The Company’s management has evaluated all such proceedings and claims that existed as of March 31, 20222023 or December 31, 2021.2022. In the opinion of management, no provision for liability nor disclosure was required as of March 31, 20222023 related to any claim against the Company because: (a) there is not a reasonable possibility that a loss exceeding amounts already recognized (if any) may be incurred with respect to such claim; (b) a reasonably possible loss or range of loss cannot be estimated; or (c) such estimate is immaterial.
Item 2. | Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations |
You should read the following discussion of our financial condition and results of operations together with our condensed consolidated financial statements and the related notes and other financial information included elsewhere in this report and our Annual Report on Form 10-K for the fiscal year ended December 31, 2021,2022, or our Annual Report. The following discussion contains forward‑looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in the forward‑looking statements. Factors that could cause or contribute to these differences include those discussed in Part I, Item 1A. “Risk Factors” in our Annual Report, as well as those discussed below and elsewhere in this report, particularly in the section titled “Item 1A.1A – Risk Factors” in Part II below.
ACM Research, Inc., or ACM Research, is a Delaware corporation founded in California in 1998 to supply capital equipment developed for the global semiconductor industry. Since 2005, ACM Research has conducted its business operations principally through its subsidiary ACM Research (Shanghai), Inc., or ACM Shanghai, a limited liability corporation formed by ACM Research in the People’s Republic of China, or the PRC, in 2005. Unless the context requires otherwise, references in this report to “our company,” “our,” “us,” “we” and similar terms refer to ACM Research, Inc. and its subsidiaries, including ACM Shanghai, collectively.
Our principal corporate office is located in Fremont, California. We conduct a substantial majority of our product development, manufacturing, support and services in the PRC through ACM Shanghai. We perform, through a subsidiary of ACM Shanghai, additional product development and subsystem production in South Korea, and we conduct, through ACM Research, sales and marketing activities focused on sales of ACM Shanghai products in North America, Europe and certain regions in Asia outside mainland China.
ACM Research is not a PRC operating company, and we do not conduct our operations in the PRC through the use of a variable interest entity, or VIE, or any other structure designed for the purpose of avoiding PRC legal restrictions on direct foreign investments in PRC-based companies. ACM Research has a direct ownership interest in ACM Shanghai as the result of its holding 82.5% of the outstanding shares of ACM Shanghai. Stockholders of ACM Research may never directly own equity interests in ACM Shanghai. We do not believe that our corporate structure or any other matters relating to our business operations require that we obtain any permissions or approvals from the China Securities Regulatory Commission, the Cyberspace Administration of China, or any other PRC central government authority in order to continue to list shares of Class A common stock of ACM Research on the Nasdaq Global Select Market. This determination was based on the facts aforementioned and the PRC Company Law, PRC Securities Law, cybersecurity regulations and other relevant laws, regulations and regulatory requirements in the PRC currently in effect. However, if this determination proves to be incorrect, then it could have a material adverse effect on ACM Research. See “Item IA. Risk Factors—Risks Related to International Aspects of Our Business—If any PRC central government authority were to determine that existing PRC laws or regulations require that ACM Shanghai obtain the authority’s permission or approval to continue the listing of ACM Research’s Class A common stock in the United States or if those existing PRC laws and regulations, or interpretations thereof, were to change to require such permission or approval, or if we inadvertently conclude that permissions or approvals are not required, ACM Shanghai may be unable to obtain the required permission or approval or may only be able to obtain such permission or approval on terms and conditions that impose material new restrictions and limitations on operation of ACM Shanghai, either of which could have a material adverse effect on our business, financial condition, results of operations, reputation and prospects and on the trading price of ACM Research Class A common stock, which could decline in value or become worthless” in our Annual Report.
The business of ACM Shanghai is subject to complex laws and regulations in the PRC that can change quickly with little or no advance notice. To date, beyond the COVID-19-related restrictions in 2022, we have not experienced such intervention or influence by PRC central government authorities or a change in those authorities’ rules and regulations that have had a material impact on ACM Shanghai or ACM Research.
In addition, in the ordinary course of business, ACM Shanghai is required to obtain certain operating permits and licenses necessary for it to operate in the PRC, including business licenses, certifications relating to quality management standards, import and export-related qualifications from customs, as well as environmental and construction permits, licenses and approvals relating to construction projects. We believe ACM Shanghai has all such required permits and licenses. However, from time to time the PRC government issues new regulations, which may require additional actions on the part of ACM Shanghai to comply. If ACM Shanghai does not, or is unable to, obtain any such additional permits or licenses, ACM Shanghai may be subjected to restrictions and penalties imposed by the relevant PRC regulatory authorities, and it
could have a material adverse effect on our business, financial condition, results of operations, reputation and prospects and on the trading price of ACM Research Class A common stock, which could decline in value or become worthless.
The following chart depicts our corporate organization as of March 31, 2023:
A detailed description of how cash is transferred through our organization is set forth under “Note 2 – Summary of Significant Accounting Policies – Cash and Cash Equivalents” to the Consolidated Financial Statements of this report.
The U.S. Holding Foreign Companies Accountable Act, or the HFCA Act, requires that the Public Company Accounting Oversight Board, or the PCAOB, determine whether it is unable to inspect or investigate completely registered public accounting firms located in a non-U.S. jurisdiction because of a position taken by one or more authorities in any non-U.S. jurisdiction. BDO China Shu Lun Pan Certified Public Accountants LLP, or BDO China, had been our independent registered public accounting firm in recent years, including for the year ended December 31, 2021. On June 22, 2021, the U.S. Senate passed the Accelerating Holding Foreign Companies Accountable Act, which was enacted on December 29, 2022 under the Consolidated Appropriations Act, 2023, as further described below. On December 16, 2021, the PCAOB reported its determination that it was unable to inspect or investigate completely registered public accounting firms headquartered in the PRC and Hong Kong, including BDO China, because of positions taken by PRC authorities in those jurisdictions. On March 30, 2022, based on this determination, ACM Research was transferred to the SEC’s “Conclusive list of issuers identified under the HFCA.” See “Item 1A. Risk Factors—Risks Related to International Aspects of Our Business—We could be adversely affected if we are unable to comply with recent and proposed legislation and regulations regarding improved access to audit and other information and audit inspections of accounting firms, including registered public accounting firms, such as our prior audit firm, operating in the PRC” in our Annual Report for more information. Under current regulations, if ACM Research were to be included on this list for two consecutive years due to our independent auditor being located in a jurisdiction that does not allow for PCAOB inspections, the SEC would prohibit trading in our securities and this ultimately could cause our securities to be delisted in the U.S., and their value may significantly decline or become worthless.
On December 15, 2022, the PCAOB announced that it was able to secure complete access to inspect and investigate PCAOB-registered public accounting firms headquartered in the PRC and Hong Kong in 2022 and vacated its previous December 16, 2021 determination to the contrary. However, whether the PCAOB will continue to be able to satisfactorily conduct inspections of PCAOB-registered public accounting firms headquartered in the PRC and Hong Kong is subject to uncertainty and depends on a number of factors out of our, and our auditor’s, control. PRC authorities will need to ensure that the PCAOB continues to have full access for inspections and investigations in 2023 and beyond. Each year, the PCAOB will determine whether it can inspect and investigate completely audit firms in the PRC and Hong Kong, among other jurisdictions. If the PRC authorities do not allow the PCAOB complete access for inspections and investigations for two consecutive years, the SEC would prohibit trading in the securities of issuers engaging those audit firms, as required under the HFCA Act. Further, on December 29, 2022, the Consolidated Appropriations Act, 2023, was signed into law by U.S. President Biden, which, among other things, amended the HFCA Act to reduce the number of consecutive non-inspection years that would trigger the trading prohibition under the HFCA Act from three years to two years (originally such threshold under the HFCA Act was three consecutive years), and so that any foreign jurisdiction could be the reason why the PCAOB does not have complete access to inspect or investigate a company’s public accounting firm (originally
the HFCA Act only applied if the PCAOB’s ability to inspect or investigate was due to a position taken by an authority in the jurisdiction where the relevant public accounting firm was located).
In addition, on June 30, 2022, stockholders of ACM Research ratified the appointment of Armanino LLP as our independent auditor for the year ended December 31, 2022. Armanino LLP is neither headquartered in the PRC or Hong Kong nor was it subject to the determinations announced by the PCAOB on December 16, 2021, which determinations were vacated by the PCAOB on December 15, 2022, and we do not believe ACM Research will appear on the “Conclusive list of issuers identified under the HFCAA” for a second time.
In addition to the matters discussed above, we are also subject to a number of legal and operational risks associated with our corporate structure, including as the result of a substantial portion of our operations being conducted in the PRC. Consequences of any of those risks could result in a material adverse change in our operations or cause the value of ACM Research Class A common stock to significantly decline in value or become worthless. Please carefully read the information included in “Item 1A. Risk Factors” in our Annual Report, in particular the risk factors addressing the following issues:
•If any PRC central government authority were to determine that existing PRC laws or regulations require that ACM Shanghai obtain the authority’s permission or approval to continue the listing of ACM Research’s Class A common stock in the United States or if those existing PRC laws and regulations, or interpretations thereof, were to change to require such permission or approval, or if we inadvertently conclude that such permissions or approvals are not required, ACM Shanghai may be unable to obtain the required permission or approval or may only be able to obtain such permission or approval on terms and conditions that impose material new restrictions and limitations on operation of ACM Shanghai, either of which could have a material adverse effect on our business, financial condition, results of operations, reputation and prospects and on the trading price of ACM Research Class A common stock, which could decline in value or become worthless.
•PRC central government authorities may intervene in, or influence, ACM Shanghai’s PRC-based operations at any time, and those authorities’ rules and regulations in the PRC can change quickly with little or no advance notice.
•The PRC central government may determine to exert additional control over offerings conducted overseas or foreign investment in PRC-based issuers, which could result in a material change in operations of ACM Shanghai and cause significant declines in the value of ACM Research Class A common stock, or make them worthless.
Recent statements and regulatory actions by PRC central government authorities with respect to the use of VIEs and to data security and anti-monopoly concerns have not affected our ability to conduct our business operations in China. For further information, see “Item 1A. Risk Factors —Risks Related to International Aspects of Our Business”in our Annual Report for more information.
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. ACM Research is neither a PRC operating company nor do we conduct our operations in the PRC through the use of VIEs.
Initially we focused on developing tools for chip manufacturing process steps involving the integration of ultra‑low‑K materials and copper. In the early 2000s we sold tools based on stress-free copper polishing technology. In 2007 we began to focus our development efforts on single-wafer wet-cleaning solutions for the front-end chip fabrication process. Since that time, we have strategically built our technology base and expanded our product offerings:
•In 2009 we introduced SAPS megasonic technology, which can be applied in wet wafer cleaning at numerous steps during the chip fabrication process.
•In 2016 we introduced TEBO technology, which can be applied at numerous steps during the fabrication of small node conventional two-dimensional and three-dimensional patterned wafers.
