ACM Research, Inc. 10-K

Item 8. Financial Statements and Supplementary Data INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Consolidated Financial Statements 80 Report of Independent Registered Public Accounting Firm ( BDO China Shu Lun Pan Certified Public Accountants LLP , Shenzhen, China , PCAOB ID# 1818 ) 81 Consolidated Balance Sheets as of December 31, 2021 and 2020 84 Consolidated Statements of Operations and Comprehensive Income for the Years ended December 31, 2021, 2020 and 2019 85 Consolidated Statements of Changes in Stockholders’ Equity for the Years ended December 31, 2021, 2020 and 2019 86 Consolidated Statements of Cash Flows for the Years ended December 31, 2021, 2020 and 2019 87 Notes to Consolidated Financial Statements 88 80 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, 2021 and 2020, 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, 2021, 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, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021 , 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, 2021, 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, 2022 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. 81 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 Matter The critical audit matter communicated below is a matter 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) relates 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 matter 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 matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates. Revenue recognition related to sale of semiconductor capital equipment As described in Notes 2 and 3 to the consolidated financial statements, the Company derives revenue principally from the sale of semiconductor capital equipment. Revenue of sale of semiconductor capital 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. 82 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 controls related to the identification and evaluation of performance obligations in contracts with customers and assessment of 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. 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, 2022 83 Table of Contents ACM RESEARCH, INC. Consolidated Balance Sheets (In thousands, except per share data) December 31, 2021 2020 Assets Current assets: Cash and cash equivalents $ 563,067 $ 71,766 Trading securities (note 16) 29,498 28,239 Accounts receivable, less allowance for doubtful accounts of $ 0 as of December 31, 2021 and December 31, 2020 (note 4) 105,553 56,441 Income tax recoverable 1,082 - Other receivables 18,979 9,679 Inventories (note 5) 218,116 88,639 Prepaid expenses 16,639 5,892 Total current assets 952,934 260,656 Property, plant and equipment, net (note 6) 14,042 8,192 Land use right, net (note 7) 9,667 9,646 Operating lease right-of-use assets, net (note 11) 4,182 4,297 Intangible assets, net 477 554 Deferred tax assets (note 21) 13,166 11,076 Long-term investments (note 14) 12,694 6,340 Other long-term assets (note 8) 45,017 40,496 Total assets 1,052,179 341,257 Liabilities and Stockholders’ Equity Current liabilities: Short-term borrowings (note 9) 9,591 26,147 Current portion of long-term borrowings (note 12) 2,410 1,591 Accounts payable 101,350 35,603 Advances from customers 52,824 17,888 Deferred revenue 3,180 1,343 Income taxes payable (note 21) 254 31 FIN-48 payable (note 21) 2,282 83 Other payables and accrued expenses (note 10) 31,735 18,805 Current portion of operating lease liability (note 11) 2,313 1,417 Total current liabilities 205,939 102,908 Long-term borrowings (note 12) 22,957 17,979 Long-term operating lease liability (note 11) 1,869 2,880 Deferred tax liability (note 21) 1,302 1,286 Other long-term liabilities (note 13) 8,447 8,034 Total liabilities 240,514 133,087 Commitments and contingencies (note 23) Stockholders’ equity: Common stock – Class A, par value $ 0.0001 : 150,000,000 shares authorized as of December 31, 2021 and 50,000,000 shares authorized as of December 31, 2020 ; 17,869,643 shares issued and outstanding as of December 31, 2021 and 16,896,693 shares issued and outstanding as of December 31, 2020 (note 18) 2 2 Common stock–Class B, par value $ 0.0001 : 5,307,816 shares authorized as of December 31, 2021 and 2,409,738 shares authorized as of December 31, 2020 ; 1,695,938 shares issued and outstanding as of December 31, 2021 and 1,802,606 shares issued and outstanding as of December 31, 2020 (note 18) - - Additional paid in capital 595,049 102,004 Accumulated surplus 72,044 34,287 Accumulated other comprehensive income 9,109 4,857 Total ACM Research, Inc. stockholders’ equity 676,204 141,150 Non-controlling interests 135,461 67,020 Total stockholders’ equity 811,665 208,170 Total liabilities and stockholders’ equity $ 1,052,179 $ 341,257 The accompanying notes are an integral part of these consolidated financial statements. 84 Table of Contents ACM RESEARCH, INC. Consolidated Statements of Operations and Comprehensive Income (In thousands, except per share data) Year Ended December 31, 2021 2020 2019 Revenue (note 3) $ 259,751 $ 156,624 $ 107,524 Cost of revenue 144,895 87,025 56,870 Gross profit 114,856 69,599 50,654 Operating expenses: Sales and marketing 26,733 16,773 11,902 Research and development 34,207 19,119 12,900 General and administrative 15,214 12,215 8,061 Total operating expenses, net 76,154 48,107 32,863 Income from operations 38,702 21,492 17,791 Interest income 505 897 333 Interest expense ( 765 ) ( 982 ) ( 745 ) Change in fair value of financial liability - ( 11,964 ) - Unrealized gain on trading securities 607 12,574 - Other income (expense), net ( 631 ) ( 3,377 ) 1,393 Equity income in net income of affiliates 4,637 655 168 Income before income taxes 43,055 19,295 18,940 Income tax benefit (expense) (note 21) ( 134 ) 2,382 518 Net income 42,921 21,677 19,458 Less: Net income attributable to non-controlling interests and redeemable non-controlling interests 5,164 2,897 564 Net income attributable to ACM Research, Inc. $ 37,757 $ 18,780 $ 18,894 Comprehensive income: Net income 42,921 21,677 19,458 Foreign currency translation adjustment 4,695 10,493 ( 899 ) Comprehensive Income 47,616 32,170 18,559 Less: Comprehensive income attributable to non-controlling interests and redeemable non-controlling interests 5,607 6,858 483 Comprehensive income attributable to ACM Research, Inc. $ 42,009 $ 25,312 $ 18,076 Net income attributable to ACM Research, Inc. per common share (note 2): Basic $ 1.96 $ 1.03 $ 1.12 Diluted $ 1.73 $ 0.89 $ 0.99 Weighted average common shares outstanding used in computing per share amounts (note 2): Basic 19,218,236 18,233,361 16,800,623 Diluted 21,785,572 21,183,469 19,135,497 The accompanying notes are an integral part of these consolidated financial statements. 