What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2022-08-09 compared with 2022-05-09 · 770 added, 413 removed, 179 unchanged (87% of the section changed)

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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.

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.

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.

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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.

Revenue from wet cleaning and other front-end processing tools totaled $79.6 million, or 76.2% of total revenue, for the three months ended June 30, 2022, as compared to $46.0 million, or 85.4%

of total revenue, for the same period in 2021.

Revenue from wet cleaning and other front-end processing tools totaled $111.3 million, or 75.9% of total revenue, for the six months ended June 30, 2022, as compared to $77.9 million, or 79.8% 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.

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 $24.8 million, or 23.8% of total revenue, for the three months ended June 30, 2022, as compared to

$7.9 million, or 14.6% of total revenue, for the same period in 2021.

Revenue from advanced packaging, other back-end processing tools, services and spares totaled $35.3 million, or 24.1% of total revenue, for the six months ended June 30, 2022, as

compared to $19.7 million, or 20.2% 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.

Our 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.;

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.

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

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.

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

We have focused our selling efforts on establishing a referenceable base of leading foundry, logic and memory chip makers, whose use of our products can influence decisions by other

manufacturers.

We believe this customer base has helped us penetrate the mature chip manufacturing markets and build credibility with additional industry leaders.

We have used a “demo-to-sales” process to place evaluation equipment, or “first

tools,” with a number of selected customers.

Since 2009 we have delivered more than 290 wet cleaning and other front-end processing tools, more than 230 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.

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.

operation includes sales, marketing and services personnel to expand and support major new customer initiatives for the products of ACM Shanghai to additional regions beyond mainland China.

As of June 30, 2022, we

have delivered one tool for evaluation to a U.S.

lab of a global semiconductor capital equipment vendor, and one tool for evaluation to the U.S.

facility of a major U.S.

semiconductor manufacturer.

Both of these evaluations are supported by our

services team.

We are focused on building a strategic portfolio of intellectual property to support and protect our key innovations.

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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.

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.

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.

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.

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.

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.

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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.

technologies, and will provide floor space to support significantly increase production capacity and related research and development, or R&D, 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 through our subsidiaries to address the

growing market for semiconductor manufacturing equipment in the region by working closely with regional chip manufacturers to understand their specific requirements, encourage them to adopt our technologies, and enable us to design innovative

products and solutions to address their needs.

Corporate Background

ACM Research was incorporated in California in 1998 and redomesticated in Delaware in 2016.

We perform strategic planning, marketing, and financial activities at our global corporate

headquarters in Fremont, California.

We perform strategic planning, marketing, and financial activities at our global

corporate headquarters in Fremont, California.

ACM Research is neither a PRC operating company nor do we conduct our operations in the PRC through the use of VIEs.

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 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:

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 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 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.

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

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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.

, which now is a wholly-owned subsidiary of ACM Shanghai, to manage sales and service

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

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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.

, which now is an indirect wholly-owned subsidiary of ACM Shanghai, to serve our customers based in the Republic of Korea and perform sales and marketing and R&D activities.

In March 2019 ACM Shanghai formed a wholly-owned subsidiary in the PRC, Shengwei Research (Shanghai), Inc ., or ACM Shengwei, to manage

activities related to addition of future long-term production capacity.

In June 2019 CleanChip Technologies Limited formed a wholly-owned subsidiary in California, ACM Research (CA), Inc., to provide procurement services on

behalf of ACM Shanghai.

In August 2021 we formed a wholly-owned subsidiary in Singapore, ACM Research (Singapore) PTE, Ltd., to perform sales, marketing, and other business development

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 February 2022, ACM Shanghai formed a wholly-owned subsidiary in China, ACM Research (Beijing), Inc., to perform sales, marketing and other business development

In March 2022, ACM formed a wholly-owned subsidiary in South Korea, Hanguk ACM CO., LTD , to perform business development and other related activities.

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Our Shanghai operations position us to be near

many of our current and potential new customers in the PRC (including Taiwan), Korea and throughout Asia, providing convenient access and reduced shipping and manufacturing costs.

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

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.

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

many of our current and potential new customers in the PRC (including Taiwan), South Korea and throughout Asia, providing convenient access and reduced shipping and manufacturing costs.

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

ACM Shanghai’s 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 the second production

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 ACM Shanghai leased a

second building immediately adjacent to the second factory, which increased the 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.

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square feet of available floor space for production.

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.

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 R&D center and

factory currently under construction.

The following chart depicts our corporate organization as of June 30, 2022:

A detailed description of how cash is transferred through our organization is set forth under “Note 2 – Summary of Significant Accounting

Policies – Cash and Cash Equivalents” to the Consolidated Financial Statements of this report.

Risks Associated with Corporate Structure

We are subject to a number of legal and operational risks associated with our corporate structure, including as the result of a substantial

portion of our operations being conducted in the PRC.

Consequences of any of those risks could result in a material adverse change in our operations or cause the value of ACM Research Class A common stock to significantly decline.

carefully read the information beginning on page 64 of this report and included in “Part II.

