ACM Research, Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations You should read the following discussion of our financial condition and results of operations together with our condensed consolidated financial statements and the related notes and other financial information included elsewhere in this report and our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, or our Annual Report. The following discussion contains forward‑looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in the forward‑looking statements. Factors that could cause or contribute to these differences include those discussed in Part I, Item 1A. “Risk Factors” in our Annual Report, as well as those discussed below and elsewhere in this report, particularly in the section titled “Item 1A. Risk Factors” in Part II below. Overview We supply advanced, innovative capital equipment developed for the global semiconductor industry. Fabricators of advanced integrated circuits, or chips, can use our wet-cleaning and other front-end processing tools in numerous steps to improve product yield, even at increasingly advanced process nodes. We have designed these tools for use in fabricating foundry, logic and memory chips, including dynamic random-access memory, or DRAM, and 3D NAND-flash memory chips. We also develop, manufacture and sell a range of advanced packaging tools to wafer assembly and packaging customers. Revenue from wet cleaning and other front-end processing tools totaled $31.7 million, or 75.1% of total revenue, for the three months ended March 31, 2022, as compared to $31.9 million, or 72.9% of total revenue, for the same period in 2021. Selling prices for our wet-cleaning and other front-end processing tools range from $1 million to more than $5 million. Our customers for wet-cleaning and other front-end processing tools have included Huali Microelectronics Corporation, The Huahong Group, Semiconductor Manufacturing International Corporation or SMIC, Shanghai SK Hynix Inc., Yangtze Memory Technologies Co., Ltd, and ChangXin Memory Technologies. Revenue from advanced packaging, other back-end processing tools, services and spares totaled $10.5 million, or 24.9% of total revenue, for the three months ended March 31, 2022, as compared to $11.8 million, or 27.1% of total revenue, for the same period in 2021. Selling prices for these tools range from $0.5 million to more than $4 million. Ou r customers for advanced packaging, and other processing tools have included Jiangyin Changdian Advanced Packaging Co. Ltd., a PRC-based wafer bumping packaging house that is a subsidiary of JCET Group Co., Ltd.; Nantong Tongfu Microelectronics Co., Ltd., a PRC-based chip assembly and testing company that is a subsidiary of Nantong Fujitsu Microelectronics Co., Ltd.; Nepes Co., Ltd., a semiconductor packaging company based in South Korea which acquired the operations of Deca Technologies’ Philippines manufacturing facility in 2020; and Wafer Works Corporation, a PRC-based wafer supplier. We estimate, based on third-party reports and on customer and other information, that our current product portfolio addresses approximately $8 billion of the global wafer equipment market. By product line, we estimate an approximately $3.7 billion market opportunity is addressed by our wafer cleaning equipment, $2.9 billion by our furnace equipment, $730 million by our electro-chemical plating or ECP equipment, and more than $650 million by our stress-free polishing, advanced packaging, wafer processing, and other processing equipment. By major equipment segment, Gartner estimates a 2021 worldwide semiconductor wafer fab equipment, or WFE, market size of $88.1 billion, of which $4.1 billion is for wafer cleaning equipment (auto wet stations, single-wafer spray processors, batch spray processors, and other clean process equipment), $3.4 billion is for furnace equipment (tube CVD, oxidation/diffusion furnace, and batch atomic layer deposition), and $764 million is for electro-chemical deposition, or ECD. Based on Gartner’s estimates, total available global market for these equipment segments increased by 30.1% from $6.4 billion in 2020 to $8.3 billion in 2021, and is expected to increase by 8.3% to $8.9 billion in 2022. These segments are part of the worldwide semiconductor WFE market, which based on Gartner’s estimates increased by 35.6% from $64.9 billion in 2020 to $88.1 billion in 2021, and is expected to increase by 10.7% to $97.5 billion in 2022. We have focused our selling efforts on establishing a referenceable base of leading foundry, logic and memory chip makers, whose use of our products can influence decisions by other manufacturers. We believe this customer base has helped us penetrate the mature chip manufacturing markets and build credibility with additional industry leaders. We have used a “demo-to-sales” process to place evaluation equipment, or “first tools,” with a number of selected customers. 26 Table of Contents Since 2009 we have delivered more than 245 wet cleaning and other front-end processing tools, more than 195 of which have been accepted by customers and thereby generated revenue to us. The balance of the delivered tools are awaiting customer acceptance should contractual conditions be met. To date, a substantial majority of our sales of single-wafer wet cleaning equipment for front-end manufacturing have been to customers located in Asia, and we anticipate that a substantial majority of our revenue from these products will continue to come from customers located in this region for the foreseeable future. We have begun to add to our efforts to further address customers in North America, Western Europe and Southeast Asia by expanding our direct sales and services teams and increasing our global marketing activities. We are focused on building a strategic portfolio of intellectual property to support and protect our key innovations. Our tools have been developed using our key proprietary technologies: ● Space Alternated Phase Shift, or SAPS, technology for flat and patterned (deep via or deep trench with stronger structure) wafer surfaces. SAPS technology employs alternating phases of megasonic waves to deliver megasonic energy in a highly uniform manner on a microscopic level. We have shown SAPS technology to be more effective than conventional megasonic and jet spray technologies in removing random defects across an entire wafer, with increasing relative effectiveness at more advanced production nodes. ● Timely Energized Bubble Oscillation, or TEBO, technology for patterned wafer surfaces at advanced process nodes . TEBO technology has been developed to provide effective, damage-free cleaning for 2D and 3D patterned wafers with fine feature sizes. We have demonstrated the damage-free cleaning capabilities of TEBO technology on patterned wafers for feature nodes as small as 1xnm (16 to 19 nanometers, or nm), and we have shown TEBO technology can be applied in manufacturing processes for patterned chips with 3D architectures having aspect ratios as high as 60‑to‑1. ● Tahoe technology for cost and environmental savings. Tahoe technology delivers high cleaning performance using significantly less sulfuric acid and hydrogen peroxide than is typically consumed by conventional high-temperature single-wafer cleaning tools. ● ECP technology