85 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, 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 Net income - - - - - 37,757 - 5,164 42,921 Foreign currency translation adjustment - - - - - - 4,252 443 4,695 Exercise of stock options 623,601 - - - 3,430 - - - 3,430 Stock-based compensation - - - - 5,117 - - - 5,117 Exercise of warrants 242,681 - - - 1,820 - - - 1,820 Conversion of Class B common stock to Class A common stock 106,668 - ( 106,668 ) - - - - - - Proceeds from a subsidiary equity issuance, net of issuance costs - - - - 482,678 - - 62,834 545,512 Balance at December 31, 2021 17,869,643 2 1,695,938 $ - $ 595,049 $ 72,044 $ 9,109 $ 135,461 $ 811,665 The accompanying notes are an integral part of these consolidated financial statements. 86 Table of Contents ACM RESEARCH, INC. Consolidated Statements of Cash Flows (In thousands) Year Ended December 31, 2021 2020 2019 Cash flows from operating activities: Net income $ 42,921 $ 21,677 $ 19,458 Adjustments to reconcile net income from operations to net cash used in operating activities Depreciation and amortization 2,353 1,055 788 Loss on disposals of property, plant and equipment - 25 294 Equity income in net income of affiliates ( 4,637 ) ( 655 ) ( 168 ) Unrealized gain on trading securities ( 607 ) ( 12,574 ) - Deferred income taxes ( 1,840 ) ( 4,085 ) ( 3,719 ) Stock-based compensation 5,117 5,628 3,572 Change in fair value of financial liability - 11,964 - Net changes in operating assets and liabilities: Accounts receivable ( 47,624 ) ( 22,085 ) ( 6,961 ) Income tax recoverable ( 1,082 ) - - Other receivables ( 8,420 ) ( 6,882 ) 891 Inventory ( 127,656 ) ( 40,768 ) ( 6,658 ) Prepaid expenses ( 10,606 ) ( 3,518 ) ( 83 ) Other long-term assets ( 4,521 ) ( 99 ) ( 151 ) Accounts payable 65,211 21,275 ( 3,058 ) Advances from customers 34,831 8,578 705 Income tax payable 226 ( 3,137 ) 1,952 FIN-48 payable 2,200 ( 83 ) - Other payables and accrued expenses 10,551 5,236 2,865 Deferred revenue 3,180 1,343 - Other long-term liabilities 310 3,558 ( 324 ) Net cash flow (used in) provided by operating activities ( 40,093 ) ( 13,547 ) 9,403 Cash flows from investing activities: Purchase of property and equipment ( 9,153 ) ( 5,211 ) ( 971 ) Purchase of intangible assets ( 559 ) ( 324 ) ( 154 ) Purchase of land-use-right - ( 9,744 ) - Purchase of trading securities - ( 15,020 ) - Prepayment for property - ( 40,206 ) - Investments in unconsolidated affiliates ( 1,568 ) - ( 4,406 ) Dividends from unconsolidated affiliates - 555 - Net cash used in investing activities ( 11,280 ) ( 69,950 ) ( 5,531 ) Cash flows from financing activities: Proceeds from short-term borrowings 22,884 32,573 18,423 Repayments of short-term borrowings ( 39,809 ) ( 20,234 ) ( 14,005 ) Proceeds from long-term borrowings 7,056 19,699 - Repayments of long-term borrowings ( 2,127 ) ( 129 ) - Repayments of notes payable - ( 1,820 ) - Proceeds from stock option exercise to common stock 3,430 2,745 317 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 Proceeds from a subsidiary equity issuance, net of issuance costs 545,512 - - Proceeds from warrant exercise to common stock 1,820 - - Net cash provided by financing activities 538,766 32,834 87,445 Effect of exchange rate changes on cash, cash equivalents and restricted cash $ 3,908 $ 4,570 $ ( 582 ) Net increase (decrease) in cash, cash equivalents and restricted cash $ 491,301 $ ( 46,093 ) $ 90,735 Cash, cash equivalents and restricted cash at beginning of period 71,766 117,859 27,124 Cash, cash equivalents and restricted cash at end of period $ 563,067 $ 71,766 $ 117,859 Supplemental disclosure of cash flow information: Interest paid, net of capitalized interest $ 765 $ 982 $ 745 Cash paid for income taxes $ 1,132 $ 4,971 $ 1,156 Reconciliation of cash, cash equivalents and restricted cash in condensed consolidated statements of cash flows: Cash and cash equivalents 563,067 71,766 58,261 Restricted cash - - 59,598 Cash, cash equivalents and restricted cash $ 563,067 $ 71,766 $ 117,859 Non-cash financing activities: Warrant conversion to common stock $ - $ 399 $ 9 Share cancellation, (note 16) $ - $ 9,715 $ - Cashless exercise of stock options $ 137 $ - $ - Issuance of warrant for settlement of financial liability and cancellation of note receivable $ - $ 19,859 $ - The accompanying notes are an integral part of these consolidated financial statements. 87 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 re-domesticated 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. 88 Table of Contents ACM RESEARCH, INC. Notes to Consolidated Financial Statements (in thousands, except share and per share data) In August 2017 ACM purchased 18.77 % of ACM Shanghai’s equity interests held by Shanghai Science and Technology Venture Capital Co., Ltd. On November 8, 2017, ACM purchased the remaining 18.36 % of ACM Shanghai’s equity interest held by third parties, Shanghai Pudong High-Tech Investment Co., Ltd. (“PDHTI”) and Shanghai Zhangjiang Science & Technology Venture Capital Co., Ltd. (“ZSTVC”). At December 31, 2017, ACM owned all of the outstanding equity interests of ACM Shanghai, and indirectly through ACM Shanghai, owned all of the outstanding equity interests of ACM Wuxi. On September 13, 2017, ACM effectuated a 1-for-3 reverse stock split of Class A and Class B common stock. Unless otherwise indicated, all share numbers, per share amount, share prices, exercise prices and conversion rates set forth in these notes and the accompanying 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. In August 2021 ACM formed a wholly owned subsidiary Singapore, ACM research (Singapore) PTE, Ltd. to perform sales, marketing, and other business development activities. In November 2021, ACM’s operating subsidiary ACM Shanghai, completed its STAR IPO and its shares began trading on the STAR Market. In the STAR IPO, ACM Shanghai issued 43,355,753 shares, representing 10 % of the total 433,557,100 shares outstanding after the issuance. The shares were issued at a public offering price of RMB 85.00 per share, and the net proceeds of the STAR IPO, after issuance costs, totaled $ 545,512 . Upon completion of the STAR IPO, ACM owned 82.5 % of the outstanding ACM Shanghai shares. 