Item 1A – Risk Factors,” in particular the risk factors addressing the following issues:

If any PRC central government authority were to determine that existing PRC laws or regulations require that ACM Shanghai obtain the authority’s permission or approval to continue the listing of ACM Research’s Class A common stock in

the United States or if those existing PRC laws and regulations, or interpretations thereof, were to change to require such permission or approval, ACM Shanghai may be unable to obtain any such permission or approval or may only be able

to obtain such permission or approval on terms and conditions that impose material new restrictions and limitations on the operations of ACM Shanghai, either of which could have a material adverse effect on our business, financial

condition, results of operations, reputation and prospects and on the trading price of ACM Research Class A common stock.

PRC central government authorities may intervene in, or influence, ACM Shanghai’s PRC-based operations at any time, and those authorities’ rules and regulations can change quickly with little or no advance notice.

The PRC central government may determine to exert additional control over offerings conducted overseas or foreign investment in PRC-based issuers, which could result in a material change in our operations and the value of ACM Research

Class A common stock.

Permissions or Approvals to Operate in the PRC

The business of ACM Shanghai is subject to complex laws and regulations in the PRC that can change quickly with little or no advance notice.

date, beyond the COVID-19-related restrictions in 2022, we have not experienced such intervention or influence by PRC central government authorities or a change in those authorities’ rules and regulations that have had a material impact on ACM

Shanghai or ACM Research.

In the ordinary course of business, ACM Shanghai has obtained all of the permits and licenses it believes are necessary for it to operate in the PRC.

From time to time the PRC government issues new regulations, which

may require additional actions on the part of ACM Shanghai to comply.

See “Part II.

Item 1A - Risk Factors - The PRC central government may intervene in, or influence, ACM Shanghai’s PRC-based operations at any time, and the rules and regulations in the PRC can change quickly with

little or no advance notice.”

Our Independent Registered Public Accounting Firm

Our independent registered public accounting firm for the year ending December 31, 2022 is Armanino LLP, which is registered with the Public

Company Accounting Oversight Board, or the PCAOB.

Holding Foreign Companies Accountable Act, or the HFCA Act, requires that the PCAOB determine whether it is unable to inspect or investigate completely registered public accounting

firms located in a non-U.S.

jurisdiction because of a position taken by one or more authorities in that jurisdiction.

BDO China Shu Lun Pan Certified Public Accountants LLP, or BDO China, had been our independent registered public accounting

firm in recent years including for the year ended December 31, 2021.

On December 16, 2021, the PCAOB issued a report on its determinations that the PCAOB is unable to inspect or investigate completely registered public accounting firms

headquartered in the PRC and Hong Kong because of positions taken by PRC authorities in those jurisdictions, including BDO China.

On March 30, 2022, ACM Research was transferred to the SEC’s “Conclusive list of issuers identified under the

HFCA.” See “Item 1A, “Risk Factors— We could be adversely affected if we are unable to comply with recent and proposed legislation and regulations regarding improved access

to audit and other information and audit inspections of accounting firms, including registered public accounting firms, such as our audit firm since our initial public offering in 2017, operating in the PRC.” of Part II of our Quarterly Report

on Form 10-Q for the quarter ended March 31, 2022 for more information.

On June 30, 2022, stockholders of ACM Research ratified the appointment of Armanino LLP as our independent auditor for the fiscal year ending December 31, 2022.

LLP is neither headquartered in the PRC or Hong Kong nor is it subject to the determinations announced by the PCAOB.

Recent Developments

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.

The worldwide COVID-19 health pandemic and related government and private sector responsive actions have adversely affected the economies and

financial markets of many countries and specifically have negatively impacted the Company’s business operations, including in the PRC and the United States.

The continuation of the COVID-19 pandemic could continue to result a in economic

uncertainty and global economic policies 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.

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:

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

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’ 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.

We conduct substantially all of our product development, manufacturing, support and services in the PRC through ACM Shanghai, and

those activities have been directly impacted by COVID–19 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 quarantines,” 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 quarantines, 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 in March 2022, and therefore limited ACM Shanghai’s ability to ship finished products to customers and to

produce new products.

Spot quarantines 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.

quarantine 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 our customers have substantial operations based in operations

areas of the PRC, including in the City of Shanghai, subject to the full-city restrictions, which began 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.

In late April 2022, ACM Shanghai began to resume some operations at the Chuansha manufacturing site 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,” and had resumed substantially all of its Chuansha manufacturing site operations by the end of the

second quarter of 2022.

In mid-June 2022, substantially all of ACM Shanghai’s R&D and administrative employees at its ZhangJiang facility were allowed to return to work under strict safety protocols after a period of restricted access to

the building that for many employees was partially mitigated by being able to work from home.

ACM Shanghai has established several policies to help avoid or limit future outbreaks among employees and thus protect employee safety and limit the

possibility of a facility reclosing.

We anticipate that the effects of the PRC restrictions 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.

We 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.

Our customers’, including the customers of ACM Shanghai, 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

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.

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.

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.

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.

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 related to the Shanghai facilities of ACM Shanghai, 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.

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 ACM Shanghai began construction of a new R&D 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.

For the first six months of 2022, ACM Shanghai experienced a negative impact to revenue and shipments as a result of restricted access and

logistics to its Shanghai-based production and administrative facilities.

