine whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become realizable. Management considers the scheduled reversal of deferred tax liabilities (including the impact of available carryback and carry-forward periods), and projected taxable income in assessing the realizability of deferred tax assets. In making such judgments, significant weight is given to evidence that can be objectively verified. Based on all available evidence, a partial valuation allowance has been established against some net deferred tax assets as of December 31, 2020 and 2019, based on estimates of recoverability. While the Company has optimistic plans for its business strategy, it determined that such a valuation allowance was necessary given its historical losses and the uncertainty with respect to its ability to generate sufficient profits from its business model from all tax jurisdictions. In order to fully realize the U.S. deferred tax assets, the Company must generate sufficient taxable income in future periods before the expiration of the deferred tax assets governed by the tax code. The valuation allowance in the U.S. decreased by $ 151 and $ 4,465 for the years ended December 31, 2020 and 2019, respectively. The valuation allowance in the PRC increased by $ 102 and $ 207 for the years ended December 31, 2020 and 2019, respectively. 104 Table of Contents ACM RESEARCH, INC. Notes to Consolidated Financial Statements (in thousands, except share and per share data) As of December 31, 2020 and 2019, the Company had net operating loss carry-forwards of, respectively, $ 45,031 and $ 12,158 for U.S federal purposes, $ 545 and $ 634 for U.S. state purposes and $ 1,294 and $ 66 for PRC income tax purposes . Such losses begin expiring in 2022 , 2032 and 2021 for U.S. federal, U.S. state and PRC income tax purposes, respectively. As of December 31, 2020 and 2019, the Company had research credit carry-forwards of, respectively, $ 359 and $ 479 for U.S. federal purposes and $ 377 and $ 377 for U.S. state purposes. Such credits begin expiring in 2021 for U.S. federal carry-forwards. There is no expiration date for U.S. state carry-forwards. Under provisions of the U.S. Internal Revenue Code (the “IRC”), a limitation applies to the use of the U.S. net operating loss and credit carry-forwards that would be applicable if ACM experiences an “ownership change,” as defined in IRC Section 382. ACM conducted an analysis of its stock ownership under IRC Section 382 and $ 12,118 of the net operating loss carryforwards are subject to annual limitation as a result of the ownership change in 2017. The net operating loss carryforwards are not expected to expire before utilization. The Company’s effective tax rate differs from statutory rates of 21 % for U.S. federal income tax purposes and 15 % to 25 % for PRC income tax purpose due to the effects of the valuation allowance and certain permanent differences as they pertain to book-tax differences in employee stock-based compensation and the value of client shares received for services. Pursuant to the Corporate Income Tax Law of the PRC, all of the Company’s PRC subsidiaries are liable to PRC Corporate Income Taxes at a rate of 25 %, except for ACM Shanghai. According to Guoshuihan 2009 No. 203, if an entity is certified as an “advanced and new technology enterprise,” it is entitled to a preferential income tax rate of 15 %. ACM Shanghai obtained the certificate of “advanced and new technology enterprise” in each of 2012, 2016 and 2018 with an effective period of three years , and the provision for PRC corporate income tax for ACM Shanghai is calculated by applying the income tax rate of 15 % for the years ended December 31, 2020, 2019 and 2018. Income tax expense for the years ended December 31, 2020, 2019 and 2018 differed from the amounts computed by applying the statutory U.S. federal income tax rate of 21 % to pretax income as a result of the following: Year Ended December 31, 2020 2019 2018 Effective tax rate reconciliation: Income tax provision at statutory rate 21.00 % 21.00 % 21.00 % State taxes, net of Federal benefit Foreign rate differential ( 13.87 ) ( 12.26 ) ( 20.88 ) Other permanent difference ( 19.23 ) 8.71 15.59 Effect of tax reform Change in valuation allowance ( 0.25 ) ( 20.19 ) ( 4.78 ) Total income tax expense (benefit) ( 12.35 )% ( 2.74 )% 10.93 % Tax positions are evaluated in a two-step process. The Company first determines whether it is more likely than not that a tax position will be sustained upon