•In August 2018 we introduced the Ultra-C Tahoe wafer cleaning tool, which delivers high cleaning performance with significantly less sulfuric acid than typically consumed by conventional high temperature single-wafer cleaning tools.
•In March 2019 we introduced (a) the Ultra ECP AP or Advanced Wafer Level Packaging tool, a back-end assembly tool used for bumping, or applying copper, tin and nickel to wafers at the die-level prior to packaging,
and (b) the Ultra ECP MAP or Multi Anode Plating tool, a front-end process tool that utilizes our proprietary technology to deliver world-class electrochemical copper planting for copper interconnect applications.
•In April 2020 we introduced the Ultra Furnace, our first system developed for multiple dry processing applications.
•In May 2020 we introduced the Ultra C Family of semi-critical cleaning systems, including the Ultra C b for backside clean, the Ultra C wb automated wet bench, and the Ultra C s scrubber.
•In 2022 we added two major new product categories with the launch of the Ultra Pmax™ PECVD tool, which is equipped with a proprietary designed chamber, gas distribution unit and chuck, and is intended to provide better film uniformity, reduced film stress, and improved particle performance, and the introduction of the Ultra Track tool, a 300mm process tool that delivers uniform air downflow, fast robot handling and customizable software to address specific customer requirements, and has multiple features that enhance performance including a reduction in defects, increased, throughput, and reduced cost of ownership.
To help us establish and build relationships with chip manufacturers in the PRC, in 2006 we moved our operational center to Shanghai and began to conduct our business through our subsidiary ACM Shanghai. Since that time, we have expanded our geographic presence:
•In 2011 we formed a wholly-owned subsidiary in the PRC, ACM Research (Wuxi), Inc., or ACM Wuxi, which now is a wholly-owned subsidiary of ACM Shanghai, to manage sales and service operations.
•In June 2017 we formed a subsidiary in Hong Kong, CleanChip Technologies Limited, which now is a wholly-owned subsidiary of ACM Shanghai, to act on our behalf in Asian markets outside the PRC by, for example, serving as a trading partner between ACM Shanghai and its customers, procuring raw materials and components, performing sales and marketing activities, and making strategic investments.
•In December 2017 we formed a subsidiary in the Republic of Korea, ACM Research Korea CO., LTD., which now is an indirect wholly-owned subsidiary of ACM Shanghai, to serve our customers based in the Republic of Korea and perform sales and marketing and R&D activities.
•In March 2019 ACM Shanghai formed a wholly-owned subsidiary in the PRC, Shengwei Research (Shanghai), Inc., referred to by the English name ACM Research (Lingang), or ACM Lingang, to manage activities related to the addition of future long-term production capacity.
•In June 2019 CleanChip Technologies Limited formed a wholly-owned subsidiary in California, ACM Research (CA), Inc., to provide procurement services on behalf of ACM Shanghai.
•In August 2021 we formed a wholly-owned subsidiary in Singapore, ACM Research (Singapore) PTE, Ltd., to perform sales, marketing, and other business development activities.
•In February 2022 ACM Shanghai formed a wholly-owned subsidiary in China, ACM Research (Beijing), Inc., or
ACM Beijing, to perform sales, marketing and other business development activities.
•In March 2022 ACM formed a wholly-owned subsidiary in South Korea, Hanguk ACM CO., LTD, to perform business development and other related activities.
We currently conduct the majority of our product development, support and services, and substantially all of our manufacturing, at ACM Shanghai. Our Shanghai operations position us to be near many of our current and potential new customers in the PRC (including Taiwan), South Korea and throughout Asia, providing convenient access and reduced shipping and manufacturing costs.
•ACM Shanghai’s initial factory is located in the Pudong Region of Shanghai and has a total of 36,000 square feet of available floor space.
•ACM Shanghai’s second production facility is located in the Chuansha district of Pudong, approximately 11 miles from our initial factory. In September 2018 we announced the opening of the first building of the second production facility. The first building initially had a total of 50,000 square feet of available floor space for production capacity, which was increased by 50,000 square feet in the second quarter of 2020. In February 2021 ACM Shanghai leased a second building immediately adjacent to the second factory, which increased the available floor space for production by another 100,000 square feet, bringing the total available floor space for production capacity of second production facility to 200,000 square feet.
•In July 2020 ACM Shanghai began a multi-year construction project to build a development and production center in the Lingang region of Shanghai. The new facility is expected to have a total of 1,000,000 square feet of available floor space for production capacity, with initial production of the first building to begin in the second half of 2023.
•In January 2022 ACM Shanghai completed the purchase of a housing facility in the Lingang region of Shanghai to assist in employee retention and recruitment in connection with its new R&D center and factory currently under construction.
•In February 2023, ACM Shanghai completed the purchase of several buildings in Zhangjiang region of Shanghai to be used as its future headquarters.
•In March 2023, Hanguk ACM CO., LTD purchased land in South Korea as the potential site for construction of a R&D center and production facility.
Overview
We supply advanced, innovative capital equipment developed for the global semiconductor industry. Fabricators of advanced integrated circuits, or chips, can use our wet-cleaning and other front-end processing tools in numerous steps to improve product yield, even at increasingly advanced process nodes. We have designed these tools for use in fabricating foundry, logic and memory chips, including dynamic random-access memory, or DRAM, and 3D NAND-flash memory chips. We also develop, manufacture and sell a range of advanced packaging tools to wafer assembly and packaging customers.
Revenue from wet cleaningwet-cleaning and other front-end processing tools totaled $31.7$56.4 million, or 75.1%75.9% of total revenue, for the three months ended March 31, 2022,2023, as compared to $31.9$31.7 million, or 72.9%75.1% of total revenue, for the same period in 2021.2022. Selling prices for our wet-cleaning and other front-end processing tools range from $1$0.7 million to more than $5 million. Our customers for wet-cleaning and other front-end processing tools have included Huali Microelectronics Corporation, The Huahong Group, Semiconductor Manufacturing International Corporation or SMIC, Shanghai SK Hynix Inc., Yangtze Memory Technologies Co., Ltd,YMTC and ChangXin Memory Technologies.
Revenue from advanced packaging, other back-end processing tools, services and spares totaled $10.5$17.9 million, or 24.9%24.1% of total revenue, for the three months ended March 31, 2022,2023, as compared to $11.8$10.5 million, or 27.1%24.9% of total revenue, for the same period in 2021.2022. Selling prices for these tools range from $0.5 million to more than $4 million. OurOur customers for advanced packaging, and other processing tools have includedincluded: Jiangyin Changdian Advanced Packaging Co. Ltd., a PRC-based wafer bumping packaging house that is a subsidiary of JCET Group Co., Ltd.; Nantong Tongfu Microelectronics Co., Ltd., a PRC-based chip assembly and testing company that is a subsidiary of Nantong Fujitsu Microelectronics Co., Ltd.; Nepes Co., Ltd., a semiconductor packaging company based in South Korea which acquired the operations of Deca Technologies’ Philippines manufacturing facility in 2020;Korea; and Wafer Works Corporation, a PRC-based wafer supplier.
We estimate, based on third-party reports and on customer and other information, that our current product portfolio addresses approximately $8 billion of the global wafer equipment market. By product line, we estimate an approximately $3.7 billion market opportunity is addressed by our wafer cleaning equipment, $2.9 billion by our furnace equipment, $730 million by our electro-chemical plating or ECP equipment, and more than $650 million by our stress-free polishing, advanced packaging, wafer processing, and other processing equipment. By major equipment segment, Gartner estimates a 2021 worldwide semiconductor wafer fab equipment, or WFE, market size of $88.1 billion, of which $4.1 billion is for wafer cleaning equipment (auto wet stations, single-wafer spray processors, batch spray processors, and other clean process equipment), $3.4 billion is for furnace equipment (tube CVD, oxidation/diffusion furnace, and batch atomic layer deposition), and $764 million is for electro-chemical deposition, or ECD. Based on Gartner’s estimates, total available global market for these equipment segments increased by 30.1% from $6.4 billion in 2020 to $8.3 billion in 2021, and is expected to increase by 8.3% to $8.9 billion in 2022. These segments are part of the worldwide semiconductor WFE market, which based on Gartner’s estimates increased by 35.6%10.7% from $64.9 billion in 2020 to $88.1 billion in 2021 to $97.5 billion in 2022, and is also expected to increase by 10.7% to $97.5 billion in 2022.2023.
We have focused our selling efforts on establishing a referenceable base of leading foundry, logic and memory chip makers, whose use of our products can influence decisions by other manufacturers. We believe this customer base has helped us penetrate the mature chip manufacturing markets and build credibility with additional industry leaders. We have used a “demo-to-sales” process to place evaluation equipment, or “first tools,” with a number of selected customers.
Since 2009 we have delivered more than 245 wet cleaningthan 410 wet-cleaning and other front-end processing tools, more than 195310 of which have been accepted by customers and thereby generated revenue to us. The balance of the delivered tools are awaiting customer acceptance should contractual conditions be met. To date, a substantial majority of our sales of single-wafer wet cleaningsingle-wafer wet-cleaning equipment for front-end manufacturing have been to customers located in Asia, and we anticipate that a substantial majority of our revenue from these products will continue to come from customers located in this region for the foreseeable future.
We have begun to add to our efforts to further address customers in North America, Western Europe and Southeast Asia by expanding our direct sales and services teams and increasing our global marketing activities.
We are focused on building Our U.S. operation includes sales, marketing and services personnel to expand and support major new customer initiatives for the products of ACM Shanghai to additional regions beyond mainland China. As of March 31, 2023, we have delivered one tool for evaluation to a strategic portfolioU.S. lab of intellectual property to support and protect our key innovations. Our tools have been developed using our key proprietary technologies:
● | Space Alternated Phase Shift, or SAPS, technology for flat and patterned (deep via or deep trench with stronger structure) wafer surfaces. SAPS technology employs alternating phases of megasonic waves to deliver megasonic energy in a highly uniform manner on a microscopic level. We have shown SAPS technology to be more effective than conventional megasonic and jet spray technologies in removing random defects across an entire wafer, with increasing relative effectiveness at more advanced production nodes.
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● | Timely Energized Bubble Oscillation, or TEBO, technology for patterned wafer surfaces at advanced process nodes. TEBO technology has been developed to provide effective, damage-free cleaning for 2D and 3D patterned wafers with fine feature sizes. We have demonstrated the damage-free cleaning capabilities of TEBO technology on patterned wafers for feature nodes as small as 1xnm (16 to 19 nanometers, or nm), and we have shown TEBO technology can be applied in manufacturing processes for patterned chips with 3D architectures having aspect ratios as high as 60‑to‑1.
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● | Tahoe technology for cost and environmental savings. Tahoe technology delivers high cleaning performance using significantly less sulfuric acid and hydrogen peroxide than is typically consumed by conventional high-temperature single-wafer cleaning tools.