Thirteen tools amounting to $13 million in revenue and $24 million in shipments that could not be shipped to customers in the three-months ended March 30, 2022 were

subsequently shipped in the three months ended June 30, 2022.

As a result of the restrictions, we experienced a modest increase to operational costs due to increased logistics costs and inefficiencies that resulted from the restrictions, an

increase in cash used in operations due in part to an increase in accounts receivables that resulted from a shift of shipments towards the latter part of the period, and general administrative inefficiencies.

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.

grant was awarded in 2009 to fund interest expense on short-term borrowings.

The first grant, which was awarded in 2008, relates to the development and commercialization of 65nm to 45nm stress-free polishing

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 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.

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.

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.

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,

For the six months ended June 30, 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 $4.2 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.

For the six months ended June 30, 2022 and 2021, related

government subsidies recognized as other income in the consolidated statements of operations and comprehensive income were $155,000 and $80,000, 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

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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.

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.

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 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;

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.

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;

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,

(in thousands)

Adjusted EBITDA Data:

Net Income (loss)

Interest expense (income), net

Income tax benefit

Depreciation and amortization

Stock based compensation

Unrealized loss on trading securities

Adjusted EBITDA

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,

(in thousands)

Free Cash Flow Data:

Net cash used in (provided by) in operating activities

Purchase property and equipment

Purchase of intangible assets

Free cash flow

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:

Three Months Ended March 31,

(in thousands)

Cost of revenue

Operating expenses:

Sales and marketing

Research and development

General and administrative

Income (loss) from operations

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.

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

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.

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.

There were no significant changes in our critical accounting policies or significant judgments or estimates during the three months ended June 30, 2022 to augment the critical accounting

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.

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The following table sets forth our results of operations for the periods presented, as percentages of revenue.

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

Cost of revenue

4 unchanged sentences

Total operating expenses, net

Income (loss) from operations

Income from operations

Interest income (expense), net

Unrealized loss on trading securities

Unrealized gain (loss) on trading securities

Other income (expense), net

Equity income (loss) in net income (loss) of affiliates

Income (loss) before income taxes

Income tax benefit

Net income (loss)

Net income (loss) attributable to non-controlling interests

Net income (loss) attributable to ACM Research, Inc.

Comparison of Three Months Ended March 31, 2022 and 2021

Three Months Ended March 31,

Equity income in net income of affiliates

Income before income taxes

Income tax benefit (expense)

Net income attributable to non-controlling interests

Net income attributable to ACM Research, Inc.

Comparison of Three Months Ended June 30, 2022 and 2021

Three Months Ended June 30,

Absolute Change

(in thousands)

5 unchanged sentences

Advanced packaging, other processing tools, services and spares

Total Revenue Front and Back-End

Revenue increased by $50.5 million in the three months ended June 30, 2022 as compared to the same period in 2021.

The increase was driven

by higher demand from our current customers, incremental contribution from new customers, growth from our cleaning and advanced packaging products, incremental contribution from newer ECP products, and the shipment of finished tools that

could not be shipped in the prior quarter due to COVID-19-related restrictions on our Shanghai operations which contributed $12.9 million during the period.

The increased demand from China based customers is due in part to their increased

investments in production capacity amidst global shortages of semiconductor components.

Cost of Revenue and Gross Margin

Three Months Ended June 30,

Absolute Change

(in thousands)

Cost of revenue

Cost of revenue increased $28.1 million and gross profit increased $22.5 million in the three months ended June 30, 2022 as compared to the

corresponding period in 2021 due to the increased sales volume, and a 195 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 June 30,

Absolute Change

(in thousands)

Sales and marketing expense

Research and development expense

General and administrative expense

Total operating expenses

Sales and marketing expense increased by $1.9 million

in the three months ended June 30, 2022 as compared to the corresponding period in 2021, and reflected increases of $0.8 million of personnel costs related to additional resources to our global sales and services teams to scale our business in

mainland China and the United States, an increase of $0.9 million due to supplies and spare parts, commissions and travel and entertainment costs, an increase of $0.1 million in stock-based compensation, and an increase of $0.1 million in

professional services.

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;

costs of tools built for promotional purposes for current or potential new customers;

travel and entertainment;

allocated overhead for rent and utilities.

Research and development expense increased by $3.4 million in the three months ended June 30, 2022 as compared to the corresponding period in 2021,

reflecting an increase of $3.0 million in personnel costs due to the additional of employees and higher salaries to support new product development, and an increase of $0.4 million in stock based compensation.

Research and development expense represented 10.9% and 14.7% of our revenue in the three months ended June 30, 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 $11.4 million, or 10.9% of total revenue, in the three months

ended June 30, 2022 as compared to $9.4 million, or 17.3% 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 the research of technical requirements for product development purposes and testing of concepts under consideration;

amortization of costs of software used for research and development purposes;

allocated overhead for rent and utilities.

General and administrative expense increased $1.5 million in the three months ended June 30, 2022 as compared to the corresponding period in 2021.

General and administrative

expense consists primarily of:

compensation of executive, accounting and finance, human resources, information technology, and other administrative personnel, including stock-based compensation;

professional fees, including accounting and corporate legal and defense fees;

other corporate expenses including insurance;

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, ACM Research operating a public company in the United States and ACM Shanghai operating as a public company in the PRC.