89 Table of Contents ACM RESEARCH, INC. Notes to Consolidated Financial Statements (in thousands, except share and per share data) 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 2021 2020 ACM Research (Shanghai), Inc. PRC, May 2005 82.5 % 91.7 % ACM Research (Wuxi), Inc. PRC, July 2011 82.5 % 91.7 % CleanChip Technologies Limited Hong Kong, September 2017 82.5 % 91.7 % ACM Research Korea CO., LTD. Korea, December 2017 82.5 % 91.7 % Shengwei Research (Shanghai), Inc. PRC, March 2019 82.5 % 91.7 % ACM Research (CA), Inc. USA, April 2019 82.5 % 91.7 % ACM Research (Cayman), Inc. Cayman Islands, April 2019 100.0 % 100.0 % ACM Research (Singapore) PTE. Ltd. Singapore, August 2021 100.0 % NM 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 pandemic 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. COVID-19 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, 2021, the Company had not experienced a significant negative impact from 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 pandemic and related restrictions on transportation and public appearances. The Company cannot assure that 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 pandemic. The Company’s corporate headquarters are located in San Mateo County in the San Francisco Bay Area. The effects of actions taken by local governmental agencies 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. 90 Table of Contents ACM RESEARCH, INC. Notes to Consolidated Financial Statements (in thousands, except share and per share data) 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 2022, 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. Extended periods of interruption to our corporate, development or manufacturing facilities due to the COVID-19 pandemic 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. 91 Table of Contents ACM RESEARCH, INC. Notes to Consolidated Financial Statements (in thousands, except share and per share data) 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. 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, 2021, and 2020, 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). 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, 2021 and 2020. ● 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. 92 Table of Contents ACM RESEARCH, INC. Notes to Consolidated Financial Statements (in thousands, except share and per share data) 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. 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 14 for discussion of equity method investment. 93 Table of Contents ACM RESEARCH, INC. Notes to Consolidated Financial Statements (in thousands, except share and per share data) The Company elects to measure its investments in other equity securities that the Company does not have control nor significant influence on the investee at cost minus impairment, if any for those equity securities without a readily determinable fair value. 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 statements 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. Revenue Recognition The Company derives revenue principally from the sale of semiconductor capital 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. 94 Table of Contents ACM RESEARCH, INC. Notes to Consolidated Financial Statements (in thousands, except share and per share data) 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. 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 and the customers have obtained control of the parts. The Company does not expect revenue from extended maintenance service contracts to represent a material portion of its revenue in the future. 95 Table of Contents ACM RESEARCH, INC. Notes to Consolidated Financial Statements (in thousands, except share and per share data) 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, 2021, 2020 and 2019, shipping and handling costs included in sales and marketing expenses were $ 923 , $ 76 , and $ 172 , 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. Warranty For each of its products, the Company generally provides a standard assurance type 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, 2021, 2020 and 2019 respectively. 96 Table of Contents ACM RESEARCH, INC. Notes to Consolidated Financial Statements (in thousands, except share and per share data) Year Ended December 31, 2021 2020 2019 Balance at beginning of period 3,975 2,811 1,710 Additions 5,026 3,101 2,105 Utilized ( 2,370 ) ( 1,937 ) ( 1,004 ) Balance at end of period $ 6,631 $ 3,975 $ 2,811 Government Subsidies ACM Shanghai has received seven special government grants. 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. As of December 31, 2021, the fourth and fifth grants had been fully utilized. The sixth grant was made in 2020, and relates to the development of other cleaning technologies. The seventh grant was made in 2021, and relates to the development of the R&D and production center in the Lin-gang Special Area of Shanghai. These governmental authorities provide significant funding, although ACM Shanghai and ACM Shengwei 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, 2021, 2020 and 2019, related government subsidies recognized as reductions of relevant expenses in the consolidated statements of operations and comprehensive income were $ 11,260 , $ 2,658 and $ 3,195 , 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, 2021, 2020 and 2019, related government subsidies recognized as other income in the consolidated statements of operations and comprehensive income were $ 200 , $ 149 , and $ 147 , 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. 97 Table of Contents ACM RESEARCH, INC. Notes to Consolidated Financial Statements (in thousands, except share and per share data) 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. 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, 2021 2020 2019 Numerator: Net income $ 42,921 $ 21,677 $ 19,458 Less: Net income attributable to non-controlling interests and redeemable non-controlling interests 5,164 2,897 564 Net income available to common stockholders, basic $ 37,757 $ 18,780 $ 18,894 Less: Dilutive effect arising from share-based awards by ACM Shanghai 108 - - Net income available to common stockholders, diluted $ 37,649 $ 18,780 $ 18,894 Weighted average shares outstanding, basic 19,218,236 18,233,361 16,800,623 Effect of dilutive securities 2,567,336 2,950,108 2,334,874 Weighted average shares outstanding, diluted 21,785,572 21,183,469 19,135,497 Net income per common share: Basic 1.96 1.03 1.12 Diluted $ 1.73 $ 0.89 $ 0.99 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, 2021. 98 Table of Contents ACM RESEARCH, INC. Notes to Consolidated Financial Statements (in thousands, except share and per share data) 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, 2021, 2020 and 2019, the net income per common share attributable to each class is the same under the “two-class” method. As such, the two classes of common stock have been presented on a combined basis in the 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, 2021. 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 98,800 , 78,000 and 606,000 the years ended December 31, 2021, 2020 and 2019, 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 $ 42,009 , $ 25,312 , and $ 18,076 for the years ended December 31, 2021, 2020 and 2019, respectively. 