for advanced metal plating. Our Ultra ECP ap, or Advanced Packaging, technology was developed for back-end assembly processes to deliver a more uniform metal layer at the notch area of wafers prior to packaging. Our Ultra ECP map, or Multi-Anode Partial Plating, technology was developed for front-end wafer fabrication processes to deliver advanced electrochemical copper plating for copper interconnect applications. Ultra ECP map offers improved gap-filling performance for ultra-thin seed layer applications, which is critical for advanced nodes at 28nm, 14nm and beyond. In 2020 we introduced and delivered a range of new tools intended to broaden our revenue opportunity with global semiconductor manufacturers. Product extensions include the Ultra SFP ap tool for advanced packaging solutions, the Ultra C VI 18-chamber single wafer cleaning tool for advanced memory devices, and the Ultra ECP 3d platform for through-silicon-via, or tsv, application. New product lines include the Ultra fn Furnace, our first dry processing tool, and a suite of semi-critical cleaning systems which include single wafer back side cleaning, scrubber, and auto bench cleaning tools. We have been issued more than 411 patents in the United States, the People’s Republic of China or PRC, Japan, Singapore, South Korea and Taiwan. We conduct a substantial majority of our product development, manufacturing, support and services in the PRC, with additional product development and subsystem production in South Korea. Substantially all of our integrated tools are built to order at our manufacturing facilities in the Pudong region of Shanghai, which now encompass a total of 236,000 square feet of floor space for production capacity, with 100,000 square feet having been added in 2021 with the lease of a second building in the Pudong region of Shanghai. In May 2020 ACM Shanghai, through its wholly owned subsidiary Shengwei Research (Shanghai), Inc., entered into an agreement for a land use right in the Lingang region of Shanghai. In 2020 Shengwei Research (Shanghai), Inc. began a multi-year construction project for a new 1,000,000 square foot development and production center that will incorporate state-of-the-art manufacturing systems and automation technologies, and will provide floor space to support significantly increase production capacity and related research and development activities. Our experience has shown that chip manufacturers in the PRC and throughout Asia demand equipment meeting their specific technical requirements and prefer building relationships with local suppliers. We will continue to seek to leverage our local presence in the PRC and South Korea to address the growing market for semiconductor manufacturing equipment in the region by working closely with regional chip manufacturers to understand their specific requirements, encourage them to adopt our technologies, and enable us to design innovative products and solutions to address their needs. 27 Table of Contents Corporate Background ACM Research was incorporated in California in 1998 and redomesticated in Delaware in 2016. We perform strategic planning, marketing, and financial activities at our global corporate headquarters in Fremont, California. Initially we focused on developing tools for chip manufacturing process steps involving the integration of ultra‑low‑K materials and copper. In the early 2000s we sold tools based on stress-free copper polishing technology. In 2007 we began to focus our development efforts on single-wafer wet-cleaning solutions for the front-end chip fabrication process. Since that time, we have strategically built our technology base and expanded our product offerings: • In 2009 we introduced SAPS megasonic technology, which can be applied in wet wafer cleaning at numerous steps during the chip fabrication process. • In 2016 we introduced TEBO technology, which can be applied at numerous steps during the fabrication of small node conventional two-dimensional and three-dimensional patterned wafers. • In August 2018 we introduced the Ultra-C Tahoe wafer cleaning tool, which delivers high cleaning performance with significantly less sulfuric acid than typically consumed by conventional high temperature single-wafer cleaning tools. • In March 2019 we introduced (a) the Ultra ECP AP or Advanced Wafer Level Packaging tool, a back-end assembly tool used for bumping, or applying copper, tin and nickel to wafers at the die-level prior to packaging, and (b) the Ultra ECP MAP or Multi Anode Plating tool, a front-end process tool that utilizes our proprietary technology to deliver world-class electrochemical copper planting for copper interconnect applications. • In April 2020 we introduced the Ultra Furnace , our first system developed for multiple dry processing applications. • In May 2020 we introduced the Ultra C Family of semi-critical cleaning systems, including the Ultra C b for backside clean, the Ultra C wb automated wet bench, and the Ultra C s scrubber. To help us establish and build relationships with chip manufacturers in the PRC, in 2006 we moved our operational center to Shanghai and began to conduct our business through our subsidiary ACM Shanghai. Since that time, we have expanded our geographic presence: • In 2011 we formed a wholly owned subsidiary in the PRC, ACM Research (Wuxi), Inc. , which now is a wholly owned subsidiary of ACM Shanghai, to manage sales and service operations. • In June 2017 we formed a subsidiary in Hong Kong, CleanChip Technologies Limited , which now is a wholly owned subsidiary of ACM Shanghai, to act on our behalf in Asian markets outside the PRC by, for example, serving as a trading partner between ACM Shanghai and its customers, procuring raw materials and components, performing sales and marketing activities, and making strategic investments. • In December 2017 we formed a subsidiary in the Republic of Korea, ACM Research Korea CO., LTD. , which now is a wholly owned subsidiary of ACM Shanghai, to serve our customers based in the Republic of Korea and perform sales, marketing, and research and development activities. • In March 2019 ACM Shanghai formed a wholly owned subsidiary in the PRC, Shengwei Research (Shanghai), Inc ., to manage activities related to addition of future long-term production capacity. • In August 2021 we formed a wholly owned subsidiary in Singapore, ACM Research (Singapore) PTE, Ltd., to perform sales, marketing, and other business development activities. • In February 2022, ACM Shanghai formed a wholly owned subsidiary in China, ACM Research (Beijing), Inc., to perform sales, marketing and other business development activities. • In March 2022, ACM formed a wholly owned subsidiary in South Korea, Hanguk ACM CO., LTD , to perform business development and other related activities. We currently conduct the majority of our product development, support and services, and substantially all of our manufacturing, at ACM Shanghai. Our Shanghai operations position us to be near many of our current and potential new customers in the PRC (including Taiwan), Korea and throughout Asia, providing convenient access and reduced shipping and manufacturing costs. 