Income from Operations

Three Months Ended June 30,

Absolute Change

(in thousands)

Income from operations

Income from operations increased by $15.7 million during the three months ended June 30, 2022 as compared to the prior year period, due to

increased revenue and gross profit, partly offset by an increase in operating expenses in absolute dollars and as a percentage of total revenue.

Interest income (expense), net, Other Income (expense), net

Three Months Ended June 30,

Absolute Change

(in thousands)

Interest Income

Interest Expense

Interest Income (expense), net

Other income (expense), net

Interest income (expense), net 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 $1.8 million of interest income (expense), net in the three months ended June 30, 2022 as compared to an expense of $163,000 of interest income (expense), net in the corresponding

period in 2021.

The significant change from the year-ago-period resulted from a higher balance of cash and equivalents and time deposits, higher interest rates on these balances, and a lower combined balance of short-term and long-term bank

Other income (expense), 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.

We realized $2.5 million of other income (expense) in the three months ended June 30, 2022, as compared to a loss of

($0.9) million in the corresponding period in 2021.

The variance was due primarily to the impact to transactions that resulted from changes in the RMB-to-U.S.

dollar exchange rate during the respective periods.

Unrealized loss from trading securities and equity income in net income of affiliates.

Three Months Ended June 30,

Absolute Change

(in thousands)

Unrealized gain (loss) on trading securities

Equity income in net income of affiliates

We recorded an unrealized loss of $0.4 million for the three months ended June 30, 2022, as compared to an unrealized gain of $3.8 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.

Equity income in net income of affiliates increased by $0.2

million for the three months ended June 30, 2022.

Income Tax Benefit (Expense)

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

Three Months Ended June 30,

(in thousands)

Total income tax benefit (expense)

We recognized a tax expense of $7.7 million for the three months ended June 30, 2022 as compared to a tax expense of $15,000 for prior year

The increased tax expense in 2022 primarily resulted from the tax effect of increased operating profit generated and an increase in our effective income tax rate.

The increase in our effective income tax rate for the three months ended

June 30, 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 U.S.

Cuts and Jobs Act of 2017, or the TCJA, which became effective on January 1, 2022, and a decrease in discrete tax benefits associated with stock-based compensation deductions.

The capitalization of overseas R&D expenses resulted in a

significant increase in our 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 at a rate of 25%.

According to Guoshuihan 2009 No.

203, an entity

certified as an “advanced and new technology enterprise” is entitled to a preferential income tax rate of 15%.

ACM Shanghai was certified as an “advanced and new technology enterprise” in 2012 and again in 2016 and 2018, with an effective period of

In 2021, ACM Shanghai was certified as an eligible integrated circuit production enterprise and is entitled to a preferential income tax rate of 0% from January 1, 2018 to December 31, 2019 and 12.5% from January 1, 2020 to December

31, 2022 instead of 15%.

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 June 30,

Absolute Change

(in thousands)

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

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 June 30, 2022, this amount totaled $4.5 million as compared to $0.7

million in the corresponding period in 2021.

Foreign currency translation adjustment

Three Months Ended June 30,

Absolute Change

(in thousands)

Foreign currency translation adjustment

We recorded a foreign currency translation adjustment of ($40.4) million for the three months ended June 30, 2022, as compared to $3.0

million for the same period in 2021, based on the net effect of RMB to dollar exchange rate fluctuations for the period on the converted value of ACM Shanghai’s RMB-denominated balances to U.S.

dollar equivalents.

The amount was especially large

due to a significant weakening of the RMB versus the U.S.

dollar during the period.

Comparison of Six Months Ended June 30, 2022 and 2021

Six Months Ended June 30,

Absolute Change

(in thousands)

Single wafer cleaning, Tahoe and semi-critical cleaning equipment

ECP (front-end and packaging), furnace and other technologies

Advanced packaging (excluding ECP), services & spares

Total Revenue By Product Category

Wet cleaning and other front-end processing tools

Advanced packaging, other processing tools, services and spares

Total Revenue Front-end and Back-End

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.

Revenue increased by $49.0 million in the six months ended June 30, 2022 as compared to the same period in 2021.

Revenue for the period was

impacted by COVID-19 related restrictions which reduced production output and logistics to and from our facilities for several months.

The increase versus the prior year period was driven by higher demand from current and new customers, growth

from our cleaning and advanced packaging products, and incremental contribution from our newer ECP products.

The increased demand from China based customers is due in part to increased investments in production capacity amidst global shortages

of semiconductor components.

Cost of Revenue and Gross Margin

Three Months Ended March 31,

Six Months Ended June 30,

Absolute Change

(in thousands)

Cost of revenue

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.

Cost of revenue increased $24.9 million and gross profit increased $24.1 million in the six months ended June 30, 2022 as compared to the corresponding period in 2021 due to the increased sales

volume, and a 285 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.

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,

Six Months Ended June 30,

Absolute Change

(in thousands)

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Total operating expenses

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.

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.