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 $ 8,312 and $ 4,388 based on an accumulated profit as of December 31, 2021 and 2020, 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: 99 Table of Contents ACM RESEARCH, INC. Notes to Consolidated Financial Statements (in thousands, except share and per share data) 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 1 and Level 2 fair value measurement as of December 31, 2021 and 2022, respectively (note 16). 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, 2021. 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. 100 Table of Contents ACM RESEARCH, INC. Notes to Consolidated Financial Statements (in thousands, except share and per share data) The Company is potentially subject to concentrations of credit risks in its accounts receivable. In the year ended December 31, 2021 and 2020, a total of two and three customers, respectively, individually accounted for greater than ten percent of the Company’s revenue: December 31, 2021 2020 Customer A 28.1 % 36.9 % Customer B 20.8 % 26.8 % Customer C * 12.1 % Total 48.9 % 75.8 % Interest Rate Risk As of December 31, 2021 and 2020, 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, 2021, 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, 2021 and 2020 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 $ 4,695 , $ 10,493 and ($ 899 ) for the years ended December 31, 2021, 2020 and 2019, respectively. 101 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, 2021 2020 2019 Consolidated balance sheets: RMB to $1.00 6.3757 6.5232 6.9784 KRW to $1.00 1,145.48 1,088.14 1,156.07 Consolidated statements of operations and comprehensive income: RMB to $1.00 6.4515 6.8966 6.8966 KRW to $1.00 1,190.48 1,179.25 1,165.50 Recently Adopted Accounting Pronouncements In December 2019, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. ASU 2019-12 simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. It also improves consistent application of and simplifies GAAP for other areas of Topic 740 by clarifying and amending existing guidance. The Company adopted ASU 2019-12 on January 1, 2021. The adoption of ASU 2019-12 did not have a material impact on the Company’s consolidated financial statements. 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 Company adopted ASU 2020-04 on January 1, 2021. The adoption of ASU 2020-04 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. 102 Table of Contents ACM RESEARCH, INC. Notes to Consolidated Financial Statements (in thousands, except share and per share data) 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 U.S. Securities and Exchange Commission (“SEC”) to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Since the Company was eligible to be an SRC based on its 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. 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 business. The following tables present disaggregated revenue information: Year Ended December 31, 2021 2020 2019 Single Wafer Cleaning, Tahoe and Semi-Critical Cleaning Equipment $ 189,208 $ 131,248 90,501 ECP (front-end and packaging), Furnace and Other Technologies 33,210 13,343 6,900 Advanced Packaging (excluding ECP), Services & Spares 37,333 12,033 10,124 Total Revenue By Product Category $ 259,751 $ 156,624 107,524 Wet cleaning and other front-end processing tools $ 202,268 $ 136,317 90,935 Advanced packaging, other processing tools, services and spares 57,483 20,307 16,590 Total Revenue Front-end and Back-End $ 259,751 $ 156,624 107,524 Year Ended December 31, 2021 2020 2019 Mainland China $ 258,615 $ 154,359 103,467 Other Regions 1,136 2,265 4,057 $ 259,751 $ 156,624 107,524 NOTE 4 – ACCOUNTS RECEIVABLE At December 31, 2021 and 2020, accounts receivable consisted of the following: December 31, 2021 2020 Accounts receivable $ 105,553 $ 56,441 Less: Allowance for doubtful accounts - - Total $ 105,553 $ 56,441 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, 2021 and 2020. 103 Table of Contents ACM RESEARCH, INC. Notes to Consolidated Financial Statements (in thousands, except share and per share data) NOTE 5 – INVENTORIES At December 31, 2021 and 2020, inventory consisted of the following: December 31, 2021 2020 Raw materials $ 90,552 $ 32,391 Work in process 35,840 23,871 Finished goods 91,724 32,377 Total inventory $ 218,116 $ 88,639 At December 31, 2021 and 2020, the Company held an inventory reserve of $ 1,215 and $ 1,140 respectively. At December 31, 2021 and 2020, respectively, finished goods inventory included system shipments of first-tools to existing or prospective customers, for which ownership does not transfer until customer acceptance or customer purchase, totaling $ 91,724 and $ 32,377 respectively. At December 31, 2021 and 2020, the value of finished goods inventory for which customers are contractually obligated to take ownership upon acceptance totaled $ 71,889 and $ 20,834 , respectively. NOTE 6 – PROPERTY, PLANT AND EQUIPMENT, NET At December 31, 2021 and 2020, property, plant and equipment consisted of the following: December 31, 2021 2020 Manufacturing equipment $ 7,973 $ 5,966 Office equipment 2,012 1,047 Transportation equipment 217 216 Leasehold improvement 4,134 2,398 Total cost 14,336 9,627 Less: Total accumulated depreciation ( 5,900 ) ( 3,745 ) Construction in progress 5,606 2,310 Total property, plant and equipment, net $ 14,042 $ 8,192 Depreciation expense was $ 2,099 , $ 826 , and $ 713 the years ended December 31, 2021, 2020 and 2019, respectively. During the years ended December 31, 2021 and 2020, the Company retired certain fully depreciated manufacturing equipment with cost of $ 0 and $ 446 , respectively. NOTE 7 – LAND USE RIGHT, NET A summary of land use right is as follows: December 31, 2021 2020 Land use right purchase amount $ 9,966 $ 9,744 Less: accumulated amortization ( 299 ) ( 98 ) Land use right, net $ 9,667 $ 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. 104 Table of Contents ACM RESEARCH, INC. Notes to Consolidated Financial Statements (in thousands, except share and per share data) The amortization for the year ended December 31, 2021 and 2020 was $ 199 and $ 98 respectively. The annual amortization of land use right for each of the five succeeding years is as follows: Year ending December 31, 2022 199 2023 199 2024 199 2025 199 2026 199 NOTE 8 – OTHER LONG-TERM ASSETS At December 31, 2021 and 2020, other long-term assets consisted of the following: December 31, 2021 2020 Prepayment for property - Lingang $ 42,111 $ 39,450 Prepayment for property, plant and equipment and other non-current assets 440 - Prepayment for property - lease deposit 429 - Security deposit for land use right 773 756 Others 1,264 290 Total other long-term assets $ 45,017 $ 40,496 The prepayment for property - Lingang is for the housing in Lingang, Shanghai, which consists of (1) the contractual amount to acquire the property and (2) capitalized interest charges on the long-term loan related to acquisition of the property, which amounted to $ 986 as of December 31, 2021. In January 2022, ACM Shengwei received ownership of the apartment units and corresponding land use rights. The property is pledged for a long-term loan from China Merchants Bank (note 12). 