examination. If a tax position meets the more-likely-than-not recognition threshold it is then measured to determine the amount of benefit to recognize in the financial statements. The tax position is measured as the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement. The aggregate changes in the balance of gross unrecognized tax benefits, which excludes interest and penalties, for the years ended December 31, 2020 and 2019, were as follows: Year Ended December 31, 2020 2019 Beginning balance $ 44 $ 44 Increase of unrecognized tax benefits taken in prior years 116 - Increase of unrecognized tax benefits related to current year 410 - Increase of unrecognized tax benefits related to settlements - - Reductions to unrecognized tax benefits related to lapsing statute of limitations - - Ending balance $ 570 $ 44 105 Table of Contents ACM RESEARCH, INC. Notes to Consolidated Financial Statements (in thousands, except share and per share data) The Company is subject to taxation in the United States, California 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, 1999 through December 31, 2020. 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 or by state or foreign tax authorities to the extent utilized in a future period. The Company had $ 570 and $ 44 of unrecognized tax benefits as of December 31, 2020 and 2019, respectively. The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. As of December 31, 2020 and 2019, respectively, the Company had $ 0 and $ 44 of accrued penalties related to uncertain tax positions, all of which was recognized in the Company’s consolidated statements of operations and comprehensive income for the year then ended. The amount of the unrecognized tax benefit that, if recognized, would impact the effective tax rate was $ 422 as of December 31, 2020. There were no ongoing examinations by taxing authorities as of December 31, 2020 or 2019. The Company intends to indefinitely reinvest the PRC earnings outside of the United States as of December 31, 2020 and 2019. Thus, deferred taxes are not provided in the United States for unremitted earnings in the PRC. NOTE 22 – SEGMENT INFORMATION The Company is engaged in the developing, manufacture and sale of single-wafer wet cleaning equipment, which have been organized as one reporting segment as the equipment has substantially similar nature and economic characteristics. The Company’s principal operating decision maker, ACM’s Chief Executive Officer, receives and reviews the results of the operations for all major type of equipment as a whole when making decisions about allocating resources and assessing performance of the Company. In accordance with FASB ASC 280-10, the Company is not required to report segment information. NOTE 23 – 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 December 31, 2020, the Company had $ 1,173 of open capital commitments. In the normal course of business, the Company is subject to contingencies, including legal proceedings and environmental claims arising out of the normal course of businesses that relate to a wide range of matters, including among others, contracts breach liability. The Company records accruals for such contingencies based upon the assessment of the probability of occurrence and, where determinable, an estimate of the liability. Management may consider many factors in making these assessments including past history, scientific evidence and the specifics of each matter. Some of these contingencies involve claims that are subject to substantial uncertainties and unascertainable damages . The Company’s management has evaluated all such proceedings and claims that existed as of December 31, 2020 and 2019. In the opinion of management, no provision for liability nor disclosure was required as of December 31, 2020 related to any claim against the Company because: (a) there is not a reasonable possibility that a loss exceeding amounts already recognized (if any) may be incurred with respect to such claim; (b) a reasonably possible loss or range of loss cannot be estimated; or (c) such estimate is immaterial. 