28 Table of Contents • Our initial factory is located in the Pudong Region of Shanghai and has a total of 36,000 square feet of available floor space. • Our second production facility is located in the Chuansha district of Pudong, approximately 11 miles from our initial factory. In September 2018 we announced the opening of the first building of our second production facility. The first building initially had a total of 50,000 square feet of available floor space for production capacity, which was increased by 50,000 square feet in the second quarter of 2020. In February 2021 we leased a second building immediately adjacent to our second factory, which increased our available floor space for production by another 100,000 square feet, bringing to total available floor space for production capacity of second production facility to 200,000 square feet. • In July 2020 ACM Shanghai began a multi-year construction project to build a development and production center in the Lingang region of Shanghai. The new facility is expected to have a total of 1,000,000 square feet of available floor space for production. capacity. • In January 2022 ACM Shanghai completed the purchase of a housing facility in the Lingang region of Shanghai to assist in employee retention and recruitment in connection with its new research and development center and factory currently under construction. Recent Developments COVID–19 Following its initial outbreak in December 2019, COVID–19, or the coronavirus, spread across the PRC, the United States and globally. The COVID–19 pandemic has affected our business and operating results since the first quarter of 2020. Since that time, our personnel have been largely unable to travel between our offices in the United States and facilities of our company and some of our key customers in the PRC have been and will likely continue to be restricted, which has and may continue to impact our ability to effectively operate our company and to oversee our operations. The COVID–19 situation continues to evolve, and it is impossible for us to predict the effect and ultimate impact of the COVID–19 pandemic on our business operations and results. We continue to monitor the impact of the COVID-19 pandemic on all aspects of our business, including our operations, customers, suppliers and projects. While the ongoing regulatory measures instituted or recommended in response to COVID–19 are expected to be temporary, the duration of the business disruptions, and related financial impact, of the pandemic cannot be estimated at this time. For an explanation of some of the risks we potentially face, please read carefully the information provided under “Item 1A. Risk Factors—Risks Related to the COVID–19 Pandemic,” of part I of this report. The following summary reflects our expectations and estimates based on information known to us as of the date of this filing: • Operations : We conduct substantially all of our product development, manufacturing, support and services in the PRC, and those activities have been directly impacted by the COVID–19 pandemic and related restrictions on transportation and public appearances. In March 2022, several regions in China began to experience elevated levels of COVID-19 infections, and the PRC government instituted policies to restrict the spread of the virus. The policies began with an increase of “spot lockdowns,” under which a positive polymerase chain reaction (PCR) or other test would result in the quarantining of individual buildings, groups of buildings, or even full neighborhoods. The policies were later expanded to full-city lockdowns, including in the City of Shanghai, where substantially all of ACM Shanghai’s operations are located. COVID-19 related restrictions in Shanghai began to limit employee access to, and logistics activities of, ACM Shanghai’s offices and production facilities in the Pudong district of Shanghai during the first quarter of 2022, and therefore limited ACM Shanghai’s ability to ship finished products to customers and to produce new products. Spot lockdowns in mid-March 2022 began to impact a number of ACM Shanghai’s employees and led to a closure of ACM Shanghai’s administrative and R&D offices in Zhangjiang in the Pudong district. A subsequent lockdown of the entire Pudong region of Shanghai was imposed in late March 2022 and impacted the operation of ACM Shanghai’s Chuansha production facility. Furthermore, a number of the Company’s customers have substantial operations based in operations areas of the PRC, including in the City of Shanghai, subject to the full-city lockdown restrictions, which have been limiting the operations of those customers since the first quarter of 2022, including inhibiting their ability to receive, implement and operate new tools for their manufacturing facilities. As a result, in some cases, ACM Shanghai has been required to defer shipments of finished products to these customers because of operational and logistics limitations affecting customers rather than, or in addition to, ACM Shanghai. The Company has begun to resume some operations using the “closed loop method,” in which a limited collection of workers remains together as a group between a single hotel, the ACM Shanghai facility, and a dedicated bus transportation route, also referred to as “two spots and one line.” The Company anticipates that the lockdowns and their effects will be temporary but may continue for several months, with a gradual return of PRC operations, production capacity, and global logistics as Shanghai and other areas in the PRC begin to reopen. The Company cannot assure that closures or reductions of PRC operations or production, whether of ACM Shanghai or of some of its key customers, may not be extended 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 COVID-19. Our corporate headquarters are located in Alameda County in the San Francisco Bay Area and are the subject of a number of state and county public health directives and orders. These actions have not negatively impacted our business to date, however, because of the limited number of employees at our headquarters and the nature of the work they generally perform. To date we have not experienced absenteeism of management or other key employees, other than certain of our executive officers being delayed in traveling between the PRC, our California office, and other global locations. • Customers: Our customers’ business operations have been, and are continuing to be, subject to business interruptions arising from the COVID–19 pandemic. Historically substantially all of our revenue has been derived from customers located in the PRC and surrounding areas that have been impacted by COVID–19. Two customers that accounted for 48.9% of our revenue in 2021 are based in the PRC, and three customers that accounted for 75.8% of our revenue in 2020, and 73.8% of our revenue in 2019 are based in the PRC and South Korea. One of those customers, Yangtze Memory Technologies Co., Ltd. — which accounted for 20.2% of our 2021 revenue, 26.8% of our 2020 revenue, and 27.5% of our 2019 revenue — is based in Wuhan. While Yangtze Memory Technologies Co., Ltd. and other key customers continued to operate their fabrication facilities without interruption during and after the first quarter of 2020, some customers have been forced to restrict access of service personnel and deliveries to and from their facilities. We have experienced longer and in some