105 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, 2021 and December 31, 2020, short-term and long-term borrowings consisted of the following: December 31, 2021 2020 Line of credit up to RMB 80,000 from China Everbright Bank, 1)due on April 1, 2021 with an annual interest rate of 4.70 %. *1 and fully repaid on March 23, 2021 . $ - $ 4,599 2)due on June 27, 2021 with an annual interest rate of 4.25 %. *1 and fully repaid on June 28, 2021 . - 1,380 3)due on April 29, 2021 with an annual interest rate of 2.80 %. *1 and fully repaid on March 23, 2021 . - 820 4)due on June 27, 2021 with an annual interest rate of 2.70 %. *1 and fully repaid on June 25, 2021 . - 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 % and fully repaid on April 12, 2021 . - 1,533 2)due on May 24, 2021 with an annual interest rate of 3.65 % and fully repaid on May 24, 2021 . - 1,533 Line of credit up to RMB 70,000 from Bank of Shanghai Pudong Branch, 1)due on May 27, 2021 with an annual interest rate of 4.68 %. *2 and fully repaid on May 27, 2021 . - 2,575 2)due on June 27, 2021 with an annual interest rate of 4.68 %. *2 and fully repaid on March 29, 2021 . - 1,380 3)due on May 28, 2021 with an annual interest rate of 3.48 %. *2 and fully repaid on May 28, 2021 . - 2,442 4)due on June 7, 2021 with an annual interest rate of 3.50 %. *2 and fully repaid on June 7, 2021 . - 1,521 5)due on June 16, 2021 with an annual interest rate of 3.50 %. *2 and fully repaid on June 16, 2021 . - 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 % and fully repaid on August 10, 2021 . - 1,380 2)due on August 25,2021 with annual interest rate of 3.85 % and fully repaid on August 25, 2021 . - 3,066 Line of credit up to RMB 100,000 from Bank of Shanghai Pudong Branch, 1)due on June 7, 2022 with an annual interest rate of 2.7 %. *3 4,616 - Line of credit up to RMB 150,000 from China Everbright Bank, 1)due on October 21, 2022 with annual interest rate of 1.95 %. 3,407 - Line of credit up to RMB 60,000 from Bank of Communications, 1)due on October 25, 2022 with an annual interest rate of 3.85 %. 1,568 - Total $ 9,591 $ 26,147 *1 guaranteed by ACM’s Chief Executive Officer *2 guaranteed by ACM’s Chief Executive Officer and Cleanchip Technologies Limited *3 guaranteed by Cleanchip Technologies Limited For the years ended December 31, 2021, 2020 and 2019, interest expense related to short-term borrowings amounted to $ 700 , $ 897 , and $ 745 , respectively. NOTE 10 – OTHER PAYABLE AND ACCRUED EXPENSES At December 31, 2021 and 2020, other payable and accrued expenses consisted of the following: December 31, 2021 2020 Accrued commissions $ 12,507 $ 7,127 Accrued warranty 6,631 3,975 Accrued payroll 5,684 3,068 Accrued professional fees 785 384 Accrued machine testing fees 149 1,595 Others 5,979 2,656 Total $ 31,735 $ 18,805 106 Table of Contents ACM RESEARCH, INC. Notes to Consolidated Financial Statements (in thousands, except share and per share data) 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, 2021 2020 2019 Operating lease cost $ 2,451 $ 1,541 $ 1,432 Short-term lease cost 394 236 165 Lease cost $ 2,845 $ 1,777 $ 1,597 Supplemental cash flow information related to operating leases was as follows for the years ended December 31, 2021, 2020 and 2019: Year Ended December 31, 2021 2020 2019 Cash paid for amounts included in the measurement of lease liabilities: Operating cash outflow from operating leases $ 2,845 $ 1,777 $ 1,597 Maturities of lease liabilities for all operating leases were as follows as of December 31, 2021: December 31, 2022 $ 2,385 2023 1,063 2024 929 2025 19 Total lease payments 4,396 Less: Interest ( 214 ) Present value of lease liabilities $ 4,182 The weighted average remaining lease terms and discount rates for all operating leases were as follows as of December 31, 2021 and 2020: December 31, 2021 2020 Remaining lease term and discount rate: Weighted average remaining lease term (years) 1.37 2.11 Weighted average discount rate 4.54 % 5.14 % 107 Table of Contents ACM RESEARCH, INC. Notes to Consolidated Financial Statements (in thousands, except share and per share data) NOTE 12 – LONG-TERM BORROWINGS At December 31, 2021 and 2020, long-term borrowings consisted of the following: December 31, 2021 2020 Loan from China Merchants Bank $ 18,390 $ 19,570 Loans from Bank of China 6,977 - Less: Current portion ( 2,410 ) ( 1,591 ) $ 22,957 $ 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, 2021, 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. Two loans from Bank of China are for the purpose of funding ACM Shanghai project expenditures. The loans bear interest at an annual rate of 2.6 % and are repayable in 6 installments, with the last installments due in June 2024 and September 2024 . Scheduled principal payments for the outstanding long-term loan as of December 31, 2021 are as follows: Year ending December 31, 2022 $ 2,410 2023 2,491 2024 7,436 2025 1,959 2026 and onwards 11,071 $ 25,367 For the year ended December 31, 2021, $ 1,040 of interest related to long-term borrowings was incurred, of which $ 65 was charged to interest expense and $ 975 was capitalized as other long-term assets. For the year ended December 31, 2020, $ 72 of interest related to long-term borrowings was incurred, and capitalized, as other long-term assets. 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, 2021 and 2020, other long-term liabilities consisted of the following unearned government subsidies: December 31, 2021 2020 Subsidies to Stress Free Polishing project, commenced in 2008 and 2017 $ 791 $ 1,266 Subsidies to Electro Copper Plating project, commenced in 2014 160 2,156 Subsidies to Polytetrafluoroethylene, commenced in 2018 - 130 Subsidies to Tahoe-Single Bench Clean, commenced in 2020 - 1,544 Subsidies to other cleaning tools,commenced in 2020 1,014 2,591 Subsidies to SW Lingang R&D development in 2021 5,958 - Other 524 347 Total $ 8,447 $ 8,034 108 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. On October 29, 2021, ACM Shanghai and Waferworks (Shanghai) Co., Ltd, or Waferworks, a company based in Shanghai, China, and one of the Company’s customers, entered into an agreement pursuant to which Waferworks issued to ACM Shanghai shares representing 0.25 % of Waferworks’ post-closing equity for a purchase price of $ 1,568 . As there is no readily determinable fair value, the Company measures the investment in Waferworks at cost minus impairment, if any. 