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● | ECP technology for advanced metal plating. Our Ultra ECP ap, or Advanced Packaging, technology was developed for back-end assembly processes to deliver a more uniform metal layer at the notch area of wafers prior to packaging. Our Ultra ECP map, or Multi-Anode Partial Plating, technology was developed for front-end wafer fabrication processes to deliver advanced electrochemical copper plating for copper interconnect applications. Ultra ECP map offers improved gap-filling performance for ultra-thin seed layer applications, which is critical for advanced nodes at 28nm, 14nm and beyond.
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In 2020 we introduced and delivered a range of new tools intended to broaden our revenue opportunity with global semiconductor manufacturers. Product extensions includecapital equipment vendor, and two tools to the Ultra SFP ap tool for advanced packaging solutions, the Ultra C VI 18-chamber single wafer cleaning tool for advanced memory devices, and the Ultra ECP 3d platform for through-silicon-via, or tsv, application. New product lines include the Ultra fn Furnace, our first dry processing tool, and a suite of semi-critical cleaning systems which include single wafer back side cleaning, scrubber, and auto bench cleaning tools.
We have been issued more than 411 patents in the United States, the People’s Republic of China or PRC, Japan, Singapore, South Korea and Taiwan.
We conduct a substantial majority of our product development, manufacturing, support and services in the PRC, with additional product development and subsystem production in South Korea. Substantially all of our integrated tools are built to order at our manufacturing facilities in the Pudong region of Shanghai, which now encompass a total of 236,000 square feet of floor space for production capacity, with 100,000 square feet having been added in 2021 with the leaseU.S. facility of a second building in the Pudong regionmajor U.S. semiconductor manufacturer. Both of Shanghai. In May 2020 ACM Shanghai, through its wholly owned subsidiary Shengwei Research (Shanghai), Inc., entered into an agreement for a land use right in the Lingang regionthese evaluations are supported by our U.S. and global services team.
Recent Developments
COVID–19
The worldwide COVID-19 health pandemic and related researchgovernment and development activities. Our experience has shown that chip manufacturersprivate sector responsive actions have adversely affected the economies and financial markets of many countries and specifically have negatively impacted the Company’s business operations, including in the PRC and throughout Asia demand equipment meeting their specific technical requirements and prefer building relationships with local suppliers. We will continue to seek to leverage our local presence in the PRC and South Korea to address the growing market for semiconductor manufacturing equipment in the region by working closely with regional chip manufacturers to understand their specific requirements, encourage them to adopt our technologies, and enable us to design innovative products and solutions to address their needs.
Corporate Background
ACM Research was incorporated in California in 1998 and redomesticated in Delaware in 2016. We perform strategic planning, marketing, and financial activities at our global corporate headquarters in Fremont, California.
Initially we focused on developing tools for chip manufacturing process steps involving the integration of ultra‑low‑K materials and copper. In the early 2000s we sold tools based on stress-free copper polishing technology. In 2007 we began to focus our development efforts on single-wafer wet-cleaning solutions for the front-end chip fabrication process. Since that time, we have strategically built our technology base and expanded our product offerings:
• | In 2009 we introduced SAPS megasonic technology, which can be applied in wet wafer cleaning at numerous steps during the chip fabrication process.
|
• | In 2016 we introduced TEBO technology, which can be applied at numerous steps during the fabrication of small node conventional two-dimensional and three-dimensional patterned wafers.
|
• | In August 2018 we introduced the Ultra-C Tahoe wafer cleaning tool, which delivers high cleaning performance with significantly less sulfuric acid than typically consumed by conventional high temperature single-wafer cleaning tools.
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• | In March 2019 we introduced (a) the Ultra ECP AP or Advanced Wafer Level Packaging tool, a back-end assembly tool used for bumping, or applying copper, tin and nickel to wafers at the die-level prior to packaging, and (b) the Ultra ECP MAP or Multi Anode Plating tool, a front-end process tool that utilizes our proprietary technology to deliver world-class electrochemical copper planting for copper interconnect applications.
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• | In April 2020 we introduced the Ultra Furnace, our first system developed for multiple dry processing applications.
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• | In May 2020 we introduced the Ultra C Family of semi-critical cleaning systems, including the Ultra C b for backside clean, the Ultra C wb automated wet bench, and the Ultra C s scrubber.
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To help us establish and build relationships with chip manufacturers in the PRC, in 2006 we moved our operational center to Shanghai and began to conduct our business through our subsidiary ACM Shanghai. Since that time, we have expanded our geographic presence:
• | In 2011 we formed a wholly owned subsidiary in the PRC, ACM Research (Wuxi), Inc., which now is a wholly owned subsidiary of ACM Shanghai, to manage sales and service operations.
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• | In June 2017 we formed a subsidiary in Hong Kong, CleanChip Technologies Limited, which now is a wholly owned subsidiary of ACM Shanghai, to act on our behalf in Asian markets outside the PRC by, for example, serving as a trading partner between ACM Shanghai and its customers, procuring raw materials and components, performing sales and marketing activities, and making strategic investments.
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• | In December 2017 we formed a subsidiary in the Republic of Korea, ACM Research Korea CO., LTD., which now is a wholly owned subsidiary of ACM Shanghai, to serve our customers based in the Republic of Korea and perform sales, marketing, and research and development activities.
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• | In March 2019 ACM Shanghai formed a wholly owned subsidiary in the PRC, Shengwei Research (Shanghai), Inc., to manage activities related to addition of future long-term production capacity.
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• | In August 2021 we formed a wholly owned subsidiary in Singapore, ACM Research (Singapore) PTE, Ltd., to perform sales, marketing, and other business development activities.
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• | In February 2022, ACM Shanghai formed a wholly owned subsidiary in China, ACM Research (Beijing), Inc., to perform sales, marketing and other business development activities.
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• | In March 2022, ACM formed a wholly owned subsidiary in South Korea, Hanguk ACM CO., LTD, to perform business development and other related activities.
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We currently conduct the majority of our product development, support and services, and substantially all of our manufacturing, at ACM Shanghai. Our Shanghai operations position us to be near many of our current and potential new customers in the PRC (including Taiwan), Korea and throughout Asia, providing convenient access and reduced shipping and manufacturing costs.
Our initial factory is located in the Pudong Region of Shanghai and has a total of 36,000 square feet of available floor space.
Our second production facility is located in the Chuansha district of Pudong, approximately 11 miles from our initial factory. In September 2018 we announced the opening of the first building of our second production facility. The first building initially had a total of 50,000 square feet of available floor space for production capacity, which was increased by 50,000 square feet in the second quarter of 2020. In February 2021 we leased a second building immediately adjacent to our second factory, which increased our available floor space for production by another 100,000 square feet, bringing to total available floor space for production capacity of second production facility to 200,000 square feet.
In July 2020 ACM Shanghai began a multi-year construction project to build a development and production center in the Lingang region of Shanghai. The new facility is expected to have a total of 1,000,000 square feet of available floor space for production. capacity.
In January 2022 ACM Shanghai completed the purchase of a housing facility in the Lingang region of Shanghai to assist in employee retention and recruitment in connection with its new research and development center and factory currently under construction.
Recent Developments
COVID–19
Following its initial outbreak in December 2019, COVID–19, or the coronavirus, spread across the PRC, the United States and globally.States. The COVID–19 pandemic has affected our business and operating results since the first quarter of 2020. Since that time, our personnel have been largely unable to travel between our offices in the United States and facilities of our company and some of our key customers in the PRC have been and will likely continue to be restricted, which has and may continue to impact our ability to effectively operate our company and to oversee our operations. The COVID–19 situation continues to evolve, and it is impossible for us to predict the effect and ultimate impact of the COVID–19 pandemic on our business operations and results. We continue to monitor the impactcontinuation of the COVID-19 pandemic could continue to result in economic uncertainty and global economic policies that could reduce demand for the Company’s products and its customers’ chips and have a material adverse impact on all aspects of ourthe Company’s business, including our operations, customers, suppliersoperating results and projects. While the ongoing regulatory measures instituted or recommended in response to COVID–19 are expected to be temporary, the duration of the business disruptions, and related financial impact, of the pandemic cannot be estimated at this time.condition. For an explanation of some of the risks we potentially face,face, please read carefully the information provided under “Item 1A. Risk Factors—Risks Related to the COVID–19 Pandemic,” in our Annual Report.
We conduct substantially all of part I of this report.our product development, manufacturing, support and services in the PRC through ACM Shanghai, and those activities have been directly impacted by COVID–19 and related restrictions on transportation and public appearances.
The following summary reflects our expectations and estimates based on information known to us as of the date of this filing:
• | Operations: We conduct substantially all of our product development, manufacturing, support and services in the PRC, and those activities have been directly impacted by the COVID–19 pandemic and related restrictions on transportation and public appearances.
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In March 2022, several regions in China began to experience elevated levels of COVID-19 infections, and the PRC government instituted policies to restrict the spread of the virus.virus, which are referred to as zero-COVID policies. The policies began with an increase of “spot lockdowns,quarantines,” under which a positive polymerase chain reaction (PCR) or other test would result in the quarantining of individual buildings, groups of buildings, or even full neighborhoods. The policies were later expanded to full-city lockdowns,quarantines, including in the City of Shanghai, where substantially all of ACM Shanghai’s operations are located. COVID-19 related restrictions in Shanghai began to limit employee access to, and logistics activities of, ACM Shanghai’s offices and production facilities in the Pudong district of Shanghai during the first quarter ofin March 2022, and therefore limited ACM Shanghai’s ability to ship finished products to customers and to produce new products. Spot lockdownsquarantines in mid-March 2022 began to impact a number of ACM Shanghai’s employees and led to a closure of ACM Shanghai’s administrative and R&D offices in Zhangjiang in the Pudong district. A subsequent lockdownquarantine of the entire Pudong region of Shanghai was imposed in late March 2022 and impacted the operation of ACM Shanghai’s Chuansha production facility. Furthermore, a number of the Company’sour customers have substantial operations based in operations areas of the PRC, including in the City of Shanghai, subject to the full-city lockdown restrictions, which have beenbegan limiting the operations of those customers sincein the first quarter of 2022, including inhibiting their ability to receive, implement and operate new tools for their manufacturing facilities. As a result, in some cases, ACM Shanghai has beenwas required to defer shipments of finished products to these customers because of operational and logistics limitations affecting customers rather than, or in addition to, ACM Shanghai. The Company has begun
In late April 2022, ACM Shanghai began to resume some operations at the Chuansha manufacturing site using the “closed loop method,” in which a limited collection of workers remains together as a group between a single hotel, the ACM Shanghai facility, and a dedicated bus transportation route, also referred to as “two spotspoints and one line.line,” and had resumed substantially all of its Chuansha manufacturing site operations by the end of the second quarter of 2022
In mid-June 2022, substantially all of ACM Shanghai’s R&D and administrative employees at its Zhangjiang facility were allowed to return to work under strict safety protocols after a period of restricted access to the building that for many employees was partially mitigated by being able to work from home. ACM Shanghai established several policies to help avoid or limit future outbreaks among employees and thus protect employee safety and limit the possibility of a facility reclosing. The Company anticipates thateffects of the lockdowns and their effects will be temporary but may continuePRC restrictions continued for several months, with a gradual return of PRC operations, production capacity, and global logistics as Shanghai and other areas in the PRC beginbegan to reopen. The CompanyWe cannot assure you that closures or reductions of PRC operations or production, whether of ACM Shanghai or of some of its key customers, may not be extended in upcoming monthsthe future as the result of business interruptions arising from protective measures being taken by the PRC and other governmental agencies or of other consequences of COVID-19.