Sales and marketing expense increased by $3.3 million in the six months ended June 30, 2022 as compared to the corresponding period in 2021 and reflected

increases of $1.6 million of personnel costs related to additional resources to our global sales and services teams to scale our business in mainland China and the United States, and an increase of $1.4 million due to supplies and spare parts,

commissions and travel and entertainment costs, an increase of $0.1 million in stock-based compensation, and an increase of $0.1 million in professional services.

Sales and marketing expense consists primarily of:

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cost of trade shows;

costs of tools built for promotional purposes for current or potential new customers;

travel and entertainment;

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.

Research and development expense increased by $15.3 million in the six months ended June 30, 2022 as compared to the corresponding period in 2021,

reflecting an increase of $5.6 million in personnel costs due to the additional of employees and higher salaries to support new product development, an increase of $6.3 million for to cost of tools built for product development purposes, an

increase of $2.8 million for other items including travel and entertainment, professional services and other items, and an increase of $0.6 million in stock based compensation.

Research and development expense represented 19.6% and 13.8% of our revenue in the six months ended June 30, 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.

governmental authorities (see “—Government Research and Development Funding”), gross research and development expense totaled $28.8 million, or 19.6% of total revenue, in the six months ended June 30, 2022 and $15.7 million, or 16.0% 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:

Research and development expense consists

primarily of:

compensation of personnel associated with our research and development activities, including stock based compensation;

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costs of tools built for product development purposes;

travel expense associated with customer support;

travel expense associated with the research of technical requirements for product development purposes and testing of concepts under consideration;

amortization of costs of software used for research and development purposes;

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.

administrative expense consists primarily of:

General and administrative expense increased $2.6 million in the six months ended June 30, 2022 as compared to the corresponding period in 2021.

General and administrative

expense consists primarily of:

compensation of executive, accounting and finance, human resources, information technology, and other administrative personnel, including stock-based compensation;

2 unchanged sentences

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,

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, ACM Research operating a public company in the United States and ACM Shanghai operating a public company in the PRC.

Income from operations

Six Months Ended June 30,

Absolute Change

(in thousands)

Unrealized loss on trading securities

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,

Income from operations

Income from operations increased by $2.9 million for during the six months ended June 30, 2022 as compared to the prior year period, due to increased revenue and gross profit, partly offset by an

increase in operating expenses in absolute and as a percentage of total revenue.

Interest income (expense), net, Other Income (expense), net

Six Months Ended June 30,

Absolute Change

(in thousands)

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Other income (expense), net

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.

$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.

Interest income (expense), net consists of interest earned on our cash and equivalents and restricted cash accounts, offset by interest expense incurred from outstanding short-term borrowings.

realized $3.4 million of interest income (expense), net in the six months ended June 30, 2022 as compared to ($303,000) of interest income (expense), net in the corresponding period in 2021.

The significant change from the year-ago-period resulted

from a higher balance of cash and equivalents and time deposits, and higher interest rates on these balances.

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.

We realized $2.7 million of other income (expense) in the three months ended June 30, 2022, as compared to a loss of ($0.4) million

in the corresponding period in 2021.

The variance was due primarily to the impact to transactions that resulted from changes in the RMB-to-U.S.

dollar exchange rate during the respective periods.

Unrealized loss from trading securities and equity income in net income of affiliates

Six Months Ended June 30,

Absolute Change

(in thousands)

Unrealized gain (loss) on trading securities

Equity income in net income of affiliates

We recorded an unrealized loss of $4.3 million for the six months ended June 30, 2022, as compared to an unrealized gain of $3.8 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.

Equity income in net income of affiliates increased by $0.2 million

for the three months ended June 30, 2022.

Income Tax Benefit (Expense)

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

Three Months Ended March 31,

Total income tax benefit

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

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.

Six Months Ended June 30,

(in thousands)

Total income tax benefit (expense)

We recognized a tax expense of $3.7 million for the six months ended June 30, 2022 as compared to a tax benefit of $2.8 million for prior year

The increased tax expense in 2022 primarily resulted from the tax effect of increased operating profit generated and an increase in our effective income tax rate.

The increase in our effective income tax rate for the six months ended

became effective on January 1, 2022, and a decrease in discrete tax benefits associated with stock-based compensation deductions.

The capitalization of overseas R&D expenses resulted in a significant increase in our 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.

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%.

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 at 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.

entity certified as an “advanced and new technology enterprise” is entitled to a preferential income tax rate of 15%.

ACM Shanghai was certified as an “advanced and new technology enterprise” in 2012 and again in 2016 and 2018, with an effective

period of three years.

In 2021, ACM Shanghai was certified as an eligible integrated circuit production enterprise and is entitled to a preferential income tax rate of 12.5% from January 1, 2020 to December 31, 2022 instead of 15%.

We file income tax returns in the United States and state and foreign jurisdictions.

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examinations for 1999 through 2021.

to the extent utilized in a future period.

the extent utilized in a future period.

Net Income Attributable to Non-Controlling Interests

Three Months Ended March 31,

Six Months Ended June 30,

Absolute Change

(in thousands)

Net income (loss) attributable to non-controlling interests and redeemable 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.

Net income attributable to non-controlling interests

In 2019 ACM Shanghai sold 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.