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. December 31, 2021 2020 Ninebell $ 3,051 $ 1,666 Shengyi 211 134 Hefei Shixi 7,864 4,540 Subtotal 11,126 6,340 Other investee: Waferworks 1,568 - Total $ 12,694 $ 6,340 For the years ended December 31, 2021, 2020 and 2019, the Company’s share of equity investees’ net income was $ 4,637 , $ 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, 2021, 2020 and 2019, dividends received from its equity investee was $ 0 , $ 555 and $ 0 , respectively, which was offset in part by a reduction in the carrying value of the Company’s share of equity investees’ net income. 109 Table of Contents ACM RESEARCH, INC. Notes to Consolidated Financial Statements (in thousands, except share and per share data) NOTE 15 – 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. 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. 110 Table of Contents ACM RESEARCH, INC. Notes to Consolidated Financial Statements (in thousands, except share and per share data) 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. On June 9, 2021, subsequent to its obtaining the necessary PRC approvals, SMC exercised the 2020 Warrant by paying the $ 1,820 exercise price to ACM and surrendering the 2020 Warrant to ACM. In return, ACM delivered 242,681 shares of ACM Class A common stock to SMC. NOTE 16 – 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 ($ 315.0 million), 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. At December 31, 2020, the fair market value 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. Following the expiration of the lock-up period in July 2021, the trading securities are stated at fair market value, which is classified as Level 1 of the hierarchy established under ASC 820 with valuations based on quoted prices for identical securities in active markets at December 31, 2021. 111 Table of Contents ACM RESEARCH, INC. Notes to Consolidated Financial Statements (in thousands, except share and per share data) The components of trading securities were as follows: December 31, 2021 2020 Trading securities listed in Shanghai Stock Exchange Cost $ 15,363 $ 15,020 Market value $ 29,498 $ 28,239 For the year ended December 31, 2021 and 2020, unrealized gain on trading securities, net of exchange difference amounted to $ 607 and $ 12,574 , respectively . NOTE 17 – RELATED PARTY BALANCES AND TRANSACTIONS December 31, Prepaid expenses 2021 2020 Ninebell $ 2,383 $ 1,607 December 31, Accounts payable 2021 2020 Ninebell $ 5,703 $ 2,898 Shengyi 2,196 1,195 Total $ 7,899 $ 4,093 Year Ended December 31 Purchase of materials 2021 2020 2019 Ninebell $ 33,659 $ 15,251 $ 8,572 Shengyi 2,434 2,300 856 Total $ 36,093 $ 17,551 $ 9,428 Year Ended December 31 Service fee charged by 2021 2020 2019 Shengyi $ 561 $ 322 $ - Ninebell - 22 - Total $ 561 $ 344 $ - 112 Table of Contents ACM RESEARCH, INC. Notes to Consolidated Financial Statements (in thousands, except share and per share data) NOTE 18 – COMMON STOCK At December 31, 2020, ACM was 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 . On July 13, 2021, the Company filed a certificate of amendment to its restated certificate of incorporation with the Secretary of State of the State of Delaware. The amendment i) increased the authorized number of shares of Class A common stock from 50,000,000 to 150,000,000 with 60,000,000 of the 100,000,000 additional authorized shares of Class A common stock reserved for issuance only as dividends on outstanding shares of Class A common stock; ii) increased the authorized number of shares of Class B common stock from 2,409,738 to 5,307,816 , with all of the authorized but unissued shares of Class B common stock being available for issuance only as dividends on outstanding shares of Class B common stock; and iii) removed a now obsolete provision related to the automatic conversion of Class B common stock into Class A common stock. The amendment to ACM’s certificate of incorporation that increased the number of authorized Class A common stock and Class B common stock was approved by ACM’s stockholders on June 2, 2021. At December 31, 2021, ACM was authorized to issue 150,000,000 shares of Class A common stock and 5,307,816 shares of Class B common stock, each with a par value of $ 0.0001 . Each share of Class A common stock is entitled to one vote, and each share of Class B common stock is entitled to twenty votes and is convertible at any time into one share of Class A common stock. Shares of Class A common stock and Class B common stock are treated equally, identically and ratably with respect to any dividends declared by the Board of Directors unless the Board of Directors declares different dividends to the Class A common stock and Class B common stock by getting approval from a majority of common stockholders. On March 30, 2018, SMC exercised the SMC Warrant in full (note 15) 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 15 ). During the year ended December 31, 2021, the Company issued 623,601 shares of Class A common stock upon options exercises by certain employees and non-employees and an additional 106,668 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 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, 2021, ACM issued 242,681 shares of Class A common stock upon the warrant exercise SMC (Note 15). 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, 2021 and 2020 , the number of shares of Class A common stock issued and outstanding was 17,869,643 and 16,896,693 , respectively. At December 31, 2021 and 2020 , the number of shares of Class B common stock issued and outstanding was 1,695,938 and 1,802,606 , respectively. 113 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 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 initially. 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. During the second quarter of 2020, the redemption feature of the private placement funding terminated and the aggregate proceeds of the funding therefore were reclassified from redeemable non-controlling interests to non-controlling interests. At September 30, 2020, the balance of redeemable non-controlling interest was nil . The components of the change in the redeemable non-controlling interests for the year ended December 31, 2020 are presented in the following table: Balance at December 31, 2019 $ 60,162 Net income attributable to redeemable non-controlling interests 643 Effect of foreign currency translation gain attributable to redeemable non-controlling interests ( 847 ) Reclassification of redeemable non-controlling interest ( 59,958 ) Balance at 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 did not begin trading until November 2021, 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 years ended December 31, 2021, 2020 and 2019. The vesting condition may consist of service period determined by the Board of Directors for a 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. 