In December 2022, the PRC government relaxed its zero-COVID policies, which resulted in large scale COVID-19 infections throughout China, including Shanghai. A significant number of ACM Shanghai employees were also infected, and in many cases missed work for one or several weeks, which caused administrative and operational challenges in late 2022 and early 2023. With the relaxation of the PRC’s zero-COVID policies in December 2022, and the subsequent widespread infections of China’s population, during the three months ended March 31, 2023, the Company experienced additional inefficiencies due in part to infections and the resultant absenteeism experienced by its employees and the general population of China. We cannot assure you that illnesses of ACM Shanghai employees, or of its customers, suppliers or other third parties, may not result in closures, reductions of PRC operations or production, or additional administrative inefficiencies in the upcoming months or quarters.
Our corporate headquarters are located in Alameda CountyFremont, California in the San Francisco Bay Area and are the subject of a number of state and county public health directives and orders. These actions have not negatively impacted our business to date, however, because of the limited number of employees at our headquarters and the nature of the work they generally perform. To date we have not experienced absenteeism of management or other key U.S. employees, other than certain of our executive officers being delayed in traveling between the PRC, our California office, and other global locations.
locations, and a significant number of ACM Shanghai employees missing work in late 2022 and early 2023 for one or several weeks due to COVID-19 related illness following relaxation of the PRC’s zero-COVID policies in December 2022.
• | Customers: Our customers’ business operations have been, and are continuingOur global supply chain includes components sourced from the PRC, Japan, Taiwan, the United States and Europe. While, to date, we have not experienced material issues with our supply chain beyond the logistics related to be, subject to business interruptions arising from the COVID–19 pandemic. Historically substantially all of our revenue has been derived from customers located in the PRC and surrounding areas that have been impacted by COVID–19. Two customers that accounted for 48.9% of our revenue in 2021 are based in the PRC, and three customers that accounted for 75.8% of our revenue in 2020, and 73.8% of our revenue in 2019 are based in the PRC and South Korea. One of those customers, Yangtze Memory Technologies Co., Ltd. — which accounted for 20.2% of our 2021 revenue, 26.8% of our 2020 revenue, and 27.5% of our 2019 revenue — is based in Wuhan. While Yangtze Memory Technologies Co., Ltd. and other key customers continued to operate their fabrication facilities without interruption during and after the first quarter of 2020, some customers have been forced to restrict access of service personnel and deliveries to and from their facilities. We have experienced longer and in some cases more costly shipping expenses in the delivery of tools to certain customers.
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• | Suppliers: Our global supply chain includes components sourced from the PRC, Japan, Taiwan, the United States and Europe. While, to date, we have not experienced material issues with our supply chain beyond the logistics to our Shanghai facilities of ACM Shanghai, supply chain constraints have intensified due to COVID-19, contributing to global shortages in the supply of semiconductors and other materials, and in some cases the pricing of materials used in the production of our own tools. As with our customers, we continue to be in close contact with our key suppliers to help ensure we are able to identify any potential supply issues that may arise.
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• | Projects: Our strategy includes a number of plans to support the growth of our core business, including ACM Shanghai’s acquisition of a land use right in the Lingang area of Shanghai where we began construction of a new research and development center and factory in July 2020. The extent to which COVID–19 impacts these projects will depend on future developments that are highly uncertain, but to date, the timing of these ongoing projects has not been delayed or significantly disrupted by COVID–19 or related government measures.
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PRC Government Research and Development Funding
ACM Shanghai has received seven special government grants. The first grant, which was awarded in 2008, relates to the development and commercialization of 65nm to 45nm stress-free polishing technology. The second grant was awarded in 2009 to fund interest expense on short-term borrowings. The third grant was made in 2014 and relates to the development of electro copper-plating technology. The fourth grant was made in June 2018 and related to development of polytetrafluoroethylene. The fifth grant was made in 2020, and relates to the development of Tahoe single bench cleaning technologies. As of December 31, 2021, the fourth and fifth grants had been fully utilized. The sixth grant was made in 2020, and relates to the development of other cleaning technologies. The seventh grant was made in 2021, and relates to the development of the R&D and production center in the Lin-gang Special Area of Shanghai. These governmental authorities provide significant funding, although ACM Shanghai and ACM ShengweiLingang is also required to invest certain amounts in the projects.
The governmental grants contain certain operating conditions, and we are required to go through a government due diligence process once the project is complete. The grants therefore are recorded as long-term liabilities upon receipt, although we are not required to return any funds ACM Shanghai receives. Grant amounts are recognized in our statements of operations and comprehensive income as follows:
•Government subsidies relating to current expenses are recorded as reductions of those expenses in the periods in which the current expenses are recorded. For the three months ended March 31, 2023 and 2022, related government subsidies recognized as reductions of relevant expenses in the consolidated statements of operations and comprehensive income (loss) were $0.5 million and $0.1 million, respectively.
| ● | Government subsidies relating to current expenses are recorded as reductions of those expenses in the periods in which the current expenses are recorded. For the three months ended March 31, 2022 and 2021, related government subsidies recognized as reductions of relevant expenses in the consolidated statements of operations and comprehensive income were $0.1 million and $1.9 million, respectively. |
| ● | Government subsidies related to depreciable assets are credited to income over the useful lives of the related assets for which the grant was received. For the three months ended March 31, 2022 and 2021, related government subsidies recognized as other income in the consolidated statements of operations and comprehensive income were $79,000, and $39,000, respectively. |
•Government subsidies related to depreciable assets are credited to income over the useful lives of the related assets for which the grant was received. For the three months ended March 31, 2023 and 2022, related government subsidies recognized as other income in the consolidated statements of operations and comprehensive income (loss) were $78,000 and $79,000, respectively.
Unearned government subsidies received are deferred for recognition and recorded as other long-term liabilities (see noteNote 13 in the Notes to Condensed Consolidated Financial Statements included herein under “Item 1. Financial Statements.”) in the balance sheet until the criteria for such recognition are satisfied.
Net Income Attributable to Non-Controlling Interests
In 2019 ACM Shanghai sold a total number of shares representing 8.3% of its outstanding ACM Shanghai shares, after which ACM Research held the remaining 91.7% of ACM Shanghai’s outstanding shares. In 2021 ACM Shanghai sold a total number shares representing an additional 10% of its outstanding ACM Shanghai shares in its STAR IPO, after which ACM Research held the remaining 82.5% of ACM Shanghai’s outstanding shares. As a result, we reflect the portion of our net income allocable to the minority holders of ACM Shanghai shares as net income attributable to non-controlling interests.
Critical Accounting Policies and Estimates
There were no significant changes in our critical accounting policies or significant judgments or estimates during the three months ended March 31, 2023 to augment the critical accounting estimates disclosed under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report, other than those described in the notes to the condensed consolidated financial statements included in this report. For information regarding the impact of recently adopted accounting standards, refer to Note 2 to the condensed consolidated financial statements included in this report.
Recent Accounting Pronouncements
A discussion of recent accounting pronouncements is included in our Annual Report and is updated in Note 2 to the condensed consolidated financial statements included in this report.
Results of Operations
The following table sets forth our results of operations for the periods presented, as percentages of revenue.
| | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2023 | | 2022 | | | | |
Revenue | 100.0 | % | | 100.0 | % | | | | |
Cost of revenue | 46.2 | | | 53.3 | | | | | |
Gross margin | 53.8 | | | 46.7 | | | | | |
Operating expenses: | | | | | | | |
Sales and marketing | 12.6 | | | 15.9 | | | | | |
Research and development | 18.9 | | | 41.1 | | | | | |
General and administrative | 10.4 | | | 11.7 | | | | | |
Total operating expenses, net | 41.9 | | | 68.7 | | | | | |
Income (loss) from operations | 11.9 | | | (22.0) | | | | | |
Interest income (expense), net | 1.5 | | | 3.7 | | | | | |
Realized gain from sale of trading securities | 5.4 | | | 0.0 | | | | | |
Unrealized loss on trading securities | (0.9) | | | (9.1) | | | | | |
Other benefit (expense), net | (1.9) | | | 0.6 | | | | | |
Equity loss in net loss of affiliates | — | | | (0.2) | | | | | |
Income (loss) before income taxes | 16.0 | | | (27.0) | | | | | |
Income tax benefit (expense) | (3.9) | | | 9.5 | | | | | |
Net income (loss) | 12.1 | | | (17.5) | | | | | |
Less: Net income (loss) attributable to non-controlling interests | 2.4 | | | (3.9) | | | | | |
Net income (loss) attributable to ACM Research, Inc. | 9.7 | % | | (13.6) | % | | | | |
Comparison of Three Months Ended March 31, 2023 and 2022
Revenue
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| Three Months Ended March 31, | | | | |
| 2023 | | 2022 | | % Change 2023 v 2022 | | Absolute Change 2023 v 2022 |
| (in thousands) | | | | |
Revenue | $ | 74,256 | | | $ | 42,186 | | | 76.0 | % | | $ | 32,070 | |
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Single wafer cleaning, Tahoe and semi-critical cleaning equipment | $ | 36,614 | | | $ | 26,033 | | | 40.6 | % | | $ | 10,581 | |
ECP (front-end and packaging), furnace and other technologies | 26,598 | | | 12,248 | | | 117.2 | % | | 14,350 | |
Advanced packaging (excluding ECP), services & spares | 11,044 | | | 3,905 | | | 182.8 | % | | 7,139 | |
Total Revenue by Product Category | $ | 74,256 | | | $ | 42,186 | | | 76.0 | % | | $ | 32,070 | |
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Wet-cleaning and other front-end processing tools | $ | 56,382 | | | $ | 31,702 | | | 77.8 | % | | $ | 24,680 | |
Advanced packaging, other processing tools, services and spares | 17,874 | | | 10,484 | | | 70.5 | % | | 7,390 | |
Total Revenue Front and Back-End | $ | 74,256 | | | $ | 42,186 | | | 76.0 | % | | $ | 32,070 | |
The increase in revenue for three months ended March 31, 2023 as compared to the same period in 2022 was driven by higher sales of single wafer cleaning, Tahoe and semi-critical cleaning equipment, increased contribution from newer ECP (front-end and packaging), furnace and other technologies, and higher sales of Advance packaging (excluding ECP), services & spares. The increased demand from PRC-based customers is due in part to their longer term commitment to increase production capacity to achieve a greater share of the global semiconductor market. Our Shanghai operations were adversely impacted by the continuation of effects related to the cessation of China's zero-COVID policies in late 2022 that resulted in illnesses amongst our employees, customers, and the general population in China, and the continued impact from new restrictions implemented by the U.S. Department of Commerce for PRC-based semiconductor producers in October 2022 (Note 2).