cases more costly shipping expenses in the delivery of tools to certain customers. • Suppliers : Our global supply chain includes components sourced from the PRC, Japan, Taiwan, the United States and Europe. While, to date, we have not experienced material issues with our supply chain beyond the logistics to our Shanghai facilities, supply chain constraints have intensified due to COVID-19, contributing to global shortages in the supply of semiconductors and other materials, and in some cases the pricing of materials used in the production of our own tools. As with our customers, we continue to be in close contact with our key suppliers to help ensure we are able to identify any potential supply issues that may arise. • Projects : Our strategy includes a number of plans to support the growth of our core business, including ACM Shanghai’s acquisition of a land use right in the Lingang area of Shanghai where we began construction of a new research and development center and factory in July 2020. The extent to which COVID–19 impacts these projects will depend on future developments that are highly uncertain, but to date, the timing of these ongoing projects has not been delayed or significantly disrupted by COVID–19 or related government measures. 29 Table of Contents PRC Government Research and Development Funding 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 we are required to go through a government due diligence process once the project is complete. The grants therefore are recorded as long-term liabilities upon receipt, although we are not required to return any funds ACM Shanghai 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 three months ended March 31, 2022 and 2021, related government subsidies recognized as reductions of relevant expenses in the consolidated statements of operations and comprehensive income were $0.1 million and $1.9 million, 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 three months ended March 31, 2022 and 2021, related government subsidies recognized as other income in the consolidated statements of operations and comprehensive income were $79,000, and $39,000, respectively. Unearned government subsidies received are deferred for recognition and recorded as other long-term liabilities (see note 13 in the Notes to Condensed Consolidated Financial Statements included herein under “Item 1. Financial Statements.”) in the balance sheet until the criteria for such recognition are satisfied. Net Income Attributable to Non-Controlling Interests In 2019 ACM Shanghai sold a total number of shares representing 8.3% of its outstanding ACM Shanghai shares, after which ACM Research held the remaining 91.7% of ACM Shanghai’s outstanding shares. In 2021 ACM Shanghai sold a total number shares representing an additional 10% of its outstanding ACM Shanghai shares in its STAR IPO, after which ACM Research held the remaining 82.5% of ACM Shanghai’s outstanding shares. As a result, we reflect the portion of our net income allocable to the minority holders of ACM Shanghai shares as net income attributable to non-controlling interests. How We Evaluate Our Operations We present information below with respect to four measures of financial performance: ● We define “shipments” of tools to include (a) a “repeat” delivery to a customer of a type of tool that the customer has previously accepted, for which we recognize revenue upon delivery, and (b) a “first-time” delivery of a “first tool” to a customer on an approval basis, for which we may recognize revenue in the future if contractual conditions are met, or if a purchase order is received. ● We define “adjusted EBITDA” as our net income excluding interest expense (net), income tax benefit (expense), depreciation and amortization, and stock-based compensation. We define adjusted EBITDA to also exclude restructuring costs, although we have not incurred any such costs to date. ● We define “free cash flow” as net cash provided by operating activities less purchases of property and equipment (net of proceeds from disposals) and of intangible assets. ● We define “adjusted operating income (loss)” as our income (loss) from operations excluding stock-based compensation. These financial measures are not based on any standardized methodologies prescribed by accounting principles generally accepted in the United States, or GAAP, and are not necessarily comparable to similarly titled measures presented by other companies. 30 Table of Contents We have presented shipments, adjusted EBITDA, free cash flow and adjusted operating income (loss) because they are key measures used by our management and board of directors to understand and evaluate our operating performance, to establish budgets and to develop operational goals for managing our business. We believe that these financial measures help identify underlying trends in our business that could otherwise be masked by the effect of the expenses that we exclude. In particular, we believe that the exclusion of the expenses eliminated in calculating adjusted EBITDA and adjusted operating income (loss) can provide useful measures for period-to-period comparisons of our core operating performance and that the exclusion of property and equipment purchases from operating cash flow can provide a usual means to gauge our capability to generate cash. Accordingly, we believe that these financial measures provide useful information to investors and others in understanding and evaluating our operating results, enhancing the overall understanding of our past performance and future prospects, and allowing for greater transparency with respect to key financial metrics used by our management in its financial and operational decision-making. Shipments, adjusted EBITDA, free cash flow and adjusted operating income (loss) are not prepared in accordance with GAAP, and should not be considered in isolation of, or as an alternative to, measures prepared in accordance with GAAP. Shipments Shipments consist of two components: ● a shipment to a customer of a type of tool that the customer has previously accepted, for which we recognize revenue when the tool is delivered; and ● a shipment to a customer of a type of tool that the customer is receiving and evaluating for the first time, in each case a “first tool,” for which we may recognize revenue at a later date, subject to the customer’s acceptance of the tool upon the tool’s satisfaction of applicable contractual requirements or subject to the costumer’s subsequent discretionary commitment to purchase the tool. “First tool” shipments can be made to either an existing customer that has not previously accepted that specific type of tool in the past ─ for example, a delivery of a SAPS V tool to a customer that previously had received only SAPS II tools ─ or to a new customer that has never purchased any tool from us. Shipments in the three months ended March 31, 2022 totaled $67 million, as compared to $74 million in the three months ended March 31, 2021. 