114 Table of Contents ACM RESEARCH, INC. Notes to Consolidated Financial Statements (in thousands, except share and per share data) The following table summarizes the components of stock-based compensation expense included in the consolidated statements of operations: Year Ended December 31, 2021 2020 2019 Stock-Based Compensation Expense: Cost of revenue $ 397 $ 175 $ 250 Sales and marketing expense 1,802 1,199 328 Research and development expense 1,115 763 1,093 General and administrative expense 1,803 3,491 1,901 $ 5,117 $ 5,628 $ 3,572 Year Ended December 31, 2021 2020 2019 Stock-based compensation expense by type: Employee stock purchase plan $ 4,674 $ 4,900 $ 2,265 Non-employee stock purchase plan 94 396 1,307 Subsidiary option grants 349 332 - $ 5,117 $ 5,628 $ 3,572 The fair value of options granted to employees 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, 2021 2020 2019 Fair value of common share(1) $ 38.38 - 51.07 $ 22.07 - 85.27 $ 13.64 - 16.81 Expected term in years(2) 6.25 5.50 - 6.25 6.25 Volatility(3) 48.53 - 49.47 % 42.17 %- 48.15 % 39.91 %- 40.35 % Risk-free interest rate(4) 1.00 %- 1.44 % 0.44 %- 0.82 % 1.69 %- 2.46 % Expected dividend(5) 0 % 0 % 0 % (1) Fair value of Class A common stock value was the closing market price of the Class A common stock on the grant date. (2) Expected term of share options is based on the average of the vesting period and the contractual term for each grant according to Staff Accounting Bulletin 110. (3) Volatility is calculated based on the historical volatility of the stock of companies comparable to ACM in the period equal to the expected term of each grant. (4) Risk-free interest rate is based on the yields of U.S. Treasury securities with maturities similar to the expected term of the share options in effect at the time of grant. (5) Expected dividend is assumed to be 0 % as ACM has no history or expectation of paying a dividend on its common stock. 115 Table of Contents ACM RESEARCH, INC. Notes to Consolidated Financial Statements (in thousands, except share and per share data) During the year ended December 31, 2021, no option was granted to employee with market based condition. During the year ended December 31, 2020, the fair value of option granted to an employee with market based condition was 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. Employee Awards The following table summarizes the Company’s employee share option activities during the years ended December 31, 2019, 2020 and 2021: Number of Option Share Weighted Average Grant Date Fair Value Weighted Average Exercise Price Weighted Average Remaining Contractual Term 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 Granted 140,400 48.16 106.15 Exercised ( 477,058 ) 2.46 6.30 Forfeited/cancelled ( 54,004 ) 24.97 57.10 Outstanding at December 31, 2021 2,800,749 $ 7.36 $ 17.65 6.53 years Vested and exercisable at December 31, 2021 1,922,180 As of December 31, 2021 and 2020, $ 9,544 and $ 8,733 , 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 1.61 years and 1.89 years, respectively. Total recognized compensation cost may be adjusted for future changes in estimated forfeitures. 116 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, 2019, 2020 and 2021: Number of Option Shares Weighted Average Grant Date Fair Value Weighted Average Exercise Price Weighted Average Remaining Contractual Term Outstanding at December 31, 2018 1,212,374 $ 0.78 $ 2.57 6.66 years Granted - - - Exercised ( 88,529 ) 0.45 1.06 Expired - - - Forfeited/cancelled ( 22,232 ) 0.55 3.00 Outstanding at 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 Granted - - - Exercised ( 146,543 ) 1.12 3.83 Expired - - - Forfeited/cancelled ( 489 ) 0.34 0.84 Outstanding at December 31, 2021 689,006 $ 1.00 $ 2.91 3.98 years Vested and exercisable at December 31, 2021 677,756 As of December 31, 2021 and 2020, $ 102 and $ 195 , 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 0.06 years and 0.09 years, respectively. Total recognized compensation cost may be adjusted for future changes in estimated forfeitures. ACM Shanghai Option Grants The following table summarizes the ACM Shanghai employee stock option activities during the years ended December 31, 2021 and 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 Granted - - - Exercised - - - Expired - - - Forfeited/cancelled ( 46,154 ) 0.24 2.04 Outstanding at December 31, 2021 5,377,500 $ 0.24 $ 2.04 2.50 years Vested and exercisable at December 31, 2021 - During the year ended December 31, 2021 and 2020, the Company recognized stock-based compensation expense of $ 349 and $ 332 , related to stock option grants of ACM Shanghai. As of December 31, 2021 and 2020, $ 525 and $ 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 1.5 and 2.5 years. Total recognized compensation cost may be adjusted for future changes in estimated forfeitures. 117 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, 2021, 2020 and 2019: Year Ended December 31, 2021 2020 2019 (in thousands) Current: U.S. federal $ ( 91 ) $ ( 61 ) $ - U.S. state ( 2 ) ( 2 ) - Foreign ( 2,195 ) ( 2,014 ) ( 3,176 ) Total current tax expense ( 2,288 ) ( 2,077 ) ( 3,176 ) Deferred: U.S. federal 2,089 7,325 3,728 U.S. state - - - Foreign 65 ( 2,866 ) ( 34 ) Total deferred tax benefit 2,154 4,459 3,694 Total income tax benefit (expense) $ ( 134 ) $ 2,382 $ 518 Tax effects of temporary differences that give rise to significant portions of the Company’s deferred tax assets at December 31, 2021 and 2020 are presented below: Year Ended December 31, 2021 2020 2019 Deferred tax assets: Net operating loss carry forwards (offshore) $ 522 $ 323 $ 216 Net operating loss carry forwards (U.S.) and credit 12,173 9,981 3,218 Deferred revenue (offshore) 361 556 1,181 Accruals (U.S.) 15 22 15 Reserves and other (offshore) 1,528 884 426 Stock-based compensation (U.S.) 2,283 1,599 1,168 Property and equipment (U.S.) 1 164 3 Lease liability 559 659 - Total gross deferred tax assets 17,442 14,188 6,227 Less: valuation allowance ( 919 ) ( 848 ) ( 896 ) Total deferred tax assets 16,523 13,340 5,331 Deferred tax liabilities: Fixed assets ( 589 ) ( 697 ) - Deferred revenue (offshore) ( 1,486 ) ( 967 ) - Unrealized gain on trading securities - ( 1,886 ) - Equity Investments ( 2,584 ) - - Total deferred tax liabilities ( 4,659 ) ( 3,550 ) - Translation difference - - - Deferred tax assets, net $ 11,864 $ 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, 2021 and 2020, based on estimates of recoverability. 