106 Table of Contents ACM RESEARCH, INC. Notes to Consolidated Financial Statements (in thousands, except share and per share data) As of December 31, 2020, the Company had one outstanding legal proceeding regarding securities class action. On December 21, 2020, a putative class action lawsuit against ACM and three of its current executive officers was filed in the U.S. District Court for the Northern District of California under the caption Kain v. ACM Research, Inc., et al. , No. 3:20-cv-09241. The complaint asserts claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, and seeks monetary damages in an unspecified amount as well as costs and expenses incurred in the litigation. The court has not yet appointed a lead plaintiff. ACM’s management believes the claims are without merit and intend to vigorously defend this litigation. The Company is currently unable to predict the outcome of this lawsuit and therefore cannot determine the likelihood of loss or estimate a range of possible loss . NOTE 24 – RESTRICTED NET ASSETS In accordance with the PRC’s Foreign Enterprise Law, ACM Shanghai Shengwei Research (Shanghai), Inc., and ACM Wuxi are required to make contributions to a statutory surplus reserve (note 2). As a result of PRC laws and regulations that require annual appropriations of 10% of net after-tax profits to be set aside prior to payment of dividends as a general reserve fund or statutory surplus fund, ACM Shanghai is restricted in its ability to transfer a portion of its net assets to ACM (including any assets received as distributions from Shengwei Research (Shanghai), Inc. and ACM Wuxi). Amounts restricted included paid-in capital and statutory reserve funds, as determined pursuant to PRC accounting standards and regulations, were $ 119,377 , $ 113,168 and $ 32,076 as of December 31, 2020, 2019 and 2018, respectively. NOTE 25 – PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION The Company performed a test on the restricted net assets of consolidated subsidiaries in accordance with Rule 4-08(e)(3) of Regulation S-X of the SEC and concluded that it was applicable for the Company to disclose the financial information for ACM only. Certain information and footnote disclosures generally included in financial statements prepared in accordance with GAAP have been condensed or omitted. The footnote disclosure contains supplemental information relating to the operations of ACM separately. ACM’s subsidiaries did not pay any dividends to ACM during the periods presented. ACM did not have significant capital or other commitments, long-term obligations, or guarantees as of December 31, 2020 or 2019. 107 Table of Contents ACM RESEARCH, INC. Notes to Consolidated Financial Statements (in thousands, except share and per share data) The following represents condensed unconsolidated financial information of ACM only as of December 31, 2020 and 2019, and for the years ended December 31, 2020, 2019 and 2018: CONDENSED BALANCE SHEET December 31, 2020 2019 Assets Current assets: Cash and cash equivalents $ 30,188 $ 27,733 Inventory - 444 Due from intercompany - 4,542 Other receivable 5 5 Prepaid expenses 359 - Total current assets 30,552 32,724 Deferred tax assets 11,076 - Investment in unconsolidated subsidiaries 102,455 68,527 Total assets 144,083 101,251 Liabilities and Stockholders’ Equity Accounts payable 1,278 1,138 Other payable 255 589 Income taxes payable 31 3,129 FIN-48 payable 83 - Deferred tax liability 1,286 - Total liabilities 2,933 4,856 Total stockholders’ equity 141,150 96,395 Total liabilities and stockholders’ equity $ 144,083 $ 101,251 CONDENSED STATEMENT OF OPERATIONS Year Ended December 31, 2020 2019 2018 Revenue $ 1,776 $ 10,683 $ 25,506 Cost of revenue ( 1,707 ) ( 10,036 ) ( 23,927 ) Gross profit 69 647 1,579 Operating expenses: Sales and marketing expenses ( 1,361 ) ( 490 ) ( 301 ) General and administrative expenses ( 5,010 ) ( 3,639 ) ( 5,083 ) Research and development expenses - ( 476 ) ( 255 ) Loss from operations ( 6,302 ) ( 3,958 ) ( 4,060 ) Equity in earnings of unconsolidated subsidiaries 36,273 22,510 10,360 Change in fair value of financial liability ( 11,964 ) - - Interest income, net 90 231 166 Interest expense, net - ( 67 ) - Other income, net 683 178 108 Income before income taxes 18,780 18,894 6,574 Income tax expense - - - Net income $ 18,780 $ 18,894 $ 6,574 CONDENSED STATEMENT OF CASH FLOWS Year Ended December 31, 2020 2019 2018 Net cash used in operating activities $ ( 290 ) $ ( 7,957 ) $ ( 1,189 ) Net cash provided by investing activities - - 946 Net cash provided by financing activities 2,745 23,347 3,510 Net increase in cash and cash equivalents 2,455 15,390 3,267 Cash and cash equivalents, beginning of year 27,733 13,161 10,874 Effect of exchange rate changes on cash and cash equivalents - ( 818 ) ( 980 ) Cash and cash equivalents, end of year $ 30,188 $ 27,733 $ 13,161 108 Table of Contents