31 Table of Contents The dollar amount attributed to a “first tool” shipment is equal to the consideration we expect to receive if any and all contractual requirements are satisfied and the customer accepts the tool, or if the customer subsequently determines in its discretion to purchase the tool. There are a number of limitations related to the use of shipments in evaluating our business, including that customers have significant, or in some cases total, discretion in determining whether to accept or purchase our tools after evaluation and their decision not to accept or purchase delivered tools is likely to result in our inability to recognize revenue from the delivered tools. Adjusted EBITDA There are a number of limitations related to the use of adjusted EBITDA rather than net income (loss), which is the nearest GAAP equivalent. Some of these limitations are: ● adjusted EBITDA excludes depreciation and amortization and, although these are non-cash expenses, the assets being depreciated or amortized may have to be replaced in the future; ● we exclude stock-based compensation expense from adjusted EBITDA and adjusted operating income (loss), although (a) it has been, and will continue to be for the foreseeable future, a significant recurring expense for our business and an important part of our compensation strategy and (b) if we did not pay out a portion of our compensation in the form of stock-based compensation, the cash salary expense included in operating expenses would be higher, which would affect our cash position; ● the expenses and other items that we exclude in our calculation of adjusted EBITDA may differ from the expenses and other items, if any, that other companies may exclude from adjusted EBITDA when they report their operating results; ● adjusted EBITDA does not reflect changes in, or cash requirements for, working capital needs; ● adjusted EBITDA does not reflect interest expense, or the requirements necessary to service interest or principal payments on debt; ● adjusted EBITDA does not reflect income tax expense (benefit) or the cash requirements to pay taxes; ● adjusted EBITDA does not reflect historical cash expenditures or future requirements for capital expenditures or contractual commitments; ● although depreciation and amortization charges are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and adjusted EBITDA does not reflect any cash requirements for such replacements; and ● adjusted EBITDA includes expense reductions and non-operating other income attributable to PRC governmental grants, which may mask the effect of underlying developments in net income, including trends in current expenses and interest expense, and free cash flow includes the PRC governmental grants, the amount and timing of which can be difficult to predict and are outside our control. The following table reconciles net income, the most directly comparable GAAP financial measure, to adjusted EBITDA: Three Months Ended March 31, 2022 2021 (in thousands) Adjusted EBITDA Data: Net Income (loss) $ (7,443 ) $ 5,822 Interest expense (income), net (1,544 ) 140 Income tax benefit (4,011 ) (2,770 ) Depreciation and amortization 1,213 546 Stock based compensation 1,374 1,210 Unrealized loss on trading securities 3,858 1,047 Adjusted EBITDA $ (6,553 ) $ 5,995 32 Table of Contents The $12.5 million decrease in adjusted EBITDA for the three-months ended March 31, 2022 as compared to the same period in 2021 reflected a $13.3 million decrease in net income and an $1.7 million decrease in interest expense, net, partly offset by a $2.8 million increase in unrealized loss on trading securities, an $1.2 million increase in income tax benefit, and a $0.7 million increase in depreciation and amortization. We do not exclude from adjusted EBITDA expense reductions and non-operating other income attributable to PRC governmental grants because we consider and incorporate the expected amounts and timing of those grants in incurring expenses and capital expenditures. If we did not receive the grants, our cash expenses therefore would be lower, and our cash position would not be affected, to the extent we have accurately anticipated the amounts of the grants. For additional information regarding our PRC grants, please see “—Key Components of Results of Operations—PRC Government Research and Development Funding.” Free Cash Flow The following table reconciles net cash provided by (used in) operating activities, the most directly comparable GAAP financial measure, to free cash flow: Three Months Ended March 31, 2022 2021 (in thousands) Free Cash Flow Data: Net cash used in (provided by) in operating activities $ (27,729 ) $ 10,742 Purchase property and equipment (3,176 ) (1,466 ) Purchase of intangible assets (408 ) (112 ) Free cash flow $ (31,313 ) $ 9,164 The $40.5 million decrease in free cash flow for the three-months ended March 31, 2022 as compared to the same period in 2021 reflected the factors driving net cash provided by operating activities, including increases in advances from customers, accounts payable, other payables and accrued expenses and net income, partly offset by increases in inventory, accounts receivables, and other liabilities. These were partly offset by an increase of purchases of property and equipment and intangible assets. Consistent with our methodology for calculating adjusted EBITDA, we do not adjust free cash flow for the effects of PRC government subsidies, because we take those subsidies into account in incurring expenses and capital expenditures. We do not adjust free cash flow for the effects of time-deposits, which for our internal purposes are considered as largely similar to cash. Adjusted Operating Income Adjusted operating income excludes stock-based compensation from income from operations. Although stock-based compensation is an important aspect of the compensation of our employees and executives, determining the fair value of certain of the stock-based instruments we utilize involves a high degree of judgment and estimation and the expense recorded may bear little resemblance to the actual value realized upon the vesting or future exercise of the related stock-based awards. Furthermore, unlike cash compensation, the value of stock options, which is an element of our ongoing stock-based compensation expense, is determined using a complex formula that incorporates factors, such as market volatility, that are beyond our control. Management believes it is useful to exclude stock-based compensation in order to better understand the long-term performance of our core business and to facilitate comparison of our results to those of peer companies. The use of non-GAAP financial measures excluding stock-based compensation has limitations, however. If we did not pay out a portion of our compensation in the form of stock-based compensation, the cash salary expense included in operating expenses would be higher and our cash holdings would be less. The following tables reflect the exclusion of stock-based compensation, or SBC, from line items comprising income from operations: 33 Table of Contents ` Three Months Ended March 31, 2022 2021 Actual (GAAP) SBC Adjusted (Non-GAAP) Actual (GAAP) SBC Adjusted (Non-GAAP) (in thousands) Revenue $ 42,186 $ - $ 42,186 $ 43,732 $ - $ 43,732 Cost of revenue (22,500 ) (113 ) (22,387 ) (25,687 ) (71 ) (25,616 ) Gross profit 19,686 (113 ) 19,799 18,045 (71 ) 18,116 Operating expenses: Sales and marketing (6,697 ) (354 ) (6,343 ) (5,308 ) (505 ) (4,803 ) Research and development (17,346 ) (411 ) (16,935 ) (5,504 ) (229 ) (5,275 ) General and administrative (4,949 ) (496 ) (4,453 ) (3,783 ) (405 ) (3,378 ) Income (loss) from operations (9,306 ) (1,374 ) (7,932 ) 3,450 (1,210 ) 4,660 Adjusted operating income for the three months ended on March 31, 2022 decreased by $12.6 million, as compared with the same period in 2021, due to a $12.7 million decrease in income (loss) from operations, and a $0.1 million increase in stock-based compensation expense. Critical Accounting Policies and Estimates There were no significant changes in our critical accounting policies or significant judgments or estimates during the three months ended March 31, 2022 to augment the critical accounting estimates disclosed under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report, other than those described in the notes to the condensed consolidated financial statements included in this report. For information regarding the impact of recently adopted accounting standards, refer to note 2 to the condensed consolidated financial statements included in this report. Recent Accounting Pronouncements A discussion of recent accounting pronouncements is included in our Annual Report and is updated in note 2 to the condensed consolidated financial statements included in this report. Results of Operations The following table sets forth our results of operations for the periods presented, as percentages of revenue. Three Months Ended March 31, 2022 2021 Revenue 100.0 % 100.0 % Cost of revenue 53.3 58.7 Gross margin 46.7 41.3 Operating expenses: Sales and marketing 15.9 12.1 Research and development 41.1 12.6 General and administrative 11.7 8.7 Total operating expenses, net 68.7 33.4 Income (loss) from operations (22.1 ) 7.9 Interest income (expense), net 3.7 (0.3 ) Unrealized loss on trading securities (9.1 ) (2.4 ) Other income (expense), net 0.6 1.1 Equity income (loss) in net income (loss) of affiliates (0.2 ) 0.7 Income (loss) before income taxes (27.1 ) 7.0 Income tax benefit 9.5 6.3 Net income (loss) (17.6 ) 13.3 Less: Net income (loss) attributable to non-controlling interests (3.9 ) 0.8 Net income (loss) attributable to ACM Research, Inc. (13.7 %) 12.5 % 34 Table of Contents Comparison of Three Months Ended March 31, 2022 and 2021 Revenue Three Months Ended March 31, 2022 2021 % Change 2022 v 2021 (in thousands) Revenue $ 42,186 $ 43,732 -3.5 % Single wafer cleaning, Tahoe and semi-critical cleaning equipment $ 26,033 $ 32,413 -19.7 % ECP (front-end and packaging), furnace and other technologies 12,248 5,550 120.7 % Advanced packaging (excluding ECP), services & spares 3,905 5,769 -32.3 % Total Revenue By Product Category $ 42,186 $ 43,732 -3.5 % Wet cleaning and other front-end processing tools $ 31,702 $ 31,900 -0.6 % Advanced packaging, other processing tools, services and spares 10,484 11,832 -11.4 % Total Revenue Front-end and Back-End $ 42,186 $ 43,732 -3.5 % Revenue decreased by $1.5 million in the three months ended March 31, 2022 as compared to the same period in 2021. The decrease was due to a $0.2 million decrease in revenue from advanced packaging and other back-end processing tools, services and spares, and a $1.3 million decrease in revenue from wet cleaning and other front-end processing tools. Cost of Revenue and Gross Margin Three Months Ended March 31, 2022 2021 % Change 2022 v 2021 (in thousands) Cost of revenue $ 22,500 $ 25,687 -12.4 % Gross profit 19,686 18,045 9.1 % Gross margin 46.7 % 41.3 % 540 bps Cost of revenue decreased $3.2 million and gross profit increased $1.6 million in the three months ended March 31, 2022 as compared to the corresponding period in 2021 due to the decreased sales volume, more than offset by a 540 basis point increase in gross margin, that reflected differences in product mix. Gross margin may vary from period to period, primarily related to the level of utilization and the timing and mix of purchase orders. We expect gross margin to be between 40.0% and 45.0% for the foreseeable future, with direct manufacturing costs approximating 50.0% to 55.0% of revenue and overhead costs totaling 5.0% of revenue. Operating Expenses Three Months Ended March 31, 2022 2021 % Change 2022 v 2021 (in thousands) Sales and marketing expense $ 6,697 $ 5,308 26.2 % Research and development expense 17,346 5,504 215.2 % General and administrative expense 4,949 3,783 30.8 % Total operating expenses $ 28,992 $ 14,595 98.6 % Sales and marketing expense increased by $1.4 million in the three months ended March 31, 2022 as compared to the corresponding period in 2021. The increase was due the addition of resources to our global sales and services teams to further scale our business in mainland China and other regions to support our longer term growth targets. 35 Table of Contents Sales and marketing expense consists primarily of: • compensation of personnel associated with pre- and after-sale services and support and other sales and marketing activities, including stock-based compensation; • sales commissions paid to independent sales representatives; • fees paid to sales consultants; • cost of trade shows; • travel and entertainment; and • allocated overhead for rent and utilities. Research and development expense increased by $11.8 million in the three months ended March 31, 2022 as compared to the corresponding period in 2021, principally as a result of increases in new product development, testing fees and personnel costs related to the introduction of product line extensions and new product categories and the cost of tools built for product development purposes. Research and development expense represented 41.1% and 12.6% of our revenue in the three months ended March 31, 2022 and 2021, respectively. Without reduction by grant amounts received from PRC governmental authorities (see “—Government Research and Development Funding”), gross research and development expense totaled $17.4 million, or 41.4% of total revenue, in the three months ended March 31, 2022 and $7.4 million, or 17.1% of revenue, in the corresponding period in 2021. Research and development expense relates to the development of new products and processes and encompasses our research, development and customer support activities. Research and development expense consists primarily of: • compensation of personnel associated with our research and development activities, including stock based compensation; • costs of components and other research and development supplies; • costs of tools built for product development purposes; • travel expense associated with customer support; • amortization of costs of software used for research and development purposes; and • allocated overhead for rent and utilities. General and administrative expense increased $1.2 million in the three months ended March 31, 2022 as compared to the corresponding period in 2021. General and administrative expense consists primarily of: 36 Table of Contents • compensation of executive, accounting and finance, human resources, information technology, and other administrative personnel, including stock-based compensation; • professional fees, including accounting and corporate legal and defense fees; • other corporate expenses including insurance; and • allocated overhead for rent and utilities. We expect that, for the foreseeable future, general and administrative expenses will increase in dollars, as we incur additional costs associated with growing our business