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.

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 six months ended June 30, 2022, this amount totaled $2.9 million as compared to $1.1 million in the corresponding period in 2021.

Foreign currency translation adjustment

Six Months Ended June 30,

Absolute Change

(in thousands)

Foreign currency translation adjustment

We recorded a foreign currency translation adjustment of ($37.9) million for the six months ended June 30, 2022, as compared to $1.7

million for the same period in 2021, based on the net effect of RMB to dollar exchange rate fluctuations for the period on the converted value of ACM Shanghai’s RMB-denominated balances to U.S.

dollar equivalents.

The amount was especially large

due to a significant weakening of the RMB versus the U.S.

dollar during the period.

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.

Cash and Cash Equivalents

During the first six months of 2022, we funded our technology development and operations principally through our beginning global cash balances,

including the cash balances at ACM Shanghai, and borrowings by ACM Shanghai from local financial institutions.

Cash and cash equivalents, short-term time deposits and long-term time deposits declined by $94.3 million for the six-months ended

June 30, 2022 primarily due to $61.3 million net cash used by operations, $22.2 million decrease due to the effect of foreign exchange on cash balances, $5.3 million in capital expenditures, and $5.0 million cash used by financing activities.

(in thousands)

Cash and cash equivalents and time deposits:

Cash and cash equivalents

Short-term time deposits

Long-term time deposits

We believe our existing cash and cash equivalents and short-term and long-term time deposits, our cash flow from operating activities, and

bank borrowings by ACM Shanghai will be sufficient to meet our anticipated cash needs for at least the next twelve months.

Our anticipated cash needs for the next twelve months do not require receipt of any PRC government subsidies.

Our future working capital needs beyond the next twelve months will depend on many factors, including the rate of our business and revenue

growth, the payment schedules of our customers, the timing and magnitude of our capital expenditures, and the timing of investment in our research and development as well as sales and marketing.

We believe our existing cash and cash equivalents

and short-term and long-term time deposits, our cash flow from operating activities, and bank borrowings by ACM Shanghai will be sufficient to meet our anticipated cash needs within our longer term planning horizon.

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.

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);

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,

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.

Restrictions under PRC laws and regulations as well as restrictions under ACM Shanghai’s bank loan agreements, may significantly restrict ACM

Shanghai’s ability to transfer a portion of ACM Shanghai’s net assets to ACM Research, other subsidiaries of ACM Research and to holders of ACM Research Class A common stock.

See “Item 1A.

Risk Factors–Regulatory Risks–The PRC’s currency

exchange control and government restrictions on investment repatriation may impact our ability to transfer funds outside of the PRC, which could materially and adversely affect our ability to grow, make investments or acquisitions that could

benefit our business, otherwise fund and conduct our business, or pay dividends on our common stock.” in our Annual Report.

For the six months ended June 30, 2022 and 2021, no transfers, dividends, or distributions have been made between ACM Research, and its

subsidiaries, including ACM Shanghai, or to holders of ACM Research Class A common stock.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet financing arrangements as defined in Item 303(a)(4) of Regulation S-K.

Contractual Obligations

Grant Contract for State-owned Construction Land Use Right in Shanghai City

In 2020 ACM Shanghai, through its wholly-owned subsidiary ACM Shengwei, 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, or the Grantor.

ACM Shengwei 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, or the Land Use Right, 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.

In exchange for its land use rights, ACM Shengwei paid aggregate grant fees of RMB 61.7 million ($9.5 million), or the Grant Fees, 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), or Construction Start Milestone;

the completion of construction within 30 months after the Delivery Date (20% of the performance deposit), or Construction Completion

the start of production within 42 months after the Delivery Date (20% of the performance deposit), or Production Start Milestone.

Upon satisfaction of a milestone, the portion of the performance deposit attributable to that milestone will be repayable to ACM Shengwei within

ten business days.

If the achievement of any of the above milestones is delayed or abandoned, ACM Shengwei 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.

The status of the performance milestones for the period ending June 30, 2022 is as follows:

ACM Shengwei achieved the Construction Start Milestone and 60% of the performance deposit was refunded to ACM Shanghai in 2020.

The Construction Completion Milestone is required to be met prior to January 9, 2023.

Although this date has not yet been reached, due

to COVID-19 related restrictions, ACM Shengwei has experienced delays and does not expect to meet the milestone, and plans to file a request for an extension in December 2022.

We cannot guarantee the extension will be met or that ACM

Shengwei will be refunded this 20% portion of the performance deposit.

Contractual penalties in the case of a delay of Construction

Completion Milestone :

If ACM Shengwei fails to complete the construction pursuant to the date agreed under the Grant Agreement or any extended completion date approved by the Grantor, ACM Shengwei shall pay 50% of the deposit for

timely completion of construction as liquidated damages;

If the ACM Shengwei delays the completion for more than six months beyond the date agreed under the Grant Agreement, or beyond any extended completion date approved by the Grantor, it shall pay the total deposit for timely completion

of construction as liquidated damages.

If the delay is more than one year, the Grantor is entitled to terminate the Grant Agreement and take back the Land Use Right.