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. 118 Table of Contents ACM RESEARCH, INC. Notes to Consolidated Financial Statements (in thousands, except share and per share data) As of December 31, 2021 and 2020, the Company had valuation allowances, respectively, of $ 160 and $ 288 for U.S federal purposes, $ 237 and $ 237 for U.S. state purposes and $ 522 and $ 323 for PRC income tax purposes. As of December 31, 2021 and 2020, the Company had net operating loss carry-forwards of, respectively, $ 56,077 and $ 44,333 for U.S federal purposes, $ 545 and $ 545 for U.S. state purposes and $ 2,086 and $ 1,294 for PRC income tax purposes . Such losses begin expiring in 2022 , 2032 and 2022 for U.S. federal, U.S. state and PRC income tax purposes, respectively. As of December 31, 2021 and 2020, the Company had research credit carry-forwards of, respectively, $ 200 and $ 359 for U.S. federal purposes and $ 377 and $ 377 for U.S. state purposes. Such credits begin expiring in 2022 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 $ 11,957 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 12.5 % 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 12.5 %. 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 12.5 % for the years ended December 31, 2021, 2020 and 2019. Income tax expense for the years ended December 31, 2021, 2020 and 2019 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, 2021 2020 2019 Effective tax rate reconciliation: Income tax provision at statutory rate 21.00 % 21.00 % 21.00 % Stock Compensation ( 12.75 ) ( 36.99 ) ( 1.05 ) Foreign rate differential ( 11.60 ) ( 5.07 ) ( 6.44 ) Other permanent difference ( 0.23 ) 11.71 2.82 Foreign income taxed in US 10.32 6.05 6.94 Foreign Research Expense ( 6.59 ) ( 8.80 ) ( 5.82 ) Change in valuation allowance 0.16 ( 0.25 ) ( 20.19 ) Total income tax expense (benefit) 0.31 % ( 12.35 )% ( 2.74 )% 119 Table of Contents ACM RESEARCH, INC. Notes to Consolidated Financial Statements (in thousands, except share and per share data) 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, 2021 and 2020, were as follows: Year Ended December 31, 2021 2020 2019 Beginning balance $ 570 $ 44 $ 44 Increase of unrecognized tax benefits taken in prior years 52 116 - Increase of unrecognized tax benefits related to current year 5,476 410 - Reductions for tax positions related to prior years ( 32 ) - - Reductions to unrecognized tax benefits related to lapsing statute of limitations - - - Ending balance $ 6,066 $ 570 $ 44 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, 2021. 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 $ 6,066 and $ 570 of unrecognized tax benefits as of December 31, 2021 and 2020, respectively. The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. As of December 31, 2021 and 2020, respectively, the Company had $ 44 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 $ 5,950 as of December 31, 2021. There were no ongoing examinations by taxing authorities as of December 31, 2021 or 2020. The Company intends to indefinitely reinvest the PRC earnings outside of the United States as of December 31, 2021 and 2020. 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 11 for future minimum lease payments under non-cancelable operating lease agreements with initial terms of one year or more. As of December 31, 2021 and 2020, the Company had $ 5,463 and $ 1,173 of open capital commitments, respectively. 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 . 120 Table of Contents ACM RESEARCH, INC. Notes to Consolidated Financial Statements (in thousands, except share and per share data) The Company’s management has evaluated all such proceedings and claims that existed as of December 31, 2021 and 2020. In the opinion of management, no provision for liability nor disclosure was required as of December 31, 2021 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. As of December 31, 2021, 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 asserted claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, and sought monetary damages in an unspecified amount as well as costs and expenses incurred in the litigation. The suit was dismisse d with prejudice on January 10, 2022. 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 $ 671,750 , $ 119,377 and $ 113,168 as of December 31, 2021, 2020 and 2019, 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, 2021 or 2020. 121 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, 2021 and 2020, and for the years ended December 31, 2021, 2020 and 2019: CONDENSED BALANCE SHEET December 31, 2021 2020 Assets Current assets: Cash and cash equivalents $ 29,536 $ 30,188 Accounts receivable 16 - Due from intercompany - - Other receivable 48 5 Prepaid expenses 594 359 Total current assets 30,194 30,552 Deferred tax assets 13,166 11,076 Investment in unconsolidated subsidiaries 637,961 102,455 Total assets 681,321 144,083 Liabilities and Stockholders’ Equity Accounts payable 875 1,278 Other payable 404 255 Income taxes payable 254 31 FIN-48 payable 2,282 83 Deferred tax liability 1,302 1,286 Total liabilities 5,117 2,933 Total stockholders’ equity 676,204 141,150 Total liabilities and stockholders equity $ 681,321 $ 144,083 CONDENSED STATEMENT OF OPERATIONS Year Ended December 31, 2021 2020 2019 Revenue $ 16 $ 1,776 $ 10,683 Cost of revenue - ( 1,707 ) ( 10,036 ) Gross profit 16 69 647 Operating expenses: Sales and marketing expenses ( 2,443 ) ( 1,361 ) ( 490 ) General and administrative expenses ( 5,116 ) ( 5,010 ) ( 3,639 ) Research and development expenses - - ( 476 ) Loss from operations ( 7,543 ) ( 6,302 ) ( 3,958 ) Equity in earnings of unconsolidated subsidiaries 43,866 36,273 22,510 Change in fair value of financial liability - ( 11,964 ) - Interest income, net 54 90 231 Interest expense, net - - ( 67 ) Other income, net 1,380 683 178 Income before income taxes 37,757 18,780 18,894 Income tax expense - - - Net income $ 37,757 $ 18,780 $ 18,894 122 Table of Contents ACM RESEARCH, INC. Notes to Consolidated Financial Statements (in thousands, except share and per share data) CONDENSED STATEMENT OF CASH FLOWS Year Ended December 31, 2021 2020 2019 Net cash used in operating activities $ ( 5,902 ) $ ( 290 ) $ ( 7,957 ) Net cash provided by investing activities - - - Net cash provided by financing activities 5,250 2,745 23,347 Net increase (decrease) in cash and cash equivalents ( 652 ) 2,455 15,390 Cash and cash equivalents, beginning of year 30,188 27,733 13,161 Effect of exchange rate changes on cash and cash equivalents - - ( 818 ) Cash and cash equivalents, end of year $ 29,536 $ 30,188 $ 27,733 123 Table of Contents