and operating public companies in the United States and the PRC. Unrealized loss from trading securities Three Months Ended March 31, 2022 2021 % Change 2022 v 2021 (in thousands) Unrealized loss on trading securities $ (3,858 ) $ (1,047 ) 268.5 % We recorded an unrealized loss of $3.9 million for the three months ended March 31, 2022, as compared to an unrealized loss of $1.0 million for the same period in 2021, based on a change in market value of ACM Shanghai’s indirect investment in SMIC shares on the STAR Market as is described in note 15 to the condensed consolidated financial statements included in this report. Other Income and Expenses Three Months Ended March 31, 2022 2021 % Change 2022 v 2021 (in thousands) Interest Income $ 1,805 $ 49 3583.7 % Interest Expense (261 ) (189 ) 38.1 % Interest Income (expense), net $ 1,544 $ (140 ) -1202.9 % Other income (expense), net $ 237 $ 469 -49.5 % Interest income consists of interest earned on our cash and equivalents and restricted cash accounts, offset by interest expense incurred from outstanding short-term borrowings. We realized $1.5 million of interest income (expense), net in the three months ended March 31, 2022 as compared to ($140,000) of interest income (expense), net in the corresponding period in 2021. This was a result of a higher balance of cash and equivalents and higher interest rates on these balances, and a lower combined balance of short-term and long-term bank loans. Other income, net primarily reflects (a) gains or losses recognized from the impact of exchange rates on our foreign currency-denominated working-capital transactions and (b) depreciation of assets acquired with government subsidies, as described under “—Government Research and Development Funding” above. Other income (expense), declined by $232,000 in the three months ended March 31, 2022 as compared to Other income (expense) in the corresponding period in 2021, due primarily to a realized loss of $22,000 resulting from changes in the RMB-to-U.S. dollar exchange rate, compared to a realized gain of $411,000 in the prior year period, offset by other items. Income Tax Benefit (Expense) The following presents components of income tax benefit (expense) for the indicated periods: Three Months Ended March 31, 2022 2021 Total income tax benefit $ 4,011 $ 2,770 37 Table of Contents We recognized a tax benefit of $4.0 million for the three months ended March 31, 2022 as compared to a tax benefit of $2.8 million for prior year period. The benefit in 2022 primarily resulted from the tax effect of the operating loss generated. The increase in our effective income tax rate for the three months ended March 31, 2022 compared to the same period of the prior year was primarily due to a new requirement to capitalize and amortize previously deductible research and experimental expenses resulting from a change in Section 174 made by the Tax Cuts and Jobs Act of 2017 (the “TCJA”) which became effective on January 1, 2022, and a decrease in discrete tax benefits associated with stock-based compensation deductions. Under the TCJA, the Company is required to capitalize, and subsequently amortize R&D expenses over fifteen years for research activities conducted outside of the U.S. The capitalization of overseas R&D expenses resulted in a significant increase in the Company’s global intangible low-taxed income inclusion. Congress is considering legislation, but legislation has not passed, that would defer the capitalization requirement to later years. Our effective tax rate differs from statutory rates of 21% for U.S. federal income tax purposes and 12.5% to 25% for Chinese income tax purposes due to the treatment of stock-based compensation including the impact from stock option exercises and non-US research expenses. Our two PRC subsidiaries, ACM Shanghai and ACM Research (Wuxi), Inc., are liable for PRC corporate income taxes at the rates of 12.5% and 25%, respectively. Pursuant to the Corporate Income Tax Law of the PRC, our PRC subsidiaries generally would be liable for PRC corporate income taxes as a rate of 25%. According to Guoshuihan 2009 No. 203, an entity certified as an “advanced and new technology enterprise” is entitled to a preferential income tax rate of 12.5%. ACM Shanghai was certified as an “advanced and new technology enterprise” in 2012 and again in 2016 and 2018, with an effective period of three years. We file income tax returns in the United States and state and foreign jurisdictions. Those federal, state and foreign income tax returns are under the statute of limitations subject to tax examinations for 1999 through 2021. To the extent we have tax attribute carryforwards, the tax years in which the attribute was generated may still be adjusted upon examination by the Internal Revenue Service or state or foreign tax authorities to the extent utilized in a future period. Net Income Attributable to Non-Controlling Interests Three Months Ended March 31, 2022 2021 % Change 2022 v 2021 (in thousands) Net income (loss) attributable to non-controlling interests and redeemable non-controlling interests $ (1,657 ) $ 352 -570.7 % In 2019 ACM Shanghai sold a total number of shares representing 8.3% of its outstanding ACM Shanghai shares, after which ACM Research held the remaining 91.7% of ACM Shanghai’s outstanding shares. In 2021 ACM Shanghai sold a total number shares representing an additional 10% of its outstanding ACM Shanghai shares in its STAR IPO, after which ACM Research held the remaining 82.5% of ACM Shanghai’s outstanding shares. As a result, we reflect, the portion of our net income allocable to the minority holders of ACM Shanghai shares as net income attributable to non-controlling interests. In the three months ended March 31, 2022, this amount totaled ($1.7 million) as compared to $352,000 in the corresponding period in 2021. Liquidity and Capital Resources During the first three months of 2022, we funded our technology development and operations principally through our beginning cash balance and short-term borrowings by ACM Shanghai from local financial institutions. We believe our existing cash and cash equivalents, including proceeds from the STAR IPO, our cash flow from operating activities, and short-term bank borrowings by ACM Shanghai will be sufficient to meet our anticipated cash needs for at least the next twelve months. We do not expect that our anticipated cash needs for the next twelve months will require our receipt of any PRC government subsidies. Our future working capital needs will depend on many factors, including the rate of our business and revenue growth, the payment schedules of our customers, and the timing of investment in our research and development as well as sales and marketing. To the extent our cash and cash equivalents, cash flow from operating activities and short-term bank borrowings are insufficient to fund our future activities in accordance with our strategic plan, we may determine to raise additional funds through public or private debt or equity financings or additional bank credit arrangements. We also may need to raise additional funds in the event we determine in the future to effect one or more acquisitions of businesses, technologies and products. If additional funding is necessary or desirable, we may not be able to obtain bank