In such case, the Grantor shall refund the Grant Fees for the remaining land use

term after deducting the deposit agreed under the Grant Agreement and refund the deposit for timely commencement of production and relevant bank interests in full to ACM Shengwei.

The Production Start Milestone is required to be met prior to January 9, 2024.

Although this date has not yet been reached, ACM

Shengwei plans to also file a request for an extension of this milestone due to COVID-related delays.

We cannot guarantee the extension will be met or that ACM Shengwei will be refunded this 20% portion of the performance deposit.

Contractual penalties in the case of a delay of Production Start

If ACM Shengwei fails to commence production pursuant to the date agreed under the Grant Agreement or any extended commencement date approved by the Grantor, ACM Shengwei shall pay the total deposits for

timely commencement of production as liquidated damages;

If ACM Shengwei fails to commence production pursuant to the extended commencement of production date, the Grantor is entitled to terminate the Grant Agreement and take back the Land Use Right.

In such case,

the Grantor shall refund the Grant Fees for the remaining land use term after deducting the deposit agreed under the Grant Agreement to ACM Shengwei.

In addition to the milestones, covenants in the Grant Agreement require that, among other things, ACM Shengwei 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).

ACM Shengwei shall pay the

liquidated damages equal to the same proportion of the Grant Fees as the proportion of the actual shortfall amount of investment in the total agreed investment amount or the investment intensity.

(b) within six years after the Delivery Date, or prior to July 9, 2026, it does not (i) generate a minimum specified amount of annual sales of

products manufactured on the granted land or (ii) pay to the PRC at least RMB 157.6 million ($22.2 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.

If the total tax revenue of the project tax fails to reach but is no less than 80% of the standard agreed under the Grant Agreement, ACM Shengwei shall pay 20% of the actual shortfall amount of

the tax revenue as liquidated damages.

If the total tax revenue of the project fails to reach 80% of the standard agreed under the Grant Agreement within 1 month after the agreed date of reaching target production, the Grantor is entitled to

terminate this Contract, take back the Land Use Right, and shall refund the Grant Fees for the remaining Land Use Term to ACM Shengwei.

If the Grant Agreement is terminated because of breach of any terms above, the

Grantor shall take back the buildings, fixtures and auxiliary facilities on the land area and provide ACM Shengwei with corresponding compensation according to the residual value of the buildings, fixtures and auxiliary facilities when

they are taken back.

The total of buildings and construction in progress related to ACM Shengwei amounted to $7.9 million and $5.6 million at June 30, 2022 and December 31, 2021, respectively.

Loan and Mortgage Contract for Lingang, Shanghai Housing Units

In connection with its financing the purchase of housing units in Lingang, Shanghai, or the Property, in November 2020 ACM Shengwei entered

into a Loan and Mortgage Contract, or the Loan Agreement, with China Merchants Bank Co., Ltd., Shanghai Pilot Free Trade Zone Lin-Gang Special Area Sub-branch, or the Lender, pursuant to which the ACM Shengwei obtained a loan in the aggregate

amount of $19.6 million.

The loan under the Loan Agreement is secured by a pledge of the Property, which ACM Shangwei’s subsidiary received ownership of in January 2022, and is guaranteed by ACM Shanghai.

Under the Loan Agreement, ACM Shengwei

must deliver the right certificate of the Property within sixty days of the execution of the Loan Agreement or the Lender has the right to, among other things, declare a breach of contract and enforce its remedies under the Loan Agreement,

which remedies include the ability to declare any borrowings outstanding, together with accrued and unpaid interest and fees, to be immediately due and payable.

As of the date of this report, ACM Shengwei and its developer have been unable to

obtain the required right certificate of the Property due to administrative difficulties related to the COVID 19 pandemic and, as a result, the procedures of the formal pledge registration by the Lender have not been completed.

delivered a letter to ACM Shengwei on July 27, 2022 confirming that it is aware of the cause of the delay in ACM Shengwei’s delivery of the right certificate of the Property and as of the date of this report has not taken any action to date as

a result of the delay.

The Lender could, however, assert at any time that the delay is a breach of contract and, among other remedies, could seek to declare the amounts owing under the Loan Agreement to be due and payable.

The Shanghai Lingang

Industrial Zone Public Rental Housing Construction and Operation Management Co., Ltd., or the Developer, delivered a letter to ACM Shengwei on August 4, 2022, citing a force majeure delay due to the COVID-19-related restrictions in Shanghai for

the delay of the initial registration of the housing ownership, and that it expects to complete the initial registration of housing ownership by the end of August 2022.

See “Risks Related to International Aspects of Our Business—As the result

of administrative delays in the PRC related to the COVID-19 pandemic, ACM Research’s indirect subsidiary ACM Shengwei has not been able to obtain the right certificate of property in Lingang, Shanghai as required by its Loan and Mortgage

Contract, and our liquidity, financial position and business would be adversely affected if the lender bank were to assert successfully that the failure to obtain the right certificate is a breach of the Loan and Mortgage Contract” in Item 1A.

Risk Factors” of Part II of this report.

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.

During the six months

ended June 30, 2022, we received proceeds of $0.8 million from sales of ACM Research 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:

During the six months

ended June 30, 2022, ACM Shanghai paid $5 million to reduce the balance outstanding of our short-term and long-term borrowings.