Cost of Revenue and Gross Margin
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| Three Months Ended March 31, | | | | |
| 2023 | | 2022 | | % Change 2023 v 2022 | | Absolute Change 2023 v 2022 |
| (in thousands) | | | | |
Cost of revenue | $ | 34,270 | | | $ | 22,500 | | | 52.3 | % | | $ | 11,770 | |
Gross profit | 39,986 | | | 19,686 | | | 103.1 | % | | 20,300 | |
Gross margin | 53.8 | % | | 46.7 | % | | 7.1 | % | | 718 bps |
Cost of revenue and gross profit increased in the three months ended March 31, 2023 as compared to the corresponding period in 2022 due to the increased sales volume, and an increase in gross margin. The increased gross margin versus the prior-year period was primarily due to a favorable revenue mix between tools within our product categories.
Gross margin may vary from period to period, primarily related to the level of utilization and the timing and mix of revenue. We expect gross margin to be between 40.0% and 45.0% for the foreseeable future, with direct manufacturing costs approximating 50.0% to 55.0% of revenue and overhead costs totaling 5.0% of revenue.
Operating Expenses
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| Three Months Ended March 31, | | | | |
| 2023 | | 2022 | | % Change 2023 v 2022 | | Absolute Change 2023 v 2022 |
| (in thousands) | | | | |
Sales and marketing expense | $ | 9,337 | | | $ | 6,697 | | | 39.4 | % | | $ | 2,640 | |
Research and development expense | 14,029 | | | 17,346 | | | (19.1) | % | | (3,317) | |
General and administrative expense | 7,758 | | | 4,949 | | | 56.8 | % | | 2,809 | |
Total operating expenses | $ | 31,124 | | | $ | 28,992 | | | 7.4 | % | | $ | 2,132 | |
Sales and marketing expense increased in the three months ended March 31, 2023 as compared to the corresponding period in 2022, and reflected an increase of $2.6 million due to $1.9 million higher costs for supplies and spare parts for promotional tools, an increase of $1.5 million due to increased costs for personnel, commissions, outside services, travel & entertainment and other costs, offset by decrease of $0.8 million in professional services. Sales and marketing expense consists primarily of:
•compensation of personnel associated with pre- and after-sale services and support and other sales and marketing activities, including stock-based compensation;
•sales commissions paid to independent sales representatives;
•fees paid to sales consultants;
•cost of trade shows;
•costs of tools built for promotional purposes for current or potential new customers;
•travel and entertainment; and
•allocated overhead for rent and utilities.
We expect that, for the foreseeable future, sales and marketing expenses will increase in dollars, as we incur additional costs associated with growing our customer base in mainland China and regions outside of mainland China.
Research and development expense decreased in the three months ended March 31, 2023 as compared to the corresponding period in 2022, reflecting a decrease of $2.8 million in costs of components, costs of tools built for product development purposes, and costs of other research and development supplies, and a decrease of $3.2 million for professional services and other R&D-related costs, offset by an increase of $2.7 million for personnel, stock-based compensation, and travel & entertainment costs to support product development.
Research and development expense represented 18.9% and 41.1% of our revenue in the three months ended March 31, 2023 and 2022, respectively. Without reduction by grant amounts received from PRC governmental authorities (see ‘–PRC Government Research and Development Funding’’), gross research and development expense totaled $14.0 million, or 18.9% of total revenue, in the three months ended March 31, 2023 as compared to $17.3 million, or 41.1% of revenue, in the corresponding period in 2022. Research and development expense relates to the development of new products and processes and encompasses our research, development and customer support activities. Research and development expense consists primarily of:
•compensation of personnel associated with our research and development activities, including stock based compensation;
•costs of components and other research and development supplies;
•costs of tools built for product development purposes;
•travel expense associated with the research of technical requirements for product development purposes and testing of concepts under consideration;
•amortization of costs of software used for research and development purposes; and
•allocated overhead for rent and utilities.
We expect that, for the foreseeable future, research and development expenses will increase in dollars, as we incur additional costs to expand our product portfolio to address additional production steps and expand our research and development team to new regions.
General and administrative expense increased in the three months ended March 31, 2023 as compared to the corresponding period in 2022, primarily reflecting a $2.2 million increase in personnel and professional services, a $0.3 million increase in stock-based compensation, and a $0.3 million increase in bad debt reserves. General and administrative expense consists primarily of:
•compensation of executive, accounting and finance, human resources, information technology, and other administrative personnel, including stock-based compensation;
•professional fees, including accounting and corporate legal and defense fees;
•other corporate expenses including insurance;
•bad debt reserve; and
•allocated overhead for rent and utilities.
We expect that, for the foreseeable future, general and administrative expenses will increase in dollars, as we incur additional costs associated with growing our business, ACM Research operating a public company in the United States and ACM Shanghai operating as a public company in the PRC.
Interest income (expense), net, Other Income (expense), net
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | | | |
| 2023 | | 2022 | | % Change 2023 v 2022 | | Absolute Change 2023 v 2022 |
| (in thousands) | | | | |
Interest Income | $ | 1,785 | | | $ | 1,805 | | | (1.1) | % | | $ | (20) | |
Interest Expense | (695) | | | (261) | | | 166.3 | % | | (434) | |
Interest Income (expense), net | $ | 1,090 | | | $ | 1,544 | | | -29.4 | % | | $ | (454) | |
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Other income (expense), net | $ | (1,418) | | | $ | 237 | | | -698.3 | % | | $ | (1,655) | |
Interest income (expense), net consists of interest earned on our cash and equivalents, restricted cash accounts, and short term and long term time deposits, offset by interest expense incurred from outstanding short-term and long-term borrowings. Interest income (expense), net decreased in the three months ended March 31, 203 as compared to the corresponding period in 2022, primarily due to higher interest expense related to a higher balance of short term borrowings.
Other income (expense), net primarily reflects (a) losses recognized from the impact of exchange rates on our foreign currency-denominated working-capital transactions which were ($1.5 million) and ($22,000) for the three months ended March 31, 2023 and 2022, respectively and (b) depreciation of assets acquired with government subsidies, as described under “—PRC Government Research and Development Funding” above.
Realized gain and unrealized loss from trading securities, and equity loss in net loss of affiliates.
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| Three Months Ended March 31, | | | | |
| 2023 | | 2022 | | % Change 2023 v 2022 | | Absolute Change 2023 v 2022 |
| (in thousands) | | | | |
Realized gain from sale of trading securities | $ | 3,994 | | | $ | - | | | 100.0 | % | | $ | 3,994 | |
Unrealized loss on trading securities | $ | (654) | | | $ | (3,858) | | | (83.0) | % | | $ | 3,204 | |
Equity loss in net loss of affiliates | $ | (32) | | | $ | (71) | | | (54.9) | % | | $ | 39 | |
We recorded a realized gain from sale of trading securities of $4.0 million for the three months ended March 31, 2023 due to a sale of ACM Shanghai’s indirect investment in SMIC shares on the STAR Market as is described in Note 15 to the condensed consolidated financial statements included in this report.
We recorded an unrealized loss on trading securities of $0.7 million for the three months ended March 31, 2023 as compared to an unrealized loss of $3.9 million for the same period in 2022, based on a change in market value of ACM Shanghai’s indirect investments in certain publicly traded securities on China's stock markets as described in Note 15 to the condensed consolidated financial statements included in this report.
Equity loss in net loss of affiliates was substantially unchanged for the three months ended March 31, 2023 due to slightly lower net loss from investments in affiliates (Note 14).
Income Tax Benefit (Expense)
The following presents components of income tax benefit (expense) for the indicated periods:
| | | | | | | | | | | |
| Three Months Ended March 31, |
| 2023 | | 2022 |
| (in thousands) |
Total income tax benefit (expense) | $ | (2,879) | | | $ | 4,011 | |
We recognized a tax expense of $2.9 million for the three months ended March 31, 2023 as compared to a tax benefit of $4 million for the prior year period. The tax expense for the three months ended March 31, 2023 primarily resulted from the tax effect of a decrease in our effective income tax rate applied to an operating profit for the period. The decrease in our effective income tax rate for the three months ended March 31, 2023 compared to the same period of the prior year was primarily due to an increased benefit from the specified deduction to the GILTI inclusion as a result of reduced net operating loss utilization which partially limited the specified deduction in the prior year, and reduced GILTI inclusion related to the amount of capitalized R&D expenses relative to pre-tax income. The tax benefit in the three months ended March 31, 2022 was primarily due to a higher effective tax rate applied to a pre-tax net loss for the period.
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 treatment of stock-based compensation including the impact from stock option exercises and non-US research expenses. Our PRC subsidiaries, ACM Shanghai, ACM Wuxi, Inc., ACM Lingang, and ACM Beijing are liable for PRC corporate income taxes at the rates of 15%, 25%, 25% and 25%, respectively. Pursuant to the Corporate Income Tax Law of the PRC, our PRC subsidiaries generally would be liable for PRC corporate income taxes at a rate of 25%. According to Guoshuihan 2009 No. 203, an entity certified as an “advanced and new technology enterprise” is entitled to a preferential income tax rate of 15%. ACM Shanghai was certified as an “advanced and new technology enterprise” in 2012 and again in 2016, 2018, and 2021 with an effective period of three years. In 2021, ACM Shanghai was certified as an eligible integrated circuit production enterprise and was entitled to a preferential income tax rate of 12.5% from January 1, 2020 to December 31, 2022.
Under the change in Section 174 made by the Tax Cuts and Jobs Act of 2017 (the “TCJA”) which became effective on January 1, 2022, the Company is required to capitalize, and subsequently amortize R&D expenses over fifteen years for research activities conducted outside of the U.S. The capitalization of overseas R&D expenses results in a significant increase in the Company’s global intangible low-taxed income inclusion. Congress is considering legislation, but legislation has not passed, that would repeal defer the capitalization requirement to later 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 2001 through 2022. To the extent we have tax attribute carryforwards, the tax years in which the attribute was generated may still be adjusted upon examination by the Internal Revenue Service or state or foreign tax authorities to the extent utilized in a future period.
Net Income (Loss) Attributable to Non-Controlling Interests
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| Three Months Ended March 31, | | | | |
| 2023 | | 2022 | | % Change 2023 v 2022 | | Absolute Change 2023 v 2022 |
| (in thousands) | | | | |
Net income (loss) attributable to non-controlling interests | $ | 1,818 | | | $ | (1,657) | | | (209.7) | % | | $ | 3,475 | |
In 2019 ACM Shanghai sold a total number of shares representing 8.3% of its outstanding ACM Shanghai shares, after which ACM Research held the remaining 91.7% of ACM Shanghai’s outstanding shares. In 2021 ACM Shanghai sold a total number shares representing an additional 10% of its outstanding ACM Shanghai shares in its STAR IPO, after which ACM Research held the remaining 82.5% of ACM Shanghai’s outstanding shares. As a result, we reflect, the portion of our net income allocable to the minority holders of ACM Shanghai shares as net income attributable to non-controlling interests.
Foreign currency translation adjustment
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| Three Months Ended March 31, | | | | |
| 2023 | | 2022 | | % Change 2023 v 2022 | | Absolute Change 2023 v 2022 |
| (in thousands) | | | | |
Foreign currency translation adjustment | $ | 9,423 | | | $ | 2,454 | | | 284.0 | % | | $ | 6,969 | |
We recorded a foreign currency translation adjustment of $9.4 million for the three months ended March 31, 2023, as compared to $2.5 million for the same period in 2022, based on the net effect of RMB to dollar exchange rate fluctuations for the period on the converted value of ACM Shanghai’s RMB-denominated balances to U.S. dollar equivalents.
Comprehensive income (loss) attributable to non-controlling interests
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| Three Months Ended March 31, | | | | |
| 2023 | | 2022 | | % Change 2023 v 2022 | | Absolute Change 2023 v 2022 |
| (in thousands) | | | | |
Comprehensive income (loss) attributable to non-controlling interests | $ | 3,462 | | | $ | (1,073) | | | (422.6) | % | | $ | 4,535 | |
Comprehensive income attributable to non-controlling interests increased by $4.5 million for the three months ended March 31, 2023 due to change in net income generated from the non-controlling interests as impacted from foreign exchange rate fluctuations.
Liquidity and Capital Resources
During the first three months of 2023, we funded our technology development and operations principally through our beginning global cash balances, including the cash balances at ACM Shanghai, and borrowings by ACM Shanghai from local financial institutions. Cash and cash equivalents, short-term time deposits and long-term time deposits were $381.7 million at March 31, 2023, compared to $420.9 million at December 31, 2022. The $39.2 million decrease was primarily driven by $30.5 million of cash used in operations, $4.7 million, excluding net cash increase for time deposits, was used in investing activities, $1.5 million net cash used in financing activities, a $2.5 million net decline from the effect of exchange rate on cash, cash equivalents and restricted cash, and other items.
| | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
| (In thousands) |
Cash and cash equivalents and time deposits: | | | |
Cash and cash equivalents | $ | 260,847 | | | $ | 248,451 | |
Short-term time deposits | 2,999 | | | 70,492 | |
Long-term time deposits | 117,855 | | | 101,956 | |
Total | $ | 381,701 | | | $ | 420,899 | |
Our future working capital needs beyond the next twelve months will depend on many factors, including the rate of our business and revenue growth, the payment schedules of our customers, the timing and magnitude of our capital expenditures, and the timing of investment in our research and development as well as sales and marketing. We believe our existing cash and cash equivalents and short-term and long-term time deposits, our cash flow from operating activities, and bank borrowings by ACM Shanghai will be sufficient to meet our anticipated cash needs within our longer term planning horizon.
ACM Shanghai has historically participated in certain PRC government-sponsored grant and subsidy programs, as described under “—PRC Government Research and Development Funding” and “—Contractual Obligations” and we expect that ACM Shanghai will continue to take advantage of these programs when they are available and fit with our business strategy. ACM Shanghai generally applies for these grants and subsidies through the applicable PRC government agency’s defined processes. Periodically, the public relations department researches the availability of these grants and subsidies through the PRC government agencies with whom ACM Shanghai files business surveys and taxes. Management of ACM Shanghai then assesses which grants and subsidies for which ACM Shanghai may be eligible and submits the relevant application. The decision to award the grant to ACM Shanghai is made by the relevant PRC government agencies based on suitability and the merits of the application. Neither ACM Research, nor ACM Shanghai or any of our other subsidiaries, has any direct relationship with any PRC government agency, and our anticipated cash needs for the next twelve months neither anticipate, nor require, receipt of any PRC government grants or subsidies.
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.
Restrictions under PRC laws and regulations as well as restrictions under ACM Shanghai’s bank loan agreements, may significantly restrict ACM Shanghai’s ability to transfer a portion of ACM Shanghai’s net assets to ACM Research, other subsidiaries of ACM Research and to holders of ACM Research Class A common stock. See “Item 1A. Risk Factor–Regulatory Risks-The PRC’s currency exchange control and government restrictions on investment repatriation may impact our ability to transfer funds outside of the PRC, which could materially and adversely affect our ability to grow, make investments or acquisitions that could benefit our business, otherwise fund and conduct our business, or pay dividends on our common stock” in our Annual Report.
For the three months ended March 31, 2023 and 2022, with the exception of sales and services-related transfer-pricing payments in the ordinary course of business, no transfers, dividends, or distributions have been made between ACM Research, and its subsidiaries, including ACM Shanghai, or to holders of ACM Research Class A common stock.
Our cash and cash equivalents at March 31, 2023 were held for working capital purposes and other potential investments. ACM Shanghai, our only direct PRC subsidiary, is, however, subject to PRC restrictions on distributions to equity holders. The use of proceeds raised by the STAR Market IPO, without further approvals, are limited to specific usage. Our accounts receivable balance fluctuates from period to period, which affects our cash flow from operating activities. Fluctuations vary depending on cash collections, client mix, and the timing of shipment and acceptance of our tools.
We have never declared or paid cash dividends on our capital stock. We intend to retain all available funds and any future earnings to support the operation of and to finance the growth and development of our business and do not anticipate paying any cash dividends in the foreseeable future.
Cash Flow Used in Operating Activities. Net cash used in operating activities of $30.5 million during the three months ended March 31, 2023 consisted of:
| | | | | | | | | | | |
| Three Months Ended March 31, |
| 2023 | | 2022 |
| (In thousands) |
Net income (loss) | $ | 8,963 | | | $ | (7,443) | |
Depreciation and amortization | 1,714 | | | 1,213 | |
Realized gain on trading securities | (3,994) | | | - | |
Equity income in net income of affiliates | 32 | | | 71 | |
Unrealized loss on trading securities | 654 | | | 3,858 | |
Bad debt expense | 298 | | | — | |
Deferred income taxes | (6,294) | | | (2,081) | |
Stock-based compensation | 2,068 | | | 1,374 | |
Net changes in operating assets and liabilities: | (33,937) | | | (24,721) | |
Net cash flow used in operating activities | $ | (30,496) | | | $ | (27,729) | |
Significant changes in operating asset and liability accounts included the following uses of cash: an increase of inventories of $79.9 million (Note 5), and an increase of accounts receivable of $2.5 million (Note 4). As described under “PRC Government Research and Development Funding,” ACM Shanghai has received research and development grants from local and central PRC governmental authorities. ACM Shanghai received $78,000 payments related to such grants in the first three months of 2023, as compared to cash receipts of $0.3 million in the same period of 2022.
The uses of cash are offset by the following significant sources of cash: an increase in advances from customers of $25.9 million (Note 3), and an increase in accounts payable of $13.2 million.
Cash Flow Used in Investing Activities. Net cash used in investing activities, excluding net cash increase for time deposits, for the three-months ended March 31, 2023 was $4.7 million, primarily consisting of $15.1 million purchase of property and intangible assets and $0.7 million purchase of long-term investment, offset by $11.1 million in proceeds from selling trading securities (Note 15).
Cash Flow Used in Financing Activities. Net cash used in financing activitiesfor the three months ended March 31, 2023 was $1.5 million, primarily consisting of $1.7 million net repayment or short and long-term borrowings, offset by $0.2 million in proceeds from the exercise of stock options.
ACM Shanghai, together with its subsidiaries, has short-term and long-term borrowings with five banks, as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Lender | | Agreement Date | | Maturity Date | | Annual Interest Rate | | Maximum Borrowing Amount(1) | | Amount Outstanding at March 31, 2023 |
| | | | | | | | (in thousands) |
China Everbright Bank | | July 2021 | | December 2023 | | 3.00%~3.60% | | RMB150,000 | | | RMB150,000 | |
| | | | | | | | $ | 21,825 | | | $ | 21,825 | |
Bank of Communications | | August 2022 | | September 2023 | | 3.50%~3.60% | | RMB100,000 | | | RMB100,000 | |
| | | | | | | | $ | 14,550 | | | $ | 14,550 | |
Bank of China | | August 2022 | | August 2023 | | 3.15% | | RMB40,000 | | | RMB40,000 | |
| | | | | | | | $ | 5,820 | | | $ | 5,820 | |
China Merchants Bank | | October 2021 | | September 2023 | | 3.50% | | RMB100,000 | | | RMB100,000 | |
| | | | | | | | $ | 14,550 | | | $ | 14,550 | |
China Merchants Bank | | November 2020 | | Repayable by installments and the last installments repayable in November 2030 | | 3.95% | | RMB128,500 | | | RMB103,428 | |
| | | | | | | | $ | 18,697 | | | $ | 15,049 | |
Bank of China | | June 2021 | | Repayable by installments and the last installments repayable in June 2024 | | 2.60% | | RMB10,000 | | | RMB8,500 | |
| | | | | | | | $ | 1,455 | | | $ | 1,237 | |
Bank of China | | September, 2021 | | Repayable by installments and the last installments repayable in September 2024 | | 2.60% | | RMB35,000 | | | RMB29,750 | |
| | | | | | | | $ | 5,093 | | | $ | 4,328 | |
| | | | | | | | $ | 81,990 | | | $ | 77,359 | |
(1)Converted from RMB to dollars as of March 31, 2023. All of the amounts owing under the line of credit with Bank of Shanghai Pudong Branch are guaranteed by CleanChip Technologies LTD, a wholly-owned subsidiary of ACM Shanghai. The loan from China Merchants Bank is secured by a pledge of the property of ACM Lingang and guaranteed by ACM Shanghai, as described above under “—Contractual Obligations.”
Effect of exchange rate changes on cash, cash equivalents and restricted cash. The effect of exchange rate cash, and cash equivalents was ($4.8 million) during the first three months of 2023. The impact of fluctuations of the RMB to U.S. dollar
currency exchange rate on a significant balance of these items held in RMB-denominated accounts (Note 2) contributed to the change.
Contractual Obligations
Grant Contract for State-owned Construction Land Use Right in Shanghai City
In 2020 ACM Shanghai, through its wholly-owned subsidiary ACM Lingang, entered into a Grant Contract for State-owned Construction Land Use Right in Shanghai City (Category of R&D Headquarters and Industrial Projects), or the Grant Agreement, with the China (Shanghai) Pilot Free Trade Zone Lin-gang Special Area Administration, or the Grantor. ACM Lingang obtained rights to use approximately 43,000 square meters (10.6 acres) of land in the Lingang Heavy Equipment Industrial Zone of Lin-gang Special Area of China (Shanghai) Pilot Free Trade Zone, or the Land Use Right, for a period of fifty years, commencing on the date of delivery of the land in July 2020, which we refer to as the Delivery Date.
In exchange for its land use rights, ACM Lingang paid aggregate grant fees of RMB 61.7 million ($9.5 million), or the Grant Fees, and a performance deposit of RMB 12.3 million ($1.9 million), which is equal to 20% of the aggregate grant fees, to secure its achievement of the following performance milestones:
•the start of construction within 6 months after the Delivery Date (60% of the performance deposit), or Construction Start Milestone;
•the completion of construction within 30 months after the Delivery Date (20% of the performance deposit), or Construction Completion Milestone; and
•the start of production within 42 months after the Delivery Date (20% of the performance deposit), or Production Start Milestone.
Upon satisfaction of a milestone, the portion of the performance deposit attributable to that milestone will be repayable to ACM Lingang within ten business days. If the achievement of any of the above milestones is delayed or abandoned, ACM Lingang may be subject to additional penalties and may lose its rights to both the use of the granted land and any partially completed facilities on that land.
The status of the performance milestones for the period ended March 31, 2023 is as follows:
•ACM Lingang achieved the Construction Start Milestone and 60% of the performance deposit was refunded to ACM Shanghai in 2020.
•The Construction Completion Milestone was originally required to be met prior to January 9, 2023. Due to COVID-19 related restrictions, ACM Lingang has experienced delays and did not meet the Construction Completion Milestone. In December 2022, the deadline to meet the Construction Completion Milestone was extended until July 9, 2023. Although the extended deadline has not been reached, ACM Lingang has experienced further delays and does not expect to meet the extended deadline. ACM Lingang plans to file another request for an extension in June 2023. We cannot guarantee the new extension will be granted or that ACM Lingang will meet any extended deadline or be refunded this 20% portion of the performance deposit.
Contractual penalties in the case of a delay of Construction Completion Milestone:
◦If ACM Lingang fails to complete the construction pursuant to the date agreed under the Grant Agreement or any extended completion date approved by the Grantor, ACM Lingang shall pay 50% of the deposit for timely completion of construction as liquidated damages;
◦If ACM Lingang delays the completion for more than six months beyond the date agreed under the Grant Agreement, or beyond any extended completion date approved by the Grantor, it shall pay the total deposit for timely completion of construction as liquidated damages.
◦If the delay is more than one year, the Grantor is entitled to terminate the Grant Agreement and take back the Land Use Right. In such case, the Grantor shall refund the Grant Fees for the remaining land use term after deducting the deposit agreed under the Grant Agreement and refund the deposit for timely commencement of production and relevant bank interests in full to ACM Lingang.
•The Production Start Milestone was originally required to be met prior to January 9, 2024. In December 2022, due to COVID-related delays, ACM filed a request for a six-month extension, which was granted, and thus the deadline for the Production Start Milestone was extended until July 9, 2024. Although the extended deadline has not been reached, ACM Lingang has experienced further delays and does not expect to meet the extended deadline. ACM Lingang plans to file another request for an extension in June 2023. We cannot guarantee the extension will be granted, or that ACM Lingang will meet any extended deadline or be refunded this 20% portion of the performance deposit.
Contractual penalties in the case of a delay of Production Start Milestone:
◦If ACM Lingang fails to commence production pursuant to the date agreed under the Grant Agreement or any extended commencement date approved by the Grantor, ACM Lingang shall pay the total deposit for timely commencement of production as liquidated damages;
◦If ACM Lingang fails to commence production pursuant to the extended commencement of production date, the Grantor is entitled to terminate the Grant Agreement and take back the Land Use Right. In such case, the Grantor shall refund the Grant Fees for the remaining land use term after deducting the deposit agreed under the Grant Agreement to ACM Lingang.
In addition to the milestones, covenants in the Grant Agreement require that, among other things, ACM Lingang will be required to pay liquidated damages in the event that:
(a)it does not make a total investment (including the costs of construction, fixtures, equipment and grant fees) of at least RMB 450.0 million ($63.4 million). ACM Lingang shall pay the liquidated damages equal to the same proportion of the Grant Fees as the proportion of the actual shortfall amount of investment in the total agreed investment amount or the investment intensity.
(b)within six years after the Delivery Date, or prior to July 9, 2026, it does not (i) generate a minimum specified amount of annual sales of products manufactured on the granted land or (ii) pay to the PRC at least RMB 157.6 million ($22.2 million) in annual total taxes (including value-added taxes, corporate income tax, personal income taxes, urban maintenance and construction taxes, education surcharges, stamp taxes, and vehicle and shipping taxes) as a result of operations in connection with the granted land.
If the total tax revenue of the project fails to reach but is no less than 80% of the standard agreed under the Grant Agreement, ACM Lingang shall pay 20% of the actual shortfall amount of the tax revenue as liquidated damages. If the total tax revenue of the project fails to reach 80% of the standard agreed under the Grant Agreement within 1 month after the agreed date of reaching target production, the Grantor is entitled to terminate this Contract, take back the Land Use Right, and shall refund the Grant Fees for the remaining Land Use Term to ACM Lingang.
If the Grant Agreement is terminated because of breach of any terms above, the Grantor shall take back the buildings, fixtures and auxiliary facilities on the land area and provide ACM Lingang with corresponding compensation according to the residual value of the buildings, fixtures and auxiliary facilities when they are taken back. The total cumulative investment of land, buildings and construction in progress related to ACM Lingang amounted to $95.4 million and $102.9 million at March 31, 2023 and December 31, 2022, respectively.
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” shipment 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” shipment of a “first tool” to a customer on an approval basis, for which we may recognize revenue in the future if contractual conditions are met, or if a purchase order is received.
● | We define “shipments” of tools to include (a) a “repeat” delivery to a customer of a type of tool that the customer has previously accepted, for which we recognize revenue upon delivery, and (b) a “first-time” delivery of a “first tool” to a customer on an approval basis, for which we may recognize revenue in the future if contractual conditions are met, or if a purchase order is received.•We define “adjusted EBITDA” as net income excluding interest expense (net), income tax benefit (expense), depreciation and amortization, unrealized (gain) loss on trading securities, and stock-based compensation. We define adjusted EBITDA to also exclude restructuring costs, although we have not incurred any such costs to date. •We define “free cash flow” as net cash provided by operating activities less purchases of property and equipment (net of proceeds from disposals). •We define “adjusted operating income (loss)” as our income (loss) from operations excluding stock-based compensation.
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● | 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.
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● | 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.
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● | We define “adjusted operating income (loss)” as our income (loss) from operations excluding stock-based compensation.
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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
We consider shipments a key operating metric as it reflects the total value of products delivered to customers and prospective customers by our productive assets.
Shipments consist of two components:
•a shipment to a customer of a type of tool that the customer has previously accepted, for which we recognize revenue when the tool is delivered; and
● | 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
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● | a shipment to a customer of a type of tool that the customer is receiving and evaluating for the first time, in each case a “first tool,” for which we may recognize revenue at a later date, subject to the customer’s acceptance of the tool upon the tool’s satisfaction of applicable contractual requirements or subject to the costumer’s subsequent discretionary commitment to purchase the tool.
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•a shipment to a customer of a type of tool that the customer is receiving and evaluating for the first time, in each case a “first tool,” for which we may recognize revenue at a later date, subject to the customer’s acceptance of the tool upon the tool’s satisfaction of applicable contractual requirements or subject to the costumer’s subsequent discretionary commitment to purchase the tool.
“First tool” shipments can be made to either an existing customer that has not previously accepted that specific type of tool in the past ─ for example, a delivery of a SAPS V tool to a customer that previously had received only SAPS II tools ─ or to a new customer that has never purchased any tool from us.
Shipments in the three months ended March 31, 20222023 totaled $67$89.2 million, as compared to $74$67.0 million for the same periods in 2022. Repeat tool shipments in the three months ended March 31, 2021.
2023 totaled $38.9 million, as compared to $30.2 million for the same periods in 2022. First tool shipments in the three months ended March 31,
2023 totaled $50.3 million, as compared to $36.8 million for the same periods in 2022.The dollar amount attributed to a “first tool” shipment is equal to the consideration we expect to receive if any and all contractual requirements are satisfied and the customer accepts the tool, or if the customer subsequently determines in its discretion to purchase the tool. There are a number of limitations related to the use of shipments in evaluating our business, including that customers have significant, or in some cases total, discretion in determining whether to accept or purchase our tools after evaluation and their decision not to accept or purchase delivered tools is likely to result in our inability to recognize revenue from the delivered tools. “First tool” shipments reflect the value of incremental new products under evaluation delivered to our customers or prospective customers for a given period and is used as an internal key metric to reflect future potential revenue opportunity. The cumulative cost of “first tool” shipments under evaluation at customers which have not been accepted by the customer is carried at cost and reflected in finished goods inventory (see Note 5 to the condensed consolidated financial statements included in this report). “First tool” shipments exclude deliveries to customers for which ACM does not have a basis to expect future revenue.
Adjusted EBITDA
There are a number of limitations related to the use of adjusted EBITDA rather than net income (loss), which is the nearest GAAP equivalent. Some of these limitations are:
•adjusted EBITDA excludes depreciation and amortization and, although these are non-cash expenses, the assets being depreciated or amortized may have to be replaced in the future;
● | 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;
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● | 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;
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● | 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;
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● | adjusted EBITDA does not reflect changes in, or cash requirements for, working capital needs;
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● | adjusted EBITDA does not reflect interest expense, or the requirements necessary to service interest or principal payments on debt;
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● | adjusted EBITDA does not reflect income tax expense (benefit) or the cash requirements to pay taxes;
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● | adjusted EBITDA does not reflect historical cash expenditures or future requirements for capital expenditures or contractual commitments;
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● | 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
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● | adjusted EBITDA includes expense reductions and non-operating other income attributable to PRC governmental grants, which may mask the effect of underlying developments in net income, including trends in current expenses and interest expense, and free cash flow includes the PRC governmental grants, the amount and timing of which can be difficult to predict and are outside our control.
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•we exclude stock-based compensation expense from adjusted EBITDA and adjusted operating income (loss), although (a) it has been, and will continue to be for the foreseeable future, a significant recurring expense for our business and an important part of our compensation strategy and (b) if we did not pay out a portion of our compensation in the form of stock-based compensation, the cash salary expense included in operating expenses would be higher, which would affect our cash position;
•the expenses and other items that we exclude in our calculation of adjusted EBITDA may differ from the expenses and other items, if any, that other companies may exclude from adjusted EBITDA when they report their operating results;
•adjusted EBITDA does not reflect changes in, or cash requirements for, working capital needs;
•adjusted EBITDA does not reflect interest expense, or the requirements necessary to service interest or principal payments on debt;
•adjusted EBITDA does not reflect income tax expense (benefit) or the cash requirements to pay taxes;
•adjusted EBITDA does not reflect historical cash expenditures or future requirements for capital expenditures or contractual commitments;
•although depreciation and amortization charges are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and adjusted EBITDA does not reflect any cash requirements for such replacements; and
•adjusted EBITDA includes expense reductions and non-operating other income attributable to PRC governmental grants, which may mask the effect of underlying developments in net income, including trends in current expenses and interest expense, and free cash flow includes the PRC governmental grants, the amount and timing of which can be difficult to predict and are outside our control.