credit arrangements or to affect an equity or debt financing on terms acceptable to us or at all. In 2020 ACM Shanghai, through its wholly owned subsidiary Shengwei Research (Shanghai), Inc., entered into a Grant Contract for State-owned Construction Land Use Right in Shanghai City (Category of R&D Headquarters and Industrial Projects), or the Grant Agreement, with the China (Shanghai) Pilot Free Trade Zone Lin-gang Special Area Administration. Shengwei Research (Shanghai), Inc. obtained rights to use approximately 43,000 square meters (10.6 acres) of land in the Lingang Heavy Equipment Industrial Zone of Lin-gang Special Area of China (Shanghai) Pilot Free Trade Zone for a period of fifty years, commencing on the date of delivery of the land in July 2020, which we refer to as the Delivery Date. 38 Table of Contents In exchange for its land use rights, Shengwei Research (Shanghai), Inc. paid aggregate grant fees of RMB 61.7 million ($9.5 million), and a performance deposit of RMB 12.3 million ($1.9 million), which is equal to 20% of the aggregate grant fees, to secure its achievement of the following performance milestones: • the start of construction within 6 months after the Delivery Date (60% of the performance deposit); • the completion of construction within 30 months after the Delivery Date (20% of the performance deposit); and • the start of production within 42 months after the Delivery Date (20% of the performance deposit). Upon satisfaction of a milestone, the portion of the performance deposit attributable to that milestone will be repayable to Shengwei Research (Shanghai), Inc. within ten business days. If the achievement of any of the above milestones is delayed or abandoned, Shengwei Research (Shanghai), Inc. may be subject to additional penalties and may lose its rights to both the use of the granted land and any partially completed facilities on that land. Covenants in the Grant Agreement require that, among other things, Shengwei Research (Shanghai), Inc. will be required to pay liquidated damages in the event that (a) it does not make a total investment (including the costs of construction, fixtures, equipment and grant fees) of at least RMB 450.0 million ($63.4 million) or (b) within six years after the Delivery Date, we do not (i) generate a minimum specified amount of annual sales of products manufactured on the granted land or (ii) pay to the PRC at least RMB 157.6 million ($22.2 million) in annual total taxes (including value-added taxes, corporate income tax, personal income taxes, urban maintenance and construction taxes, education surcharges, stamp taxes, and vehicle and shipping taxes) as a result of operations in connection with the granted land. Sources of Funds Equity and Equity-related Securities. During the three months ended March 31, 2022, we received proceeds of $0.7 million from sales of Class A common stock pursuant to option exercises. Short-Term and Long-Term Loan Facilities. We have short-term and long-term borrowings with five banks, as follows: Lender Agreement Date Maturity Date Annual Interest Rate Maximum Borrowing Amount(1) Amount Outstanding at March 31, 2022 (in thousands) Bank of Shanghai Pudong Branch June 2021 June 2022 2.70 % RMB100,000 RMB29,313 $ 15,750 $ 4,617 China Everbright Bank July 2021 October 2022 1.95 % RMB150,000 RMB21,637 $ 23,625 $ 3,408 Bank of Communications October 2021 October 2022 3.85 % RMB60,000 RMB10,000 $ 9,450 $ 1,575 China Merchants Bank November 2020 Repayable by installments and the last installments repayble in November 2030 4.65 % RMB128,500 RMB114,611 $ 20,239 $ 18,051 Bank of China June 2021 Repayable by installments and the last installments repayble in June 2024 2.60 % RMB10,000 RMB9,500 $ 1,575 $ 1,497 Bank of China September, 2021 Repayable by installments and the last installments repayble in September 2021 2.60 % RMB35,000 RMB33,250 $ 5,512 $ 5,237 $ 76,151 $ 34,385 39 Table of Contents (1) Converted from RMB to dollars as of March 31, 2022. All of the amounts owing under the line of credit with Bank of Shanghai Pudong Branch are guaranteed CleanChip Technologies LTD, a wholly owned subsidiary of ACM Shanghai. The loan from China Merchant’s bank is pledged by the property of Shengwei and guaranteed by ACM Shanghai. Government Research and Development Grants. As described under “—Key Components of Results of Operations—PRC Government Research and Development Funding,” ACM Shanghai has received research and development grants from local and central PRC governmental authorities. ACM Shanghai received no cash payments related to such grants in the first three months of 2022, as compared to cash receipts of $0.6 million in the same period of 2021. Not all grant amounts are received in the year in which a grant is awarded. Because of the nature and terms of the grants, the amounts and timing of payments under the grants are difficult to predict and vary from period to period. In addition, we expect to apply for additional grants when available in the future, but the grant application process can extend for a significant period of time and we cannot predict whether, or when, we will determine to apply for any such grants. Working Capital. The following table sets forth selected working capital information: March 31, 2022 (in thousands) Cash and cash equivalents $ 380,311 Accounts receivable, less allowance for doubtful amounts 106,351 Inventory 271,538 Working capital $ 758,200 Our cash and cash equivalents at March 31, 2022 were unrestricted and held for working capital purposes. ACM Shanghai, our only direct PRC subsidiary, is, however, subject to PRC restrictions on distributions to equity holders. We currently intend for ACM Shanghai to retain all available funds any future earnings for use in the operation of its business and do not anticipate its paying any cash dividends. We have not entered into, and do not expect to enter into, investments for trading or speculative purposes. Our accounts receivable balance fluctuates from period to period, which affects our cash flow from operating activities. Fluctuations vary depending on cash collections, client mix, and the timing of shipment and acceptance of our tools. We have never declared or paid cash dividends on our capital stock. We intend to retain all available funds and any future earnings to support the operation of and to finance the growth and development of our business and do not anticipate paying any cash dividends in the foreseeable future. Uses of Funds Cash Flow from Operating Activities. Our operations used cash flow of $27.7 million in the first three months of 2022. Our cash flow from operating activities is influenced by (a) the level of net income, (b) the amount of cash we invest in personnel and technology development to support anticipated future growth in our business, (c) increases in the number of customers using our products, and (d) the amount and timing of payments by customers. Capital Expenditures. We incurred $3.6 million in capital expenditures during the three months ended March 31, 2022, versus $1.6 million capital expenditures in the same period of 2021. Capital expenditures in the three months ended March 31, 2021 were incurred principally for the addition of production capacity and general maintenance and improvements to our global facilities.