ACM Shanghai, together with its subsidiaries, has short-term and long-term borrowings with five banks, as follows:

Agreement Date

1 unchanged sentence

Interest Rate

Maximum Borrowing

Amount Outstanding

at March 31, 2022

at June 30, 2022

(in thousands)

3 unchanged sentences

China Merchants Bank

November 2020

Repayable by installments and the last installments repayble in November 2030

installments and the last

installments repayable in

November 2030

Bank of China

Repayable by installments and the last installments repayble in June 2024

installments and the last

installments repayable in

Bank of China

September, 2021

Repayable by installments and the last installments repayble in September 2021

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.

from China Merchant’s bank is pledged by the property of Shengwei and guaranteed by ACM Shanghai.

installments and the last

installments repayable in

September 2021

Converted from RMB to dollars as of June 30, 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 Merchants Bank is secured by a pledge of the property of ACM Shengwei and guaranteed by ACM Shanghai, as described above under “—Contractual Obligations.”

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.

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 six 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.

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.

apply for any such grants.

Advances from Customers.

During the six-months ended June 30, 2022, advances from customers increased $41.6 million, due to an increase of payments made by customers for

first tools under evaluation, and an increase in pre-payments made by customers prior to delivery of repeat tools.

Working Capital.

The following table sets forth selected working capital information:

March 31, 2022

June 30, 2022

(in thousands)

2 unchanged sentences

Working capital

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.

Our cash and cash equivalents at June 30, 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.

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.

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.

3 unchanged sentences

Cash Flow from Operating Activities.

Our operations used cash flow of $27.7 million in the first three months of 2022.

Our operations used cash flow of $61.3 million in the first six 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.

(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.

We incurred $5.3 million in capital expenditures during the first six months of 2022, versus $2.4 million capital expenditures in

the same period of 2021.

Capital expenditures in the six months ended June 30, 2022 were incurred principally for the addition of production capacity and general maintenance and improvements to our global facilities.

Effect of exchange rate fluctuations on cash and cash equivalents.

The value of our cash, and cash equivalents declined $22.2 million during the first

six months of 2022 versus an increase of $0.3 million in the same period of 2021.

The impact of fluctuations of the RMB to U.S.

dollar currency exchange rate on a significant balance of these items held in RMB-denominated accounts (Note 2)

contributed to change.

How We Evaluate Our Operations

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

“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).

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.

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.

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.

We consider shipments a key operating metric as it reflects the total value of products delivered to customers and prospective customers by our productive assets.

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;

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.

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 and six months ended June 30, 2022 totaled $112 million and $179 million, as compared to $82 million and $156 million for the

same periods in 2021.

Repeat tool shipments in the three and six-months ended June 30, 2022 totaled $67 million and $97 million, as compared to $49 million and $87 million for the same periods in 2021.

First tool shipments in the three- and

six-months ended June 30, 2022 totaled $45 million and $82 million, as compared to $34 million and $69 million for the same periods in 2021.

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.

“First tool” shipments reflect the value of incremental new products under evaluation delivered to our customers or prospective customers for a given period and is used as an internal key

metric to reflect future potential revenue opportunity.

The cumulative cost of “first tool” shipments under evaluation at customers which have not been accepted by the customer is carried at cost and reflected in finished goods inventory (see

note 5 to the condensed consolidated financial statements included in this report).

“First tool” shipments exclude deliveries to customers for which ACM does not have a basis to expect future revenue.

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;

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;

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;

requirements for such replacements;

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:

Six Months Ended June 30,

(in thousands)

Adjusted EBITDA Data:

Interest expense (income), net

Income tax benefit

Depreciation and amortization

Stock based compensation

Unrealized (gain) loss on trading securities

Adjusted EBITDA

The $8.2 million increase in adjusted EBITDA for the six months ended June 30, 2022 as compared to the same period in 2021 reflected a $3.9 million decrease in net income, a $7.0 million

increase in unrealized (gain) loss on trading securities, a $1.5 million increase in depreciation and amortization, and a $0.8 million increase in stock-based compensation, partly offset by a $3.4 million impact from an increase in interest income,

net, and a $6.4 million impact from a change in income tax benefit (expense)

We do not exclude from adjusted EBITDA expense reductions and non-operating other income attributable to PRC governmental grants because we consider and incorporate the expected amounts and

timing of those grants in incurring expenses and capital expenditures.

If we did not receive the grants, our cash expenses therefore would be lower, and our cash position would not be 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:

Six Months Ended June 30,

(in thousands)

Free Cash Flow Data:

Net cash provided by (used in) operating activities

Purchase property and equipment

Free cash flow

The $64.4 million decrease in free cash flow for the six months ended June 30, 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

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:

Six Months Ended June 30,

(in thousands)

Cost of revenue

Operating expenses:

Sales and marketing

Research and development

General and administrative

Income (loss) from operations

Adjusted operating income for the six months ended June 30, 2022 increased by $3.7 million, as compared with the same period in 2021, due to a $2.9 million increase in income from operations,

offset by a $0.8 million increase in stock-based compensation expense.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis