0001654954-19-005926.txt : 20190514 0001654954-19-005926.hdr.sgml : 20190514 20190514164822 ACCESSION NUMBER: 0001654954-19-005926 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 182 CONFORMED PERIOD OF REPORT: 20190331 FILED AS OF DATE: 20190514 DATE AS OF CHANGE: 20190514 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ACM Research, Inc. CENTRAL INDEX KEY: 0001680062 STANDARD INDUSTRIAL CLASSIFICATION: SPECIAL INDUSTRY MACHINERY, NEC [3559] IRS NUMBER: 000000000 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-38273 FILM NUMBER: 19823466 BUSINESS ADDRESS: STREET 1: 42307 OSGOOD ROAD, SUITE I CITY: FREMONT STATE: CA ZIP: 94539 BUSINESS PHONE: 510-445-3700 MAIL ADDRESS: STREET 1: 42307 OSGOOD ROAD, SUITE I CITY: FREMONT STATE: CA ZIP: 94539 10-Q 1 acm_10q.htm QUARTERY REPORT Blueprint
 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
(Mark One)
 
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2019
 
or
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from _________ to _____________
 
Commission file number: 001-38273
 
ACM Research, Inc.
(Exact Name of Registrant as Specified in Its Charter)
 
Delaware
94-3290283
(State or Other Jurisdiction of Incorporation or Organization)
(I.R.S. Employer Identification No.)
 
42307 Osgood Road, Suite I
Fremont, California
94539
(Address of Principal Executive Offices)
(Zip Code)
 
Registrant’s telephone number, including area code: (510) 445-3700
_________________________________________________________
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
Yes No
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data file required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
 
 
Emerging growth company
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section13(a) of the Exchange Act.
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No
 
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Trading Symbol(s)
Name of Each Exchange on which Registered
Class A Common Stock, $0.0001 par value per share
ACMR
Nasdaq Global Market
  
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.
 
Class
 
Number of Shares Outstanding
Class A Common Stock, $0.0001 par value
 
14,196,966 shares outstanding as of May 9, 2019
Class B Common Stock, $0.0001 par value
 
1,895,090 shares outstanding as of May 9, 2019
 

 
 
 
TABLE OF CONTENTS
 
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We conduct our business operations principally through ACM Research (Shanghai), Inc., or ACM Shanghai, a subsidiary of ACM Research, Inc., or ACM Research. Unless the context requires otherwise, references in this report to “our company,” “our,” “us,” “we” and similar terms refer to ACM Research, Inc. (including its predecessor prior to its redomestication from California to Delaware in November 2016) and its subsidiaries (including ACM Shanghai), collectively.
 
SAPS, TEBO and ULTRA C are our trademarks. For convenience, these trademarks appear in this report without ™ symbols, but that practice does not mean that we will not assert, to the fullest extent under applicable law, our rights to the trademarks. This report also contains other companies’ trademarks, registered marks and trade names, which are the property of those companies.
 
 
2
 
 
NOTE ABOUT FORWARD-LOOKING STATEMENTS
 
This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical facts, included in this report regarding our strategy, future operations, future financial position, future revenue, projected costs, prospects, plans and objectives of management are forward-looking statements. In some cases, you can identify forward-looking statements by terms such as “may,” “might,” “will,” “objective,” “intend,” “should,” “could,” “can,” “would,” “expect,” “believe,” “anticipate,” “project,” “target,” “design,” “estimate,” “predict,” “potential,” “plan” or the negative of these terms, and similar expressions intended to identify forward-looking statements. These statements reflect our current views with respect to future events and are based on our management’s belief and assumptions and on information currently available to our management. Although we believe that the expectations reflected in these forward-looking statements are reasonable, these statements relate to future events or our future operational or financial performance, and involve known and unknown risks, uncertainties and other factors, including those described or incorporated by reference in “Item 1A. Risk Factors” of Part II of this report, that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements.
 
Any forward-looking statement made by us in this report speaks only as of the date on which it is made. Except as required by law, we assume no obligation to update these statements publicly or to update the reasons actual results could differ materially from those anticipated in these statements, even if new information becomes available in the future.
 
You should read this report, and the documents that we reference in this report and have filed as exhibits to this report, completely and with the understanding that our actual future results may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements.
 
3
 
 
PART I. FINANCIAL INFORMATION
 
Item 1. Financial Statements
 
ACM RESEARCH, INC.
Condensed Consolidated Balance Sheets
 
 
 March 31,
2019
 
 December 31,
2018
 
 
 (unaudited) 
 
 (in thousands, except share and per share data) 
Assets
   
   
Current assets:
   
   
Cash and cash equivalents
 $27,367 
 $27,124 
Accounts receivable, less allowance for doubtful accounts of $0 as of March 31, 2019 and $0 as of December 31, 2018 (note 3)
  25,070 
  24,608 
Other receivables
  2,982 
  3,547 
Inventories (note 4)
  42,253 
  38,764 
Prepaid expenses
  1,833 
  1,985 
        Total current assets
  99,505 
  96,028 
Property, plant and equipment, net (note 5)
  3,719 
  3,708 
Operating lease right-of-use assets, net (note 8)
  4,787 
  - 
Intangible assets, net
  263 
  274 
Deferred tax assets (note 15)
  1,669 
  1,637 
Investment in affiliates, equity method (note 10)
  1,476 
  1,360 
Other long-term assets
  - 
  40 
                         Total assets
  111,419 
  103,047 
Liabilities and Stockholders’ Equity
    
    
Current liabilities:
    
    
    Short-term borrowings (note 6)
  12,829 
  9,447 
    Accounts payable
  13,333 
  16,673 
Advances from customers
  8,469 
  8,417 
   Income taxes payable
  1,228 
  1,193 
Other payables and accrued expenses (note 7)
  11,834 
  10,410 
Current portion of operating lease liability (note 8)
  1,326 
  - 
            Total current liabilities
  49,019 
  46,140 
Long-term operating lease liability (note 8)
  3,462 
  - 
Other long-term liabilities (note 9)
  3,296 
  4,583 
                Total liabilities
  55,777 
  50,723 
Commitments and contingencies (note 16)
    
    
Stockholders’ equity:
    
    
Common stock – Class A, par value $0.0001: 100,000,000 shares authorized as of March 31, 2019 and December 31, 2018. 14,176,690 shares issued and outstanding as of March 31, 2019 and 14,110,315 shares issued and outstanding as of December 31, 2018 (note 13)
  1 
  1 
Common stock–Class B, par value $0.0001: 7,303,533 shares authorized as of March 31, 2019 and December 31, 2018. 1,898,423 shares issued and outstanding as of March 31, 2019 and 1,898,423 shares issued and outstanding as of December 31, 2018 (note 13)
  - 
  - 
Additional paid in capital
  57,371 
  56,567 
Accumulated deficit
  (1,530)
  (3,387)
Accumulated other comprehensive loss
  (200)
  (857)
               Total stockholders’ equity
  55,642 
  52,324 
                      Total liabilities and stockholders’ equity
 $111,419 
 $103,047 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
4
 
 
ACM RESEARCH, INC.
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)
 
 
 Three Months Ended March 31, 
 
 2019 
 2018 
 
 (Unaudited) 
 
 ( In thousands, except share and per share data) 
Revenue
 $20,479 
 $9,743 
Cost of revenue
  11,653 
  4,621 
        Gross profit
  8,826 
  5,122 
Operating expenses:
    
    
    Sales and marketing
  1,869 
  1,855 
    Research and development
  2,765 
  1,541 
    General and administrative
  1,941 
  3,630 
         Total operating expenses, net
  6,575 
  7,026 
         Income (loss) from operations
  2,251 
  (1,904)
Interest income
  9 
  3 
Interest expense
  (139)
  (103)
Other expense, net
  (261)
  (755)
Equity income in net income of affiliates
  116 
  1 
        Income (loss) before income taxes
  1,976 
  (2,758)
Income tax expense (note 15)
  (119)
  (22)
        Net income (loss)
 $1,857 
 $(2,780)
Comprehensive income (loss):
    
    
    Net income (loss)
  1,857 
  (2,780)
    Foreign currency translation adjustment
  657 
  705 
         Total comprehensive Income (loss) (note 2)
 $2,514 
 $(2,075)
 
    
    
Net income (loss) per common share (note 2):
    
    
     Basic
 $0.12 
 $(0.18)
     Diluted
 $0.10 
 $(0.18)
 
    
    
Weighted average common shares outstanding used in computing per share amounts (note2):
    
    
     Basic
  16,044,655 
  15,383,086 
     Diluted
  18,225,317 
  15,383,086 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
5
 
 
ACM RESEARCH, INC.
Condensed Consolidated Statements of Changes in Stockholders’ Equity (Deficit)
(in thousands, except share and per share data)
 
 
 
Common
Stock Class A
 
 
Common
Stock Class B
 
 
 
 
 
   
 
 
 
 
 
 
 
 
 
Shares
 
 
Amount
 
 
Shares
 
 
Amount
 
 
Additional Paid-in Capital
 
 
Accumulated Deficit 
 
 
Accumulated Other Comprehensive Income 
 
 
Total Stockholders’ Equity (Deficit)
 
Balance at January 1, 2019
  14,110,315 
 $1 
  1,898,423 
 $- 
 $56,567 
 $(3,387)
 $(857)
 $52,324 
Net income
  - 
  - 
  - 
  - 
  - 
  1,857 
  - 
  1,857 
Foreign currency translation adjustment
  - 
  - 
  - 
  - 
  - 
  - 
  657 
  657 
Exercise of stock option
  66,375 
  - 
  - 
  - 
  60 
  - 
  - 
  60 
Stock-based compensation
  - 
  - 
  - 
  - 
  744 
  - 
  - 
  744 
Balance at March 31, 2019
  14,176,690 
 $1 
  1,898,423 
 $- 
 $57,371 
 $(1,530)
 $(200)
 $55,642 
 
 
 
Common Stock Class A
 
 
Common Stock Class B
 
 
 
 
 
   
 
 
 
 
 
 
 
 
 
Shares
 
 
Amount
 
 
Shares
 
 
Amount
 
 
Additional Paid-in Capital
 
 
Accumulated Deficit 
 
 
Accumulated Other Comprehensive Income 
 
 
Total Stockholders’ Equity (Deficit)
 
Balance at January 1, 2018
  12,935,546 
 $1 
  2,409,738 
 $- 
 $49,695 
 $(9,961)
 $122 
 $39,857 
Net income
  - 
  - 
  - 
  - 
  - 
  (2,780)
  - 
  (2,780)
Foreign currency translation adjustment
  - 
  - 
  - 
  - 
  - 
  - 
  705 
  705 
Exercise of stock option
  57,222 
  - 
  - 
  - 
  64 
  - 
  - 
  64 
Stock-based compensation
  - 
  - 
  - 
  - 
  2,175 
  - 
  - 
  2,175 
Exercise of common stock warrant issued to SMC
  397,502 
  - 
  - 
  - 
  2,981 
  - 
  - 
  2,981 
Balance at March 31, 2018
  13,390,270 
 $1 
  2,409,738 
 $- 
 $54,915 
  $(12,741
 $827 
 $43,002 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
6
 
 
ACM RESEARCH, INC.
Condensed Consolidated Statements of Cash Flows
 
 
 
Three Months Ended March 31,
 
 
 
2019
 
 
2018
 
 
 
(unaudited)
 
Cash flows from operating activities:
 
 
 
 
 
 
Net income (loss)
 $1,857 
 $(2,780)
Adjustments to reconcile net loss from operations to net cash provided by
    
    
        operating activities:
    
    
   Depreciation and amortization
  191 
  80 
   Equity income in net income of affiliates
  (116)
  (1)
   Deferred income taxes
  - 
  - 
   Stock-based compensation
  744 
  2,175 
   Net changes in operating assets and liabilities:
    
    
       Accounts receivable
  99 
  14 
       Other receivables
  669 
  1,331 
       Inventory
  (2,759)
  (3,896)
       Prepaid expenses
  190 
  (1,791)
       Other current assets
  - 
  3 
       Accounts payable
  (3,757)
  (2,364)
       Advances from customers
  45 
  87 
       Income tax payable
  15 
  - 
       Other payables and accrued expenses
  1,013 
  27 
       Other long-term liabilities
  (1,373)
  (278)
            Net cash used in operating activities
  (3,182)
  (7,393)
 
    
    
Cash flows from investing activities:
    
    
Purchase of property and equipment
  (115)
  (395)
Purchase of intangible assets
  (1)
  - 
           Net cash used in investing activities
  (116)
  (395)
 
    
    
Cash flows from financing activities:
    
    
Proceeds from short-term borrowings
  8,285 
  7,387 
Repayments of short-term borrowings
  (5,084)
  (2,306)
Proceeds from stock option exercise to common stock
  60 
  62 
            Net cash provided by financing activities
  3,261 
  5,143 
 
    
    
Effect of exchange rate changes on cash and cash equivalents
 $280 
 $150 
Net (decrease) increase in cash and cash equivalents
 $243 
 $(2,495)
 
    
    
Cash and cash equivalents at beginning of period
  27,124 
  17,681 
Cash and cash equivalents at end of period
 $27,367 
 $15,186 
 
    
    
Supplemental disclosure of cash flow information:
    
    
       Interest paid
 $139 
 $103 
 
The accompanying notes are an integral part of these condensed consolidated financial statements
  
 
7
 
 
ACM RESEARCH, INC.
Notes to Condensed Consolidated Financial Statements (unaudited)
(in thousands, except share and per share data)
 
NOTE 1 – DESCRIPTION OF BUSINESS
 
ACM Research, Inc. (“ACM”) and its subsidiaries (collectively with ACM, the “Company”) develop, manufacture and sell single-wafer wet cleaning equipment used to improve the manufacturing process and yield for advanced integrated chips. The Company markets and sells its single-wafer wet-cleaning equipment, under the brand name “Ultra C,” based on the Company’s proprietary Space Alternated Phase Shift (“SAPS”) and Timely Energized Bubble Oscillation (“TEBO”) technologies. These tools are designed to remove random defects from a wafer surface efficiently, without damaging the wafer or its features, even at increasingly advanced process nodes.
 
ACM was incorporated in California in 1998, and it initially focused on developing tools for manufacturing process steps involving the integration of ultra low-K materials and copper. The Company’s early efforts focused on stress-free copper-polishing technology, and it sold tools based on that technology in the early 2000s.
 
In 2006 the Company established its operational center in Shanghai in the People’s Republic of China (the “PRC”), where it operates through ACM’s subsidiary ACM Research (Shanghai), Inc. (“ACM Shanghai”). ACM Shanghai was formed to help establish and build relationships with integrated circuit manufacturers in the PRC, and the Company initially financed its Shanghai operations in part through sales of non-controlling equity interests in ACM Shanghai.
 
In 2007 the Company began to focus its development efforts on single-wafer wet-cleaning solutions for the front-end chip fabrication process. The Company introduced its SAPS megasonic technology, which can be applied in wet wafer cleaning at numerous steps during the chip fabrication process, in 2009. It introduced its TEBO technology, which can be applied at numerous steps during the fabrication of small node two-dimensional conventional and three-dimensional patterned wafers, in March 2016. The Company has designed its equipment models for SAPS and TEBO solutions using a modular configuration that enables it to create a wet-cleaning tool meeting the specific requirements of a customer, while using pre-existing designs for chamber, electrical, chemical delivery and other modules. In August 2018, the Company introduced its Ultra-C Tahoe wafer cleaning tool, which can deliver high cleaning performance with significantly less sulfuric acid than typically consumed by conventional high-temperature single-wafer cleaning tools. The Company also offers a range of custom-made equipment, including cleaners, coaters and developers, to back-end wafer assembly and packaging factories, principally in the PRC.
 
In 2011 ACM Shanghai formed a wholly owned subsidiary in the PRC, ACM Research (Wuxi), Inc. (“ACM Wuxi”), to manage sales and service operations.
 
In November 2016 ACM redomesticated from California to Delaware pursuant to a merger in which ACM Research, Inc., a California corporation, was merged into a newly formed, wholly owned Delaware subsidiary, also named ACM Research, Inc.
 
In June 2017 ACM formed a wholly owned subsidiary in Hong Kong, CleanChip Technologies Limited (“CleanChip”), to act on the Company’s behalf in Asian markets outside the PRC by, for example, serving as a trading partner between ACM Shanghai and its customers, procuring raw materials and components, performing sales and marketing activities, and making strategic investments.
 
In August 2017 ACM purchased 18.77% of ACM Shanghai’s equity interests held by Shanghai Science and Technology Venture Capital Co., Ltd. On November 8, 2017, ACM purchased the remaining 18.36% of ACM Shanghai’s equity interest held by third parties, Shanghai Pudong High-Tech Investment Co., Ltd. (“PDHTI”) and Shanghai Zhangjiang Science & Technology Venture Capital Co., Ltd. (“ZSTVC”). At December 31, 2017, ACM owned all of the outstanding equity interests of ACM Shanghai, and indirectly through ACM Shanghai, owned all of the outstanding equity interests of ACM Wuxi.
 
 
8
 
 
ACM RESEARCH, INC.
Notes to Condensed Consolidated Financial Statements (unaudited)
(in thousands, except share and per share data)
 
On September 13, 2017, ACM effectuated a 1-for-3 reverse stock split of Class A and Class B common stock. Unless otherwise indicated, all share numbers, per share amount, share prices, exercise prices and conversion rates set forth in these notes and the accompanying condensed consolidated financial statements have been adjusted retrospectively to reflect the reverse stock split.
 
In December 2017 ACM formed a wholly owned subsidiary in the Republic of Korea, ACM Research Korea CO., LTD. (“ACM Korea”), to serve customers based in Republic of Korea and perform sales, marketing, research and development activities for new products and solutions.
 
NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES
 
Basis of Presentation and Principles of Consolidation
 
The consolidated accounts include ACM and its subsidiaries, ACM Shanghai, ACM Wuxi, CleanChip and ACM Korea. Subsidiaries are those entities in which ACM, directly and indirectly, controls more than one half of the voting power. All significant intercompany transactions and balances have been eliminated upon consolidation.
 
The accompanying condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and the rules and regulations of the SEC for reporting on Form 10-Q. Accordingly, they do not include all the information and footnotes required by GAAP for complete financial statements herein. The unaudited condensed consolidated financial statements herein should be read in conjunction with the historical consolidated financial statements of the Company for the year ended December 31, 2018 included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.
 
The accompanying condensed consolidated balance sheet as of March 31, 2019, the condensed consolidated statements of operations and comprehensive income (loss) for the three months ended March 31, 2019 and 2018, and the condensed consolidated statements of cash flows for the three months ended March 31, 2019 and 2018 are unaudited. In the opinion of management, the unaudited condensed consolidated financial statements of the Company reflect all adjustments that are necessary for a fair presentation of the Company’s financial position and results of operations. Such adjustments are of a normal recurring nature, unless otherwise noted. The balance sheet as of March 31, 2019 and the results of operations for the three months ended March 31, 2019 are not necessarily indicative of the results to be expected for any future period.
 
Use of Estimates
 
The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the balance sheet date and the reported revenue and expenses during the reported period in the condensed consolidated financial statements and accompanying notes. The Company’s significant accounting estimates and assumptions include, but are not limited to, those used for the valuation and recognition of stock-based compensation arrangements and warrant liability, realization of deferred tax assets, assessment for impairment of long-lived assets, allowance for doubtful accounts, inventory valuation for excess and obsolete inventories, lower of cost and market value or net realizable value of inventories, depreciable lives of property and equipment, and useful life of intangible assets. Management of the Company believes that the estimates, judgments and assumptions are reasonable, based on information available at the time they are made. Actual results could differ materially from those estimates.
 
 
9
 
 
ACM RESEARCH, INC.
Notes to Condensed Consolidated Financial Statements (unaudited)
(in thousands, except share and per share data)
 
Basic and Diluted Net Income (Loss) per Common Share
 
Basic and diluted net income (loss) per common share is calculated as follows:
 
 
 
Three Months Ended March 31,
 
 
 
2019
 
 
2018
 
Numerator:
 
 
 
 
 
 
       Net income (loss)
 $1,857 
 $(2,780)
       Denominator:
    
    
Weighted average shares outstanding, basic
  16,044,655 
  15,383,086 
       Effect of dilutive securities
  2,180,662 
  - 
       Weighted average shares outstanding, diluted
  18,225,317 
  15,383,086 
Net income (loss) per common share:
    
    
Basic
 $0.12 
 $(0.18)
Diluted
 $0.10 
 $(0.18)
 
ACM has been authorized to issue Class A and Class B common stock since redomesticating in Delaware in November 2016. The two classes of common stock are substantially identical in all material respects, except for voting rights. Since ACM did not declare any dividends during the three months ended March 31, 2019 and 2018, the net income (loss) per common share attributable to each class is the same under the “two-class” method. As such, the two classes of common stock have been presented on a combined basis in the condensed consolidated statements of operations and comprehensive income (loss) and in the above computation of net income (loss) per common share.
 
Diluted net income (loss) per common share reflects the potential dilution from securities that could share in ACM’s earnings. ACM’s potential dilutive securities consist of convertible preferred stocks, warrants and stock options for the three months ended March 31, 2019 and 2018. Certain potential dilutive securities were excluded from the net income (loss) per share calculation because the impact would be anti-dilutive.
 
Recent Accounting Pronouncements
 
Recently Adopted Accounting Pronouncements
 
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842) (“ASU 2016-02”). The amendments in ASU 2016-02 create Topic 842, Leases, and supersede the leases requirements in Topic 840, Leases. Topic 842 specifies the accounting for leases. The objective of Topic 842 is to establish the principles that lessees and lessors shall apply to report useful information to users of financial statements about the amount, timing, and uncertainty of cash flows arising from a lease. The main difference between Topic 842 and Topic 840 is the recognition of lease assets and lease liabilities for those leases classified as operating leases under Topic 840. Topic 842 retains a distinction between finance leases and operating leases. The classification criteria for distinguishing between finance leases and operating leases are substantially similar to the classification criteria for distinguishing between capital leases and operating leases in the previous lease guidance. The result of retaining a distinction between finance leases and operating leases is that under the lessee accounting model in Topic 842, the effect of leases in the statement of comprehensive income and the statement of cash flows is largely unchanged from previous GAAP.
 
Effective January 1, 2019, we adopted the ASU 2016-02, Leases, which requires the recognition of lease assets and these liabilities by leases for those leases classified as an operating lease under previous guidance. The original guidance required application on a modified retrospective basis with the earliest period presented. In August, 2018, the FASB issues ASU 2018-11, Targeted Improvements to ASC 842, which included an option to not restate comparative periods in transition and elect to use the effective date of ASC 842, Leases, as the date of initial application of transition which we elected. As a result of the adoption of ASC 842 on January 1, 2019, we recorded both operating lease right-of-use (“ROU”) assets of $5,109 and lease liabilities of $5,109. The adoption of ASC 842 had no impact on our profit or loss and cash flows for the three-month period ended March 31, 2019. In addition, we elected the package of practical expedients permitted under the transition guidance within the new standard which allowed us to carry forward the historical lease classification. Additional information and disclosures required by this new standard are contained in Note 8, ‘Operating lease right-of-use assets’.
 
 
10
 
 
ACM RESEARCH, INC.
Notes to Condensed Consolidated Financial Statements (unaudited)
(in thousands, except share and per share data)
 
In June 2018, the FASB issued ASU No. 2018-07, Compensation — Stock Compensation (Topic 718) — Improvements to Nonemployee Share-Based Payment Accounting (“ASU 2018-07”), which simplifies several aspects of the accounting for nonemployee share-based payment transactions resulting from expanding the scope of Topic 718, Compensation-Stock Compensation, to include share-based payment transactions for acquiring goods and services from nonemployees. Some of the areas for simplification apply only to nonpublic entities. ASU 2018-07 specifies that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. ASU 2018-07 also clarify that Topic 718 does not apply to share-based payments used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under the New Revenue Standard.
 
Effective January 1, 2019, we adopted ASU 2018-07 and it did not have a material impact on our condensed consolidated financial statements.
 
Recent Accounting Pronouncements Not Yet Adopted
 
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820) (“ASU 2018-13”), which eliminates, adds and modifies certain disclosure requirements for fair value measurements. The modified standard eliminates the requirement to disclose changes in unrealized gains and losses included in earnings for recurring Level 3 fair value measurements and requires changes in unrealized gains and losses be included in other comprehensive income for recurring Level 3 fair value measurements of instruments. The standard also requires the disclosure of the range and weighted average used to develop significant unobservable inputs and how weighted average is calculate for recurring and nonrecurring Level 3 fair value measurements. The amendment is effective for fiscal years beginning after December 15, 2019 and interim periods within that fiscal year with early adoption permitted. We are currently evaluating the impact of the adoption of ASU 2018-13 on our consolidated financial statements.
 
In January 2017, the FASB issued ASU No. 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (“ASU 2017-04”), which removes Step 2 from the goodwill impairment test. An entity will apply a one-step quantitative test and record the amount of goodwill impairment as the excess of a reporting unit’s carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. ASU 2017-04 does not amend the optional qualitative assessment of goodwill impairment. A business entity that is an SEC filer must adopt the amendments in ASU 2017-04 for its annual or any interim goodwill impairment test in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We are currently evaluating the impact of the adoption of ASU 2017-04 on our consolidated financial statements.
 
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 replaced the incurred loss impairment methodology under current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. ASU 2016-13 requires use of a forward-looking expected credit loss model for accounts receivables, loans, and other financial instruments. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, with early adoption permitted. Adoption of the standard requires using a modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the effective date to align existing credit loss methodology with the new standard. We will adopt ASU 2016-13 effective January 1, 2020. We are currently evaluating the impact of this standard on our consolidated financial statements, including accounting policies, processes, and systems, but do not expect the standard will have a material impact on our consolidated financial statements.
 
 
11
 
 
ACM RESEARCH, INC.
Notes to Condensed Consolidated Financial Statements (unaudited)
(in thousands, except share and per share data)
 
NOTE 3 – ACCOUNTS RECEIVABLE
 
At March 31, 2019 and December 31, 2018, accounts receivable consisted of the following:
 
 
 
March 31,
 
 
December 31,
 
 
 
2019
 
 
2018
 
Accounts receivable
 $25,070 
 $24,608 
Less: Allowance for doubtful accounts
  - 
  - 
Total
 $25,070 
 $24,608 
 
The Company reviews accounts receivable on a periodic basis and makes general and specific allowances when there is doubt as to the collectability of individual balances. No allowance for doubtful accounts was considered necessary at March 31, 2019 or December 31, 2018. At March 31, 2019 and December 31, 2018, accounts receivable of $0 and $1,457, respectively, were pledged as collateral for borrowings from financial institutions.
 
NOTE 4 – INVENTORIES
 
At March 31, 2019 and December 31, 2018, inventory consisted of the following:
 
 
 
March 31,
2019
 
 
December 31,
2018
 
Raw materials
 $13,285 
 $12,646 
Work in process
  15,981 
  9,631 
Finished goods
  12,987 
  16,487 
    Total inventory, gross
  42,253 
  38,764 
Inventory reserve
  - 
  - 
Total inventory, net
 $42,253 
 $38,764 
 
At March 31, 2019 and December 31, 2018, the Company did not have an inventory reserve and no inventory was pledged as collateral for borrowings from financial institutions. System shipments of first-tools to an existing or prospective customer, for which ownership does not transfer until customer acceptance, are classified as finished goods inventory and carried at cost until ownership is transferred.
 
NOTE 5 – PROPERTY, PLANT AND EQUIPMENT, NET
 
At March 31, 2019 and December 31, 2018, property, plant and equipment consisted of the following:
 
 
 
March 31,
 
 
December 31,
 
 
 
2019
 
 
2018
 
Manufacturing equipment
 $9,894 
 $9,703 
Office equipment
  549 
  512 
Transportation equipment
  129 
  184 
Leasehold improvement
  1,444 
  1,379 
Total cost
  12,016 
  11,778 
Less: Total accumulated depreciation
  (8,377)
  (8,102)
Construction in progress
  80 
  32 
Total property, plant and equipment, net
 $3,719 
 $3,708 
 
Depreciation expense was $175 and $85 for the three months ended March 31, 2019 and 2018, respectively.
 
 
12
 
 
ACM RESEARCH, INC.
Notes to Condensed Consolidated Financial Statements (unaudited)
(in thousands, except share and per share data)
 
NOTE 6 – SHORT-TERM BORROWINGS
 
At March 31, 2019 and December 31, 2018, short-term borrowings consisted of the following:
 
 
 
March 31,
2019
 
 
December 31,
2018
 
Line of credit up to RMB 50,000 from Bank of Shanghai Pudong Branch, due on April 17,2019 with an annual interest rate of 4.99%, guaranteed by the Company’s CEO and fully repaid on March 27, 2019.
 $- 
 $3,133 
Line of credit up to RMB 50,000 from Bank of Shanghai Pudong Branch, due on February 14,2019 with an annual interest rate of 5.15%, guaranteed by the Company’s CEO and fully repaid on February 14, 2019.
  - 
  485 
Line of credit up to RMB 50,000 from Bank of Shanghai Pudong Branch, due on January 23, 2020 with an annual interest rate of 5.22%, guaranteed by the Company’s CEO and Cleanchip Technologies Limited.
  668 
    
Line of credit up to RMB 30,000 from Bank of China Pudong Branch, due on June 06, 2019 with annual interest rate of 5.22%, secured by certain of the Company’s intellectual property and the Company’s CEO.
  2,228 
  2,186 
Line of credit up to RMB 30,000 from Bank of China Pudong Branch, due on June 13, 2019 with annual interest rate of 5.22%, secured by certain of the Company’s intellectual property and the Company’s CEO.
  2,228 
  2,186 
Line of credit up to RMB 10,000 from Shanghai Rural Commercial Bank, due on January 23, 2019 with an annual interest rate of 5.44%, guaranteed by the Company’s CEO and pledged by accounts receivable,and fully repaid on January 23, 2019.
  - 
  1,457 
Line of credit up to RMB 20,000 from Shanghai Rural Commercial Bank, due on February 21, 2020 with an annual interest rate of 5.66%, guaranteed by the Company’s CEO and pledged by accounts receivable.
  1,485 
    
Line of credit up to RMB 20,000 from Bank of Communications, due on January 18, 2020 with an annual interest rate of 5.66%.
  1,485 
    
Line of credit up to RMB 20,000 from Bank of Communications, due on January 22, 2020 with an annual interest rate of 5.66%.
  743 
    
Line of credit up to RMB 20,000 from Bank of Communications, due on February 14, 2020 with an annual interest rate of 5.66%.
  742 
    
Line of credit up to RMB 50,000 from China Everbright Bank, due on March 25, 2020 with an annual interest rate of 4.94%, guaranteed by the Company’s CEO.
  3,250 
    
Total
 $12,829 
 $9,447 
 
Interest expense related to short-term borrowings amounted to $139 and $103 for the three months ended March 31, 2019 and 2018, respectively.
 
 
13
 
 
ACM RESEARCH, INC.
Notes to Condensed Consolidated Financial Statements (unaudited)
(in thousands, except share and per share data)
 
NOTE 7 – OTHER PAYABLE AND ACCRUED EXPENSES
 
At March 31, 2019 and December 31, 2018, other payable and accrued expenses consisted of the following:
 
 
 
March 31,
2019
 
 
December 31,
2018
 
Lease expenses and payable for leasehold improvement due to a related party (note 11)
 $- 
 $53 
Accrued commissions
  2,663 
  2,931 
Accrued warranty
  2,017 
  1,710 
Accrued payroll
  1,240 
  626 
Accrued professional fees
  139 
  64 
Accrued machine testing fees
  2,978 
  3,076 
Others
  2,797 
  1,950 
Total
 $11,834 
 $10,410 
 
NOTE 8 –LEASES
 
We lease space under non-cancelable operating leases for several office and manufacturing locations. These leases do not have significant rent escalation holidays, concessions, leasehold improvement incentives, or other build-out clauses. Further, the leases do not contain contingent rent provisions.
 
Most leases include one or more options to renew. The exercise of lease renewal options is typically at our sole discretion; therefore, the majority of renewals to extend the lease terms are not included in our right-of–use assets and lease liabilities as they are not reasonably certain of exercise. We regularly evaluate the renewal options and when they are reasonably certain of exercise, we include the renewal period in our lease term.
 
As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the lease commencement date in determining the present value of the lease payments. We have a centrally managed treasury function; therefore, based on the applicable lease terms and the current economic environment, we apply a portfolio approach for determining the incremental borrowing rate.
 
The components of our lease expense are as follows:
 
 
 
March 31,
2019
 
Operating lease cost
 $437 
Short-term lease cost
  18 
Lease cost
 $455 
 
Supplemental cash flow information related to our operating leases was as follows for the period ended March 31, 2019:  
 
 
 
Three months ended
March 31,
2019
 
Cash paid for amounts included in the measurement of lease liabilities:
 
 
 
Operating cash outflow from operating leases
  455 
 
 
14
 
 
Maturities of our lease liabilities for all operating leases are as follows as of March 31, 2019:
 
 
 
March 31,
2019
 
2019
 $1,057 
2020
  1,424 
2021
  1,456 
2022
  1,494 
2023
  53 
2024
  13 
Total lease payments
  5,497 
Less: Interest
  (710)
Present value of lease liabilities
 $4,787 
 
The weighted average remaining lease terms and discount rates for all of our operating leases were as follows as of March 31, 2019:
 
Remaining lease term and discount rate:
 
March 31,
2019
 
Weighted average remaining lease term (years)
 3.80
Weighted average discount rate
  5.43%
 
NOTE 9 – OTHER LONG-TERM LIABILITIES
 
Other long-term liabilities represent government subsidies received from PRC governmental authorities for development and commercialization of certain technology but not yet recognized. As of March 31, 2019, and December 31, 2018, other long-term liabilities consisted of the following unearned government subsidies:
 
 
 
March 31,
2019
 
 
December 31,
2018
 
Subsidies to Stress Free Polishing project, commenced in 2008 and 2017
 $1,449 
 $1,483 
Subsidies to Electro Copper Plating project, commenced in 2014
  1,598 
  2,860 
Subsidies to Polytetrafluoroethylene, commenced in 2018
  171 
 178 
Other
  78 
  62 
Total
 $3,296 
 $4,583 
 
NOTE 10 – EQUITY METHOD INVESTMENT
 
On September 6, 2017, ACM and Ninebell Co., Ltd. (“Ninebell”), a Korean company that is one of the Company’s principal materials suppliers, entered into an ordinary share purchase agreement, effective as of September 11, 2017, pursuant to which Ninebell issued to ACM ordinary shares representing 20% of Ninebell’s post-closing equity for a purchase price of $1,200, and a common stock purchase agreement, effective as of September 11, 2017, pursuant to which ACM issued 133,334 shares of Class A common stock to Ninebell for a purchase price of $1,000 at $7.50 per share. The investment in Ninebell is accounted for under the equity method.
 
NOTE 11– RELATED PARTY BALANCES AND TRANSACTIONS
 
On August 18, 2017, ACM and Ninebell, its equity method investment affiliate (note 10), entered into a loan agreement pursuant to which ACM made an interest-free loan of $946 to Ninebell, payable in 180 days or automatically extended another 180 days if in default. The loan was secured by a pledge of Ninebell’s accounts receivable due from ACM and all money that Ninebell received from ACM. Ninebell repaid the loan in March 2018. ACM purchased materials from Ninebell amounting to $2,320 and $970 during the three months ended March 31, 2019 and 2018. As of March 31, 2019 and December 31, 2018, accounts payable due to Ninebell were $1,476 and $1,477, respectively, and prepaid to Ninebell for material purchases were $871 and $572, respectively.
 
 
15
 
 
ACM RESEARCH, INC.
Notes to Condensed Consolidated Financial Statements (unaudited)
(in thousands, except share and per share data)
 
In 2007 ACM Shanghai entered into an operating lease agreement with Shanghai Zhangjiang Group Co., Ltd. (“Zhangjiang Group”) to lease manufacturing and office space located in Shanghai, China. An affiliate of Zhangjiang Group holds 787,098 shares of Class A common stock that it acquired in September 2017 for $5,903. Pursuant to the lease agreement, Zhangjiang Group provided $771 to ACM Shanghai for leasehold improvements. In September 2016 the lease agreement was amended to modify payment terms and extend the lease through December 31, 2017. From January 1 to April 25, 2018, ACM Shanghai leased the property on a month-to-month basis. On April 26, 2018, ACM Shanghai entered into a renewed lease with Zhangjiang Group for the period from January 1, 2018 through December 31, 2022. Under the lease, ACM Shanghai would pay a monthly rental fee of approximately RMB 366 (equivalent to $55). The required security deposit is RMB 1,077 (equivalent to $163). The Company incurred leasing expenses under the lease agreement of $150 and $172 during the three months ended March 31, 2019 and 2018, respectively. As of March 31, 2019 and December 31, 2018, payables to Zhangjiang Group for lease expenses and leasehold improvements recorded as other payables and accrued expenses amounted to $0 and $53, respectively (note 7).
 
On December 9, 2016, ACM Shanghai received the SMC Investment from SMC for potential investment pursuant to terms to be subsequently negotiated (note 8). SMC is a limited partnership incorporated in the PRC, whose partners consist of employees of ACM Shanghai. On March 14, 2017, ACM, ACM Shanghai and SMC entered into a securities purchase agreement (the “SMC Agreement”) pursuant to which, in exchange for the SMC Investment, ACM issued to SMC a warrant exercisable, for cash or on a cashless basis, to purchase, at any time on or before May 17, 2023, all, but not less than all, of 397,502 shares of Class A common stock at a price of $7.50 per share, for a total exercise price of $2,981. On March 30, 2018, SMC exercised the warrant and purchased 397,502 shares of Class A common stock (note 12).
 
NOTE 12 – WARRANT LIABILITY
 
On December 9, 2016, Shengxin (Shanghai) Management Consulting Limited Partnership (“SMC”), a related party (note 11), delivered RMB 20,124 (approximately $2,981 as of the close of business on such date) in cash (the “SMC Investment”) to ACM Shanghai for potential investment pursuant to terms to be subsequently negotiated
 
On March 14, 2017, ACM, ACM Shanghai and SMC entered into a securities purchase agreement (the “SMC Agreement”) pursuant to which, in exchange for the SMC Investment, ACM issued to SMC a warrant exercisable, for cash or on a cashless basis, to purchase, at any time on or before May 17, 2023, all, but not less than all, of 397,502 shares of Class A common stock at a price of $7.50 per share.
 
The warrant issued to SMC, while outstanding as of December 31, 2017, was classified as a liability as it was conditionally puttable in accordance with FASB ASC 480, Distinguishing Liabilities from Equity. The fair value of the warrant was adjusted for changes in fair value at each reporting period but could not be lower than the proceeds of the SMC Investment. The corresponding non-cash gain or loss of the changes in fair value was recorded in earnings. The methodology used to value the warrant was the Black-Scholes valuation model.
 
On March 30, 2018, ACM entered into a warrant exercise agreement with ACM Shanghai and SMC pursuant to which SMC exercised its warrant in full by issuing to ACM a senior secured promissory note in the principal amount of approximately $3,000. ACM then transferred the SMC note to ACM Shanghai in exchange for an intercompany promissory note of ACM Shanghai in the principal amount of approximately $3,000. Each of the two notes bears interest at a rate of 3.01% per annum and matures on August 17, 2023. As security for its performance of its obligations under its note, SMC granted to ACM Shanghai a security interest in the 397,502 shares of Class A common stock issued to SMC upon its exercise of the warrant. Upon the issuance of 397,502 shares of Class A common stock to SMC, the senior secured promissory note issued to AMC by SMC was offset against the SMC investment.
 
 
16
 
 
ACM RESEARCH, INC.
Notes to Condensed Consolidated Financial Statements (unaudited)
(in thousands, except share and per share data)
 
NOTE 13 – COMMON STOCK
 
ACM is authorized to issue 100,000,000 shares of Class A common stock and 7,303,533 shares of Class B common stock, each with a par value of $0.0001. Each share of Class A common stock is entitled to one vote, and each share of Class B common stock is entitled to twenty votes and is convertible at any time into one share of Class A common stock. Shares of Class A common stock and Class B common stock are treated equally, identically and ratably with respect to any dividends declared by the Board of Directors unless the Board of Directors declares different dividends to the Class A common stock and Class B common stock by getting approval from a majority of common stock holders.
 
At December 31, 2017, the number of shares of Class A common stock issued and outstanding was 12,935,546. At December 31, 2017, the number of shares of Class B common stock issued and outstanding was 2,409,738, respectively.
 
On March 30, 2018, SMC exercised its warrant (note 12) and purchased 397,502 shares of Class A common stock.
 
At March 31, 2018, the number of shares of Class A common stock issued and outstanding was 13,390,270. At March 31, 2018, the number of shares of Class B common stock issued and outstanding was 2,409,738. During the three months ended March 31, 2018, no share of Class B common stock was converted into Class A common stock.
 
At December 31, 2018, the number of shares of Class A common stock issued and outstanding was 14,110,315. At December 31, 2018, the number of shares of Class B common stock issued and outstanding was 1,898,423. During the three months ended March 31, 2019, the Company issued 66,375 shares of Class A common stock, respectively, upon options exercises by certain employees and non-employees. During the three months ended March 31, 2019, no shares of Class B common stock were converted into Class A common stock.
 
At March 31, 2019, the number of shares of Class A common stock issued and outstanding was 14,176,790. At March 31, 2019, the number of shares of Class B common stock issued and outstanding was 1,898,423.
 
NOTE 14– STOCK-BASED COMPENSATION
 
ACM’s stock-based compensation awards consisting of employee and non-employee awards were issued under the 1998 Stock Option Plan and 2016 Omnibus Incentive Plan and as standalone options.
 
Employee Awards
 
The following table summarizes the Company’s employee share option activities during the three months ended March 31, 2019:
 
 
 
Number of Option Share
 
 
Weighted Average Grant Date Fair Value
 
 
Weighted Average Exercise Price
 
Weighed Average Remaining Contractual Term
Outstanding at December 31, 2018
 2,503,405 
 $0.91 
 $4.09 
7.30 years
Granted
  - 
  - 
  - 
 
Exercised
  (11,375)
  0.65 
  1.68 
 
Expired
  (628)
  0.55 
  3.00 
 
Forfeited
 -
  - 
  - 
 
Outstanding at March 31, 2019
 2,491,402 
 $1.53 
 $4.10 
7.06 years
Vested and exercisable at March 31, 2019
  1,544,974 
    
    
 
  
During the three months ended March 31, 2019 and 2018, the Company recognized employee stock-based compensation expense of $221 and $93, respectively. As of March 31, 2019 and December 31, 2018, $2,203 and $2,424, respectively, of total unrecognized employee stock-based compensation expense, net of estimated forfeitures, related to stock-based awards were expected to be recognized over a weighted-average period of 1.41 years and 1.62 years, respectively. Total recognized compensation cost may be adjusted for future changes in estimated forfeitures.
 
No options were granted to employees during the three months ended March 31, 2019.
 
Non-employee Awards
 
The following table summarizes the Company’s non-employee share option activities during the three months ended March 31, 2019:
 
 
 
Number of Option Shares
 
 
Weighted Average Grant Date Fair Value
 
 
Weighted Average Exercise Price
 
Weighted Average Remaining Contractual Term
Outstanding at December 31, 2018
 1,212,374 
 $0.78 
 $2.57 
 6.66 years
Granted
  - 
  - 
  - 
                     
Exercised
  (55,000)
  0.32 
  0.75 
                      
Expired
  - 
  - 
  - 
                      
Forfeited
  - 
  - 
  - 
                      
Outstanding at March 31, 2019
 1,157,374 
 $0.78 
 $2.57 
 6.66 years
Vested and exercisable at March 31, 2019
  950,237 
    
    
 
 
We adopted ASU 2018-07 on January 1, 2019 and the stock-based compensation expense for grants before the adoption of ASU 2018-07 is based on the grant date fair value as of December 31, 2018, which was the last business day before we adopted ASU 2018-07, for all nonemployee awards that have not vested as of December 31, 2018. Furthermore, for future awards, compensation expense is based on the market value of the shares at the grant date. Refer to "Note 2 - Summary of Significant Accounting Policies" for further discussion on our adoption of ASU 2018-07.
 
During the three months ended March 31, 2019 and 2018, the Company recognized stock-based compensation expense of $523 and $2,083 for the three months ended March 31, 2019 and 2018, respectively, related to share option vesting. As of March 31, 2019 and December 31, 2018, $1,190 and $1,713, respectively, of total unrecognized non-employee stock-based compensation expense, net of estimated forfeitures, related to stock-based awards were expected to be recognized over a weighted-average period of 1.37 years and 1.31 years, respectively. Total recognized compensation cost may be adjusted for future changes in estimated forfeitures.
 
 
17
 
 
ACM RESEARCH, INC.
Notes to Condensed Consolidated Financial Statements (unaudited)
(in thousands, except share and per share data)
 
NOTE 15 – INCOME TAXES
 
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period during which such rates are enacted.
 
The Company considers all available evidence to determine whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become realizable. Management considers the scheduled reversal of deferred tax liabilities (including the impact of available carryback and carry-forward periods), and projected taxable income in assessing the realizability of deferred tax assets. In making such judgments, significant weight is given to evidence that can be objectively verified. Based on all available evidence, in particular the Company’s three-year historical cumulative losses, recent operating results and U.S. pre-tax loss for the three months ended March 31, 2019, the Company recorded a valuation allowance against its U.S. net deferred tax assets. In order to fully realize the U.S. deferred tax assets, the Company will need to generate sufficient taxable income in future periods before the expiration of the deferred tax assets governed by the tax code.
 
In each period since inception, the Company has recorded a valuation allowance for the full amount of net deferred tax assets in the United States, as the realization of deferred tax assets is uncertain. ACM Shanghai has shown a three-year historical cumulative profit and has projections of future income. As a result, the Company maintained a partial consolidated valuation allowance for the three and nine months ended March 31, 2019 and December 31, 2018.
 
The Company accounts for uncertain tax positions in accordance with the authoritative guidance on income taxes under which the Company may only recognize or continue to recognize tax positions that meet a "more likely than not" threshold. The Company recognizes accrued interest and penalties related to unrecognized tax benefits as a component of the provision for income taxes.
 
The Company’s effective tax rate differs from statutory rates of 21% for U.S. federal income tax purposes and 15% to 25% for Chinese income tax purposes due to the effects of the valuation allowance and certain permanent differences from book-tax differences. As a result, the Company recorded income tax expense of $119 and $22 during the three months ended March 31, 2019 and 2018, respectively.
 
As of March 31, 2019, the Company's total unrecognized tax benefits were approximately $44, which would not affect the effective tax rate if recognized. The Company will recognize interest and penalties, when they occur, related to uncertain tax provisions as a component of tax expense. No interest or penalties were recognized for the three months ended March 31, 2019.
 
 
18
 
 
ACM RESEARCH, INC.
Notes to Condensed Consolidated Financial Statements (unaudited)
(in thousands, except share and per share data)
 
 
The Company files income tax returns in the United States, and state and foreign jurisdictions. The federal, state and foreign income tax returns are under the statute of limitations subject to tax examinations for the tax years ended December 31, 1999 through December 31, 2017. This is due to the Company’s tax attribute carry-forwards, the tax years in which the attribute was generated may still be adjusted upon examination by the U.S. Internal Revenue Service, state or foreign tax authorities to the extent utilized in a future period.
 
The Tax Cuts and Jobs Act (the "Tax Act"), enacted on December 22, 2017, introduced significant changes to U.S. income tax law. Effective January 1, 2018, the Tax Act reduced the U.S. statutory tax rate from 35% to 21% and created new taxes on certain foreign-sourced earnings and certain intercompany payments. Due to the timing of the enactment and the complexity involved in applying the provisions of the Tax Act, the Company made reasonable estimates of the effects and recorded provisional amounts in its financial statements as of December 31, 2017. There were no adjustments made in the three months ended March 31, 2019. The accounting for the tax effects of the Tax Act was completed in 2018.
 
NOTE 16 – COMMITMENTS AND CONTINGENCIES
 
The Company leases offices under non-cancelable operating lease agreements. See note 12 for future minimum lease payments under non-cancelable operating lease agreements with initial terms of one year or more.
 
As of March 31, 2019, the Company did not have any capital commitments.
 
From time to time the Company is subject to legal proceedings, including claims in the ordinary course of business and claims with respect to patent infringements. As of March 31, 2019, the Company did not have any legal proceedings.
 
 
19
 
 
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
You should read the following discussion of our financial condition and results of operations together with our condensed consolidated financial statements and the related notes and other financial information included elsewhere in this report and our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, or our Annual Report. The following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this report, particularly in the section titled “Item 1A. Risk Factors” in Part II below.
 
Overview
 
We supply advanced, innovative capital equipment developed for the global semiconductor industry. Fabricators of advanced integrated circuits, or chips, can use our single-wafer wet-cleaning tools in numerous steps to improve product yield, even at increasingly advanced process nodes. We have designed these tools for use in fabricating foundry, logic and memory chips, including dynamic random-access memory (or DRAM) and 3D NAND-flash memory chips. We also develop, manufacture and sell a range of advanced packaging tools to wafer assembly and packaging customers.
 
Selling prices for our single-wafer wet-cleaning tools range from $2 million to more than $5 million. Our customers for single-wafer wet-cleaning tools have included Semiconductor Manufacturing International Corporation, Shanghai Huali Microelectronics Corporation, SK Hynix Inc. and Yangtze Memory Technologies Co., Ltd. We recognized revenue from sales of single-wafer wet cleaning equipment totaling $13.0 million, or 63% of total revenue, for the first three months of 2019 and $9.5 million, or 98% of total revenue, for the first three months of 2018.
 
We focus 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 will help us penetrate the mature chip manufacturing markets and build credibility with additional industry leaders. Using a “demo-to-sales” process, we have placed evaluation equipment, or “first tools,” with a number of selected customers. Since 2009 we have delivered more than 60 single-wafer wet cleaning tools, more than 50 of which have been accepted by customers and thereby generated revenue to us and the balance of which are awaiting customer acceptance should contractual conditions be met.
 
Since our formation in 1998, we have focused on building a strategic portfolio of intellectual property to support and protect our key innovations. Our wet-cleaning equipment has been developed using our key proprietary technologies:
 
Space Alternated Phase Shift, or SAPS, technology for flat and patterned wafer surfaces, which employs alternating phases of megasonic waves to deliver megasonic energy in a highly uniform manner on a microscopic level;
Timely Energized Bubble Oscillation, or TEBO, technology for patterned wafer surfaces at advanced process nodes, which provides effective, damage-free cleaning for 2D and 3D patterned wafers with fine feature sizes; and
Tahoe technology for cost and environmental savings, which delivers high cleaning performance using significantly less sulfuric acid and hydrogen peroxide than is typically consumed by conventional high-temperature single-wafer cleaning tools.
 
We have been issued more than 220 patents in the United States, the People’s Republic of China or PRC, Japan, Korea, Singapore and Taiwan.
 
We conduct substantially all of our product development, manufacturing, support and services in the PRC. All of our tools are built to order at our manufacturing facilities in Shanghai, which encompass 86,000 square feet of floor space for production capacity. 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 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 SAPS, TEBO and Tahoe technologies, and enable us to design innovative products and solutions to address their needs.
 
Corporate Background
 
ACM Research was incorporated in California in 1998 and redomesticated in Delaware in 2016. We perform strategic planning, marketing, and financial activities at our global corporate headquarters in Fremont, California.
 
Initially we focused on developing tools for chip manufacturing process steps involving the integration of ultra-low-K materials and copper. In the early 2000s we sold tools based on stress-free copper polishing technology.
 
 
20
 
 
To help us establish and build relationships with chip manufacturers in the PRC, in 2006 we moved our operational center to Shanghai and began to conduct our business through our subsidiary ACM Shanghai. In 2007 we began to focus our development efforts on single-wafer wet-cleaning solutions for the front-end chip fabrication process.
 
In 2009 we introduced SAPS megasonic technology, which can be applied in wet wafer cleaning at numerous steps during the chip fabrication process. In 2016 we introduced TEBO technology, which can be applied at numerous steps during the fabrication of small node conventional two-dimensional and three-dimensional patterned wafers. In August 2018, we introduced the Ultra-C Tahoe wafer cleaning tool, which delivers high cleaning performance with significantly less sulfuric acid than typically consumed by conventional high temperature single-wafer cleaning tools.
 
In 2011 ACM Shanghai formed a wholly owned subsidiary in the PRC, ACM Research (Wuxi), Inc., to manage sales and service operations. In June 2017 we formed a wholly owned subsidiary in Hong Kong, CleanChip Technologies Limited, to act on our behalf in Asian markets outside the PRC by, for example, serving as a trading partner between ACM Shanghai and its customers, procuring raw materials and components, performing sales and marketing activities, and making strategic investments.
 
In December 2017 we formed a wholly owned subsidiary in the Republic of Korea, ACM Research Korea CO., LTD., to serve our customers based in the Republic of Korea and perform sales, marketing, and research and development activities. We currently conduct the majority of our product development, support and services, and substantially all of our manufacturing at ACM Shanghai. Our Shanghai operations position us to be near many of our current and potential new customers in the PR (including Taiwan), Korea and throughout Asia, providing convenient access and reduced shipping and manufacturing costs.
 
In September 2018, we announced the opening of a second factory in the Pudong region of Shanghai. The new facility has a total of 50,000 square feet of available floor space for production capacity. This is in addition to our first factory in the Pudong Region of Shanghai, which has a total of 36,000 square feet of available floor space.
 
PRC Government Research and Development Funding
 
ACM Shanghai has received four grants from local and central governmental authorities in the PRC. The first grant, which was awarded in 2008, relates to the development and commercialization of 65nm to 45nm stress-free polishing technology. The second grant was awarded in 2009 to fund interest expense on short-term borrowings. The third grant was made in 2014 and relates to the development of electro copper-plating technology. The fourth grant was made in June 2018 and related to development of polytetrafluoroethylene. PRC governmental authorities provide the majority of the funding, although ACM Shanghai is also required to invest certain amounts in the projects.
 
The PRC governmental grants contain certain operating conditions, and we are required to go through a government due diligence process once the project is complete. The grants therefore are recorded as long-term liabilities upon receipt, although we are not required to return any funds we receive. Grant amounts are recognized in our statements of operations and comprehensive income as follows:
 
Government subsidies relating to current expenses are reflected as reductions of those expenses in the periods in which they are reported. Those reductions totaled $1.3 million in the first three months of 2019, as compared to $0.2 million in the first three months of 2018.
Government grants used to acquire depreciable assets are transferred from long-term liabilities to property, plant and equipment when the assets are acquired and then the recorded amounts of the assets are credited to other income over the useful lives of the assets. Related government subsidies recognized as other income totaled less than $0.1 million in the first three months of 2019 and 2018.
 
 
21
 
 
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 tool to a customer on an approval basis, for which we may recognize revenue in the future if contractual conditions are met and customer acceptance 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
 
Shipments consist of two components:
 
a shipment to a customer of a type of tool that the customer has previously-accepted, for which we recognize revenue when the tool is delivered; and
a shipment to a customer of a type of tool that the customer is receiving and evaluating for the first time, in each case a “first tool,” for which we may recognize revenue at a later date, subject to the customer’s acceptance of the tool upon the tool’s satisfaction of applicable contractual requirements.
 
“First tool” shipments can be made to either an existing customer that not previously accepted that specific type of tool in the past ─ for example, a delivery of 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, 2019 totaled $14 million, as compared to $10 million in the three months ended March 31, 2018 and $32 million in the three months ended December 31, 2018.
 
The dollar amount attributed to a “first tool” shipment is equal to the consideration we expect to receive if any and all contractual requirements are satisfied and the customer accepts the tool. There are a number of limitations related to the use of shipments in evaluating our business, including that customers have significant discretion in determining whether to accept our tools and their decision not to accept delivered tools is likely to result in our inability to recognize revenue from the delivered tools.
 
 
22
 
 
Adjusted EBITDA
 
There are a number of limitations related to the use of adjusted EBITDA rather than net income (loss), which is the nearest GAAP equivalent. Some of these limitations are:
 
adjusted EBITDA excludes depreciation and amortization and, although these are non-cash expenses, the assets being depreciated or amortized may have to be replaced in the future;
 
we exclude stock-based compensation expense from adjusted EBITDA and adjusted operating income (loss), although (a) it has been, and will continue to be for the foreseeable future, a significant recurring expense for our business and an important part of our compensation strategy and (b) if we did not pay out a portion of our compensation in the form of stock-based compensation, the cash salary expense included in operating expenses would be higher, which would affect our cash position;
 
the expenses and other items that we exclude in our calculation of adjusted EBITDA may differ from the expenses and other items, if any, that other companies may exclude from adjusted EBITDA when they report their operating results;
 
adjusted EBITDA does not reflect changes in, or cash requirements for, working capital needs;
 
adjusted EBITDA does not reflect interest expense, or the requirements necessary to service interest or principal payments on debt;
 
adjusted EBITDA does not reflect income tax expense (benefit) or the cash requirements to pay taxes;
 
adjusted EBITDA does not reflect historical cash expenditures or future requirements for capital expenditures or contractual commitments;
 
although depreciation and amortization charges are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and adjusted EBITDA does not reflect any cash requirements for such replacements; and
 
adjusted EBITDA includes expense reductions and non-operating other income attributable to PRC governmental grants, which may mask the effect of underlying developments in net income (loss), 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 (loss), the most directly comparable GAAP financial measure, to adjusted EBITDA:
 
 
 
Three Months Ended March 31,
 
 
 
2019
 
 
2018
 
 
 
 (in thousands)
 
Adjusted EBITDA Data:
 
 
 
 
 
 
Net income (loss)
 $1,857 
 $(2,780)
    Interest expense, net
  130 
  100 
    Income tax expense
  119 
  22 
    Depreciation and amortization
  191 
  80 
    Stock based compensation
  744 
  2,175 
Adjusted EBITDA
 $3,041 
 $(403)
 
Adjusted EBITDA in the three months ended March 31 2019, increased by $3.4 million as compared to the same period in 2018, due to an increase of $4.6 million in net income, an increase of $30,000 in interest expense, an increase of $97,000 in income tax expense, and an increase of $111,000 in depreciation and amortization, offset by a decrease of $1.4 million in stock-based compensation 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.”
 
 
23
 
 
Free Cash Flow
 
The following table reconciles net cash provided by operating activities, the most directly comparable GAAP financial measure, to free cash flow:
 
 
 
Three Months Ended March 31,
 
 
 
2019
 
 
2018
 
 
 
 (in thousands)
 
Free Cash Flow Data:
 
 
 
 
 
 
Net cash used in operating activities
 $(3,182)
 $(7,393)
Purchase of property and equipment
  (115)
  (395)
Purchase of intangible assets
  (1)
  - 
Free cash flow
 $(3,298)
 $(7,788)
 
Free cash flow in the three months ended March 31, 2019, improved by $4.5 million as compared with the same period in 2018, due to a reduction of $4.2 million of cash used in operating activities and a decrease of $280,000 in purchase of property and equipment. Consistent with our methodology for calculating adjusted EBITDA, we do not adjust free cash flow for the effects of PRC government subsidies, because we take those subsidies into account in incurring expenses and capital expenditures.
 
Adjusted Operating Income (Loss)
 
Adjusted operating income (loss) excludes stock-based compensation from income (loss) 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 (loss) from operations:
 
 
 
Three Months Ended March 31,
 
 
 
2019
 
 
2018
 
 
 
Actual (GAAP)
 
 
SBC
 
 
Adjusted (Non-GAAP)
 
 
Actual (GAAP)
 
 
SBC
 
 
ADJUSTED (Non-GAAP)
 
 
(in thousands)
Revenue
 $20,479 
 $- 
 $20,479 
 $9,743 
 $- 
 $9,743 
Cost of revenue
  (11,653)
  (30)
  (11,623)
  (4,621)
  (8)
  (4,613)
        Gross profit
  8,826 
  (30)
  8,856 
  5,122 
  (8)
  5,130 
Operating expenses:
    
    
    
    
    
    
    Sales and marketing
  (1,869)
  (34)
  (1,835)
  (1,855)
  (34)
  (1,821)
    Research and development
  (2,765)
  (86)
  (2,679)
  (1,541)
  (27)
  (1,514)
    General and administrative
  (1,941)
  (594)
  (1,347)
  (3,630)
  (2,106)
  (1,524)
             Income (loss) from operations
 $2,251 
 $(744)
 $2,995 
 $(1,904)
 $(2,175)
 $271 
Net income (loss)
 $1,857 
 $(744)
 $2,601 
 $(2,780)
 $(2,175)
 $(605)
 
Adjusted operating income for the three months ended on March 31, 2019, as compared with the same period in 2018, reflected a $1.4 million decrease in stock-based compensation expense.
 
 
24
 
 
Critical Accounting Policies and Significant Judgments and Estimates
 
There were no significant changes in our critical accounting policies or significant judgments or estimates during the three months ended March 31, 2019 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, including the adoption of the Financial Accounting Standards Board’s Accounting Standards Update No. 2016-02, Leases (Topic 842) effective January 1, 2019. As a result of our adoption of the new lease standard, we re-assessed the estimates, assumptions, and judgments that are most critical in our recognition of lease and have revised our lease critical accounting policy. For information regarding the impact of recently adopted accounting standards, refer to note 2 to the condensed financial statements included in this report.
 
Recent Accounting Pronouncements
 
A discussion of recent accounting pronouncements is included in our Annual Report and is updated in note 2 to the condensed consolidated financial statements included in this report.
 
Results of Operations
 
The following table sets forth our results of operations for the periods presented, as percentages of revenue.
 
 
 
Three Months Ended March 31,
 
 
 
2019
 
 
2018
 
Revenue
  100.0%
  100.0%
Cost of revenue
  56.9 
  47.4 
       
  43.1 
  52.6 
Operating expenses:
    
    
    Sales and marketing
  9.1 
  19.0 
    Research and development
  13.5 
  15.8 
    General and administrative
  9.5 
  37.3 
         Total operating expenses, net
  32.1 
  72.1 
             Income (loss) from operations
  11.0 
  (19.5)
Interest expense, net
  (0.6)
  (1.0)
Other expense, net
  (1.3)
  (7.8)
Equity income in net income of affiliates
  0.6 
  - 
              Income (loss) before income taxes
  9.7 
  (28.3)
Income tax expense
  (0.6)
  (0.2)
              Net income (loss)
  9.1%
  (28.5%)
  
 
25
 
 
Comparison of Three Months Ended March 31, 2019 and 2018
 
Revenue
 
 
 
Three Months Ended March 31,
 
 
 
 
 
 
2019
 
 
2018
 
 
% Change
 
 
 
(in thousands)
 
 
 
 
Revenue
 $20,479 
 $9,743 
  110.2%
 
The increase in revenue of $10.7 million in the three months ended March 31, 2019 as compared to the same period in 2018 reflected increases in revenue of $3.3 million from single-wafer cleaning equipment, and a $7.4 million increase in revenue from back-end equipment and spares. The revenue increase reflected an increased number of tools shipped, coupled with higher selling prices associated with the equipment sold and customer acceptances from prior period shipments received and recognized as revenue during the three month ended March 31, 2019.
 
Cost of Revenue and Gross Margin
 
 
 
Three Months Ended March 31,
 
 
 
 
 
 
2019
 
 
2018
 
 
% Change 2019 v 2018
 
 
(in thousands)
 
 
 
Cost of revenue
 $11,653 
 $4,621 
  152.2%
Gross profit
 $8,826 
 $5,122 
  72.3 
Gross margin
  43.1%
  52.6%
  (9.5)
 
Cost of revenue increased $7.0 million and gross profit increased $3.7 million in the three months ended March 31, 2019, as compared to the corresponding period in 2018, primarily due to increased sales volume. Gross margin declined by 9.5 percentage points during the three months ended March 31, 2019, from the comparable period in 2018. Gross margin in the 2018 period was elevated primarily due to contribution from three higher-margin SAPs tools.
 
Gross margin may vary from period to period, primarily related to the level of utilization and the timing and mix of purchase orders. We expect gross margin to be between 40.0% and 45.0% for the foreseeable future, with direct manufacturing costs approximating 50.0% to 55.0% of revenue and overhead costs totaling 5.0% of revenue.
 
Operating Expenses
 
 
 
Three Months Ended March 31,
 
 
 
 
 
 
2019
 
 
2018
 
 
% Change 2019 v 2018
 
 
 
 (in thousands)
 
 
 
 
Sales and marketing expense
 $1,869 
 $1,855 
  0.8%
Research and development expense
  2,765 
  1,541 
  79.4 
General and administrative expense
  1,941 
  3,630 
  (46.5)
Total operating expenses
 $6,575 
 $7,026 
  (6.4)
 
Sales and marketing expense increased by $14,000 in the three months ended March 31, 2019, as compared to the corresponding period in 2018. Sales and marketing expense consists primarily of:
 
compensation of personnel associated with pre and aftersales support and other sales and marketing activities, including stock-based compensation;
 
sales commissions paid to independent sales representatives;
 
fees paid to sales consultants;
 
shipping and handling costs for transportation of products to customers;
 
 
26
 
 
cost of trade shows;
 
travel and entertainment; and
 
allocated overhead for rent and utilities.
 
Research and development expense increased by $1.2 million in the three months ended March 31, 2019 as compared to the corresponding period in 2018, principally as a result of increases in testing fees and personnel costs. Research and development expense represented 13.5% and 15.8% of our revenue in the three months ended March 31, 2019 and 2018, respectively. Without reduction by grant amounts received from PRC governmental authorities (see “—Key Components of Results of Operations—PRC Government Research and Development Funding”), gross research and development expense totaled $$4.1 million, or 20.0% of revenue, in the three months ended March 31, 2019 and $1.8 million, or 18.1% of revenue, in the three months ended March 31, 2018. 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;
 
travel expense associated with customer support;
 
amortization of costs of software used for research and development purposes; and
 
allocated overhead for rent and utilities.
 
General and administrative expense decreased by $1.7 million in the three months ended March 31, 2019 as compared to the corresponding period in 2018. Expenses in the first quarter of 2018 were elevated in part due to expenses related to our initial public offering of Class A common stock, or the IPO. 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 legal fees;
 
other corporate expenses; and
 
allocated overhead for rent and utilities.
 
We expect that, for the foreseeable future, general and administrative expenses will increase in absolute dollars, as we incur additional costs associated with growing our business and operating as a public company
 
Other Income and Expenses
 
 
 
Three Months Ended March 31,
 
 
 
 
 
 
2019
 
 
2018
 
 
% Change 2019 v 2018
 
 
(in thousands)
 
 
 
Interest expense, net
 $(130)
 $(100)
  30.0%
Other expense, net
  (261)
  (755)
  (65.4)
 
Interest expense consists of interest incurred from outstanding short-term borrowings. Interest expense increased by $30,000 in the three months ended March 31, 2019 as compared to the three months ended March 31, 2018, principally as a result of increased borrowings under short-term bank loans. We earn interest income from depositary accounts. Interest income was nominal in the three months ended March 31, 2019 and 2018.
 
 
27
 
 
Non-operating 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 “—Key Components of Results of Operations—PRC Government Research and Development Funding” above. Our non-operating expense was ($261,000) in the three months ended March 31, 2019 due to a the strengthening of the RMB to US dollar exchange rate during the quarter, compared to non-operating expense of ($755,000) loss in the three months ended March 30, 2018 due to an even greater strengthening of RMB to US dollar exchange rate during the quarter.
 
Income Tax Expense
 
The following presents components of income tax expense for the indicated periods:
 
 
 
Three Months Ended March 31,
 
 
 
2019
 
 
2018
 
Current:
(in thousands)
U.S. federal
 $- 
 $- 
U.S. state
  - 
  - 
Foreign
  - 
  - 
Total current tax expense
  - 
  - 
Deferred:
    
    
U.S. federal
  - 
  - 
U.S. state
  - 
  - 
Foreign
  (119)
  (22)
Total deferred tax expense
 (119)
 (22)
Total income tax expense
 $(119)
 $(22)
 
On December 22, 2017, the Tax Cuts and Jobs Act, or the Tax Act, was enacted into law. The new legislation contains several key tax provisions that affect us, including a one-time mandatory transition tax on accumulated foreign earnings and a reduction of the corporate income tax rate to 21% effective January 1, 2018. Due to the timing of the enactment and the complexity involved in applying the provisions of the Tax Act, we made reasonable estimates of the effects and recorded provisional amounts in our financial statements as of December 31, 2017. There were no adjustments made in the three months ended March 31, 2019. The accounting for the tax effects of the Tax Act was completed in 2018.
 
As we collect and prepare necessary data, and interpret the Tax Act and any additional guidance issued by the U.S. Treasury Department, the Internal Revenue Service, and other standard-setting bodies, we may make adjustments to the provisional amounts. Those adjustments may materially affect our provision for income taxes and effective tax rate in the period in which the adjustments are made. There were no adjustments made in the first nine months of 2018.
 
Our effective tax rate differs from statutory rates of 21% for U.S. federal income tax purposes and 15% to 25% for Chinese income tax purposes due to the effects of the valuation allowance and certain permanent differences as it pertains to book-tax differences in the value of client equity securities received for services. Our two PRC subsidiaries, ACM Shanghai and ACM Wuxi, are liable for PRC corporate income taxes at the rates of 15% and 25%, respectively. Pursuant to the Corporate Income Tax Law of the PRC, our PRC subsidiaries generally would be liable for PRC corporate income taxes as a rate of 25%. According to Guoshuihan 2009 No. 203, an entity certified as an “advanced and new technology enterprise” is entitled to a preferential income tax rate of 15%. ACM Shanghai was certified as an “advanced and new technology enterprise” in 2012 and again in 2016, with an effective period of three years..
 
We file income tax returns in the United States and state and foreign jurisdictions. Those federal, state and foreign income tax returns are under the statute of limitations subject to tax examinations for 2009 through 2016. 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.
 
 
28
 
 
Liquidity and Capital Resources
 
During the first three months of 2019 we funded our technology development and operations principally through application of proceeds from the IPO and concurrent private placements in November 2017 and, to a lesser extent, from short-term borrowings by ACM Shanghai from local financial institutions. During the three-month period ended March 31, 2019, our operations used cash flow of $3.2 million and we did not receive any research and development grants from local and central PRC governmental authorities.
 
We believe our existing cash and cash equivalents, our cash flow from operating activities, and short-term bank borrowings by ACM Shanghai will be sufficient to meet our anticipated cash needs for at least the next twelve months. We do not expect that our anticipated cash needs for the next twelve months will require our receipt of any PRC government subsidies. Our future working capital needs will depend on many factors, including the rate of our business and revenue growth, the payment schedules of our customers, and the timing of investment in our research and development as well as sales and marketing. To the extent our cash and cash equivalents, cash flow from operating activities and short-term bank borrowings are insufficient to fund our future activities in accordance with our strategic plan, we may determine to raise additional funds through public or private debt or equity financings or additional bank credit arrangements. We also may need to raise additional funds in the event we determine in the future to effect one or more acquisitions of businesses, technologies and products. If additional funding is necessary or desirable, we may not be able to obtain bank credit arrangements or to affect an equity or debt financing on terms acceptable to us or at all.
 
Sources of Funds
 
Equity and Equity-Related Securities. During the three months of 2019 we received proceeds of $60,000 from sales of common stock pursuant to option exercises.
 
Indebtedness. ACM Shanghai is a party to lines of credit with five banks, as follows:
 
Lender
 
Agreement Date
 
Maturity Date
 
Annual Interest Rate
 
Maximum Borrowing Amount (1)
 
Amount Outstanding at March 31, 2019
 
 
 
 
 
 
 
 
(in thousands)
Bank of China Pudong Branch
 
August 2018
 
August 2019
 
5.22%
 
RMB30,000
 
 RMB30,000
 
 
 
 
 
 
 
 
$4,456
 
$4,456
Bank of Shanghai Pudong Branch
 
January 2019
 
January 2020
 
5.22%
 
RMB50,000
 
 RMB4,500
 
 
 
 
 
 
 
 
$7,425
 
$668
Shanghai Rural Commercial Bank
 
Feburary 2019
 
January 2020
 
5.66%
 
RMB 20,000
 
RMB 10,000
 
 
 
 
 
 
 
 
$2,970
 
$1,485
Bank of Communications
 
January 2019
 
January 2020
 
5.66%
 
RMB20,000
 
RMB20,000
 
 
 
 
 
 
 
 
$2,970
 
$2,970
China Everbright Bank
 
Feburary 2019
 
Feburary 2020
 
4.94%
 
RMB50,000
 
RMB21,893
 
 
 
 
 
 
 
 
$7,425
 
$3,250
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
RMB170,000
 
RMB86,393
 
 
 
 
 
 
 
 
$25,246
 
$12,829
 
(1)
Converted from RMB to dollars as of March 31, 2019.
 
All of the amounts owing under the line of credit with Bank of China Pudong Branch are secured by ACM Shanghai’s intellectual property and guaranteed by Dr. David Wang, our Chair of the Board, Chief Executive Officer and President. All of the amounts owing under the lines of credit with Bank of Shanghai Pudong Branch are guaranteed by Dr. Wang and Cleanchip Technologies Ltd. All of the amounts owing under the line of credit with Shanghai Rural Commercial Bank are secured by accounts receivable and guaranteed by Dr. Wang. All of the amounts owing under the lines of credit with China Everbright Bank are guaranteed by Dr. Wang.
 
 
29
 
 
Working Capital. The following table sets forth selected working capital information:
 
 
 
March 31,
2019
 
 
 
 (in thousands)
 
Cash and cash equivalents
 $27,367 
Accounts receivable, less allowance for doubtful amounts
  25,070 
Inventory
  42,253 
Working capital
 $94,690 
 
Our cash and cash equivalents at March 31, 2019 were unrestricted and held for working capital purposes. ACM Shanghai, our only direct PRC subsidiary, is, however, subject to PRC restrictions on distributions to equity holders. We currently intend for ACM Shanghai to retain all available funds any future earnings for use in the operation of its business and do not anticipate its paying any cash dividends. We have not entered into, and do not expect to enter into, investments for trading or speculative purposes. Our accounts receivable balance fluctuates from period to period, which affects our cash flow from operating activities. Fluctuations vary depending on cash collections, client mix, and the timing of shipment and acceptance of our tools.
 
Uses of Funds
 
Cash Flow from Operating Activities. Our operations used cash flow of $3.2 million in the first three months of 2019. Our cash flow from operating activities is influenced by (a) the amount of cash we invest in personnel and technology development to support anticipated future growth in our business, (b) the magnitude of our product sales and associated gross profits, and (c) the amount and timing of payments by customers.
 
Capital Expenditures. We estimate that our capital expenditures in 2019 will total approximately $2.4 million. We have entered into certain capital purchase contracts related to future capital expenditures. We incurred $117,000 of capital expenditures during the three months ended March 31, 2019 and had no unpaid capital commitment as of March 31, 2019.
 
Contractual Obligations and Requirements. Our contractual obligations and other commercial commitments are summarized in the section captioned “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Contractual Obligations and Requirements” in our Annual Report. Other than changes that occurred in the ordinary course of business, we had no material changes to our contractual obligations reported in our Annual Report during the first three months of 2019. For additional discussion, see note 16 to our condensed consolidated financial statements included elsewhere in this report.
 
Effects of Inflation
 
Inflation and changing prices have not had a material effect on our business, and we do not expect that they will materially affect our business in the foreseeable future. Any impact of inflation on cost of revenue and operating expenses, especially employee compensation costs, may not be readily recoverable in the price of our product offerings.
 
Off-Balance Sheet Arrangements
 
As of March 31, 2019, we did not have any significant off-balance sheet arrangements, as defined in Item303(a)(4)(ii) of Regulation S-K of the Securities and Exchange Commission or SEC, except the operating lease commitment disclosed in the unaudited condensed consolidated financial statements.
 
Emerging Growth Company Status
 
We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act, or JOBS Act, and may take advantage of provisions that reduce our reporting and other obligations from those otherwise generally applicable to public companies. We may take advantage of these provisions until the earliest of December 31, 2022 or such time that we have annual revenue greater than $1.0 billion, the market value of our capital stock held by non-affiliates exceeds $700 million or we have issued more than $1.0 billion of non-convertible debt in a three-year period. We have chosen to take advantage of some of these provisions, and as a result we may not provide stockholders with all of the information that is provided by other public companies. We have, however, irrevocably elected not to avail ourselves, as would have been permitted by Section 107 of the JOBS Act, of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933 for complying with new or revised accounting standards, and we therefore will be subject to the same new or revised accounting standards as public companies that are not emerging growth companies
 
 
30
 
 
Item 3. Quantitative and Qualitative Disclosures about Market Risks
 
Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily the result of fluctuations in foreign exchange rates and interest rates. We do not hold or issue financial instruments for trading purposes.
 
Foreign Exchange Risk
 
Although our financial statements and product pricing are denominated in U.S. dollars, a sizable portion of our costs are denominated in other currencies, primarily the Renminbi. The Renminbi is not freely convertible into foreign currencies for capital account transactions. The value of the Renminbi against the U.S. dollar and other currencies is affected by changes in the PRC’s political and economic conditions and by the PRC’s foreign exchange policies, among other things. In July 2005, the PRC government changed its decades-old policy of pegging the value of the Renminbi to the U.S. dollar, and the Renminbi appreciated more than 20% against the U.S. dollar over the following three years. Between July 2008 and September 2010, this appreciation subsided and the exchange rate between the Renminbi and the U.S. dollar remained within a narrow band. Since September 2010, the Renminbi has fluctuated against the U.S. dollar, at times significantly and unpredictably. It is difficult to predict how market forces or PRC or U.S. government policy may impact the exchange rate between the Renminbi and the U.S. dollar in the future. To date, we have not entered into any hedging transactions in an effort to reduce our exposure to foreign currency exchange risk.
 
Interest Rate Risk
 
At March 31, 2019, we had unrestricted cash and cash equivalents totaling $27.4 million. These amounts were held for working capital purposes and were held primarily in checking accounts of various banks. We believe we do not have any material exposure to changes in our cash balance as a result of changes in interest rates. Declines in interest rates, however, would reduce future interest income.
 
Item 4. Controls and Procedures
 
Disclosure Controls and Procedures
 
Our management, with the participation of our chief executive officer and interim chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2019. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Securities Exchange Act of 1934 is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of March 31, 2019, our chief executive officer and interim chief financial officer concluded that, as of such date, our disclosure controls and procedures over financial reporting were effective.
 
Changes in Internal Control over Financial Reporting
 
During the three months ended March 31, 2019, no changes were identified to our internal control over financial reporting that materially affected, or were reasonably likely to materially affect, our internal control over financial reporting.
 
 
31
 
 
PART II. OTHER INFORMATION
 
Item 1A. Risk Factors
 
Investing in Class A common stock involves a high degree of risk. You should consider and read carefully all of the information contained in this report, including the consolidated financial statements and related notes set forth in “Item 1. Financial Statements” of Part I above, before making an investment decision. You should also review carefully the risk factors set forth in “Item 1A. Risk Factors” of Part I of our Annual Report. There have been no material changes to those risk factors since the filing of our Annual Report with the SEC on March 14, 2019. The occurrence of any of the risks described in our Annual Report, or additional risks and uncertainties not presently known to us or that we currently believe to be immaterial, could materially and adversely affect our business, financial condition, results of operations or cash flows. In any such case, the trading price of Class A common stock could decline, and you may lose all or part of your investment.
 
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 
Recent Sales of Unregistered Equity Securities
 
In March of 2019 we issued and sold to employees and consultants an aggregate of 65,000 unregistered shares of Class A common stock upon the exercise of stock options at per share exercise prices between $0.75 and $1.50. These transactions did not involve any underwriters, any underwriting discounts or commissions, or any public offering. We believe the offers, sales and issuances of these shares were exempt from registration under the Securities Act of 1933 by virtue of Section 4(a)(2) thereof (or Regulation D promulgated thereunder) because the issuance of securities to the recipients did not involve a public offering or in reliance on Rule 701 under said Act because the transactions were pursuant to a contract relating to compensation as provided under such rule. The recipients of the shares represented their intentions to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof, and appropriate legends were placed upon the shares issued in these transactions. The recipients had adequate access, through a relationship with us, to information about us. The sales of these shares were made without any general solicitation or advertising.
 
Use of IPO Proceeds
 
The net proceeds of the IPO, after deducting underwriting discounts and commissions and offering expenses, were $17.3 million. There has been no material change in the planned use of IPO proceeds from that described in the final prospectus filed with the SEC pursuant to Rule 424(b)(4) under the Securities Act of 1933 on November 3, 2017. To date we have applied $10.8 million of the IPO proceeds to purchase inventory and an additional $2.1 million in the ordinary course of business operations.
 
Item 6. Exhibits
 
The following exhibits are being filed as part of this report:
 
Exhibit Number
 
Description
 
 
 
Line of Credit Agreement dated February 25, 2019 between ACM Research (Shanghai), Inc. and Bank of Shanghai Pudong Branch
 
 
 
Line of Credit Agreement dated February 19, 2019 between ACM Research (Shanghai), Inc. and Shanghai Rural Commercial Bank
 
 
 
Line of Credit Agreement dated January 24, 2019 between ACM Research (Shanghai), Inc. and Bank of Communications Shanghai Zhangjiang Branch
 
 
 
Line of Credit Agreement dated January 24, 2019 between ACM Research (Shanghai), Inc. and Bank of Communications Shanghai Zhangjiang Branch
 
 
 
Line of Credit Agreement dated February 19, 2019 between ACM Research (Shanghai), Inc. and Bank of Communications Shanghai Zhangjiang Branch
 
 
 
Line of Credit Agreement dated January 30, 2019 between ACM Research (Shanghai), Inc. and China Everbright Branch
 
 
 
Lease Amendment dated February 4, 2019 between ACM Research, Inc. and D&J Construction Inc.
 
 
 
Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
 
 
Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
 
 
Certification of Principal Executive Officer and Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 
101.INS
 
XBRL Instance Document
 
 
101.SCH
 
XBRL Taxonomy Extension Schema Document
 
 
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document
 
 
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document
 
 
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document
 
 
 
 
32
 
 
SIGNATURE
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
ACM RESEARCH, INC.
 
 
 
 
 
Date: May 14, 2019
By:
/s/ Lisa Feng
 
 
 
Lisa Feng
 
 
 
Interim Chief Financial Officer, Chief Accounting Officer and Treasurer (Principal Financial Officer)
 
 
 
 
 
 
 
 
 
 
 
 
 
33
EX-10.01 2 acm_ex1001.htm LINE OF CREDIT AGREEMENT Untitled Document
  Exhibit 10.01
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
EX-10.02 3 acm_ex1002.htm LINE OF CREDIT AGREEMENT Untitled Document
  Exhibit 10.02
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
EX-10.03 4 acm_ex1003.htm LINE OF CREDIT AGREEMENT Untitled Document
  Exhibit 10.03
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
EX-10.04 5 acm_ex1004.htm LINE OF CREDIT AGREEMENT Untitled Document
  Exhibit 10.04
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
EX-10.05 6 acm_ex1005.htm LINE OF CREDIT AGREEMENT Untitled Document
  Exhibit 10.5
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
EX-10.06 7 acm_ex1006.htm LINE OF CREDIT AGREEMENT Untitled Document
  Exhibit 10.06