The following table reconciles net income, the most directly comparable GAAP financial measure, to adjusted EBITDA:
| | Three Months Ended March 31, | |
| | 2022 | | | 2021 | |
| | (in thousands) | |
Adjusted EBITDA Data: | | | | | | |
Net Income (loss) | | $ | (7,443 | ) | | $ | 5,822 | |
Interest expense (income), net | | | (1,544 | ) | | | 140 | |
Income tax benefit | | | (4,011 | ) | | | (2,770 | ) |
Depreciation and amortization | | | 1,213 | | | | 546 | |
Stock based compensation | | | 1,374 | | | | 1,210 | |
Unrealized loss on trading securities | | | 3,858 | | | | 1,047 | |
Adjusted EBITDA | | $ | (6,553 | ) | | $ | 5,995 | |
32
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, |
| 2023 | | 2022 | | % Change 2023 v 2022 | | Absolute Change 2023 v 2022 |
| (in thousands) | | | | |
Adjusted EBITDA Data: | | | | | | | |
Net income (loss) | $ | 8,963 | | | $ | (7,443) | | | (220.4 | %) | | $ | 16,406 | |
Interest (income), net | (1,090) | | | (1,544) | | | -29.4 | % | | 454 | |
Income tax expense (benefit) | 2,879 | | | (4,011) | | | -171.8 | % | | 6,890 | |
Depreciation and amortization | 1,714 | | | 1,213 | | | 41.3 | % | | 501 | |
Bad debt expense | 298 | | | — | | | 100.0 | % | | 298 | |
Stock based compensation | 2,068 | | | 1,374 | | | 50.5 | % | | 694 | |
Unrealized loss on trading securities | 654 | | | 3,858 | | | -83.0 | % | | (3,204) | |
Adjusted EBITDA | $ | 15,486 | | | $ | (6,553) | | | (336.3 | %) | | $ | 22,039 | |
The $12.5$22.0 million decreaseincrease in adjusted EBITDA for the three-monthsthree months ended March 31, 20222023 as compared to the same period in 20212022 reflected a $13.3$6.9 million decreaseimpact from a change in income tax benefit (expense), a $16.4 million increase in net income, and an $1.7a $0.5 million decrease in interest income, net, a $0.7 million increase in stock based compensation, and a $0.5 million increase in depreciation and amortization, $0.2 million increase in bad debt expense, net, partly offset by a $2.8$3.2 million increasedecrease in unrealized loss on trading securities, an $1.2 million increase in income tax benefit, and a $0.7 million increase in depreciation and amortization.securities.
We do not exclude from adjusted EBITDA expense reductions and non-operating other income attributable to PRC governmental grants because we consider and incorporate the expected amounts and timing of those grants in incurring expenses and capital expenditures. If we did not receive the grants, our cash expenses therefore would be lower, and our
cash position would not be affected, to the extent we have accurately anticipated the amounts of the grants. For additional information regarding our PRC grants, please see “—Key Components of Results of Operations—“—PRC Government Research and Development Funding.”
Free Cash Flow
The following table reconciles net cash provided by (used in) operating activities, the most directly comparable GAAP financial measure, to free cash flow:
| | Three Months Ended March 31, | |
| | 2022 | | | 2021 | |
| | (in thousands) | |
Free Cash Flow Data: | | | | | | |
Net cash used in (provided by) in operating activities | | $ | (27,729 | ) | | $ | 10,742 | |
Purchase property and equipment | | | (3,176 | ) | | | (1,466 | ) |
Purchase of intangible assets | | | (408 | ) | | | (112 | ) |
Free cash flow | | $ | (31,313 | ) | | $ | 9,164 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, |
| 2023 | | 2022 | | % Change 2023 v 2022 | | Absolute Change 2023 v 2022 |
| (in thousands) | | | | |
Free Cash Flow Data: | | | | | | | |
Net cash used in operating activities | $ | (30,494) | | | $ | (27,729) | | | 10.0 | % | | $ | (2,765) | |
Purchase of property and equipment | (14,895) | | | (3,176) | | | 369.0 | % | | (11,719) | |
Purchase of trading securities | (728) | | | — | | | 100.0 | % | | (728) | |
Free cash flow | $ | (46,117) | | | $ | (30,905) | | | 49.2 | % | | $ | (15,212) | |
The $40.5$15.2 million decrease in free cash flow for the three-monthsthree months ended March 31, 20222023 as compared to the same period in 20212022 reflected the factors driving net cash provided byused in operating activities, including increases in advances from customers, accounts payable, other payables and accrued expenses and net income, partly offset by increases in inventory, accounts receivables, and other liabilities. These were partly offset by an increase of purchases of property and equipment and intangible assets.assets and trading securities. Consistent with our methodology for calculating adjusted EBITDA, we do not adjust free cash flow for the effects of PRC government subsidies, because we take those subsidies into account in incurring expenses and capital expenditures. We do not adjust free cash flow for the effects of time-deposits, which for our internal purposes are considered as largely similar to cash.
Adjusted Operating Income
Adjusted operating income excludes stock-based compensation from income from operations. Although stock-based compensation is an important aspect of the compensation of our employees and executives, determining the fair value of certain of the stock-based instruments we utilize involves a high degree of judgment and estimation and the expense recorded may bear little resemblance to the actual value realized upon the vesting or future exercise of the related stock-based awards. Furthermore, unlike cash compensation, the value of stock options, which is an element of our ongoing stock-based compensation expense, is determined using a complex formula that incorporates factors, such as market volatility, that are beyond our control. Management believes it is useful to exclude stock-based compensation in order to better understand the long-term performance of our core business and to facilitate comparison of our results to those of peer companies. The use of non-GAAP financial measures excluding stock-based compensation has limitations, however. If we did not pay out a portion of our compensation in the form of stock-based compensation, the cash salary expense included in
operating expenses would be higher and our cash holdings would be less. The following tables reflect the exclusion of stock-based compensation, or SBC, from line items comprising income from operations:
` | | Three Months Ended March 31, | |
| | 2022 | | | 2021 | |
| | Actual (GAAP) | | | SBC | | | Adjusted (Non-GAAP) | | | Actual (GAAP) | | | SBC | | | Adjusted (Non-GAAP) | |
| | (in thousands) | |
Revenue | | $ | 42,186 | | | $ | - | | | $ | 42,186 | | | $ | 43,732 | | | $ | - | | | $ | 43,732 | |
Cost of revenue | | | (22,500 | ) | | | (113 | ) | | | (22,387 | ) | | | (25,687 | ) | | | (71 | ) | | | (25,616 | ) |
Gross profit | | | 19,686 | | | | (113 | ) | | | 19,799 | | | | 18,045 | | | | (71 | ) | | | 18,116 | |
Operating expenses: | | | | | | | | | | | | | | | | | | | | | | | | |
Sales and marketing | | | (6,697 | ) | | | (354 | ) | | | (6,343 | ) | | | (5,308 | ) | | | (505 | ) | | | (4,803 | ) |
Research and development | | | (17,346 | ) | | | (411 | ) | | | (16,935 | ) | | | (5,504 | ) | | | (229 | ) | | | (5,275 | ) |
General and administrative | | | (4,949 | ) | | | (496 | ) | | | (4,453 | ) | | | (3,783 | ) | | | (405 | ) | | | (3,378 | ) |
Income (loss) from operations | | | (9,306 | ) | | | (1,374 | ) | | | (7,932 | ) | | | 3,450 | | | | (1,210 | ) | | | 4,660 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, |
| 2023 | | 2022 |
| Actual (GAAP) | | SBC | | Adjusted (Non- GAAP) | | Actual (GAAP) | | SBC | | Adjusted (Non-GAAP) |
| (in thousands) |
Revenue | $ | 74,256 | | | $ | - | | | $ | 74,256 | | | $ | 42,186 | | | $ | - | | | $ | 42,186 | |
Cost of revenue | (34,270) | | | (125) | | | (34,145) | | | (22,500) | | | (113) | | | (22,387) | |
Gross profit | 39,986 | | | (125) | | | 40,111 | | | 19,686 | | | (113) | | | 19,799 | |
Operating expenses: | | | | | | | | | | | |
Sales and marketing | (9,337) | | | (431) | | | (8,906) | | | (6,697) | | | (354) | | | (6,343) | |
Research and development | (14,029) | | | (701) | | | (13,328) | | | (17,346) | | | (411) | | | (16,935) | |
General and administrative | (7,758) | | | (811) | | | (6,947) | | | (4,949) | | | (496) | | | (4,453) | |
Income (loss) from operations | $ | 8,862 | | | $ | (2,068) | | | $ | 10,930 | | | $ | (9,306) | | | $ | (1,374) | | | $ | (7,932) | |
Adjusted operating income for the three months ended on March 31, 2022 decreased2023 increased by $12.6$18.9 million, as compared with the same period in 2021,2022, due to a $12.7$18.2 million decreaseincrease in income (loss) from operations and a $0.1$0.7 million increase in stock-based compensation expense.
Critical Accounting Policies and Estimates
There were no significant changes in our critical accounting policies or significant judgments or estimates during the three months ended March 31, 2022 to augment the critical accounting estimates disclosed under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report, other than those described in the notes to the condensed consolidated financial statements included in this report. For information regarding the impact of recently adopted accounting standards, refer to note 2 to the condensed consolidated financial statements included in this report.
Recent Accounting Pronouncements
A discussion of recent accounting pronouncements is included in our Annual Report and is updated in note 2 to the condensed consolidated financial statements included in this report.
Results of Operations
The following table sets forth our results of operations for the periods presented, as percentages of revenue.
| | Three Months Ended March 31, | |
| | 2022 | | | 2021 | |
Revenue | | | 100.0 | % | | | 100.0 | % |
Cost of revenue | | | 53.3 | | | | 58.7 | |
Gross margin | | | 46.7 | | | | 41.3 | |
Operating expenses: | | | | | | | | |
Sales and marketing | | | 15.9 | | | | 12.1 | |
Research and development | | | 41.1 | | | | 12.6 | |
General and administrative | | | 11.7 | | | | 8.7 | |
Total operating expenses, net | | | 68.7 | | | | 33.4 | |
Income (loss) from operations | | | (22.1 | ) | | | 7.9 | |
Interest income (expense), net | | | 3.7 | | | | (0.3 | ) |
Unrealized loss on trading securities | | | (9.1 | ) | | | (2.4 | ) |
Other income (expense), net | | | 0.6 | | | | 1.1 | |
Equity income (loss) in net income (loss) of affiliates | | | (0.2 | ) | | | 0.7 | |
Income (loss) before income taxes | | | (27.1 | ) | | | 7.0 | |
Income tax benefit | | | 9.5 | | | | 6.3 | |
Net income (loss) | | | (17.6 | ) | | | 13.3 | |
Less: Net income (loss) attributable to non-controlling interests | | | (3.9 | ) | | | 0.8 | |
Net income (loss) attributable to ACM Research, Inc. | | | (13.7 | %) | | | 12.5 | % |
Comparison of Three Months Ended March 31, 2022 and 2021
Revenue
| | Three Months Ended March 31, | | | | |
| | 2022 | | | 2021 | | | % Change 2022 v 2021 | |
| | (in thousands) | | | | |
Revenue | | $ | 42,186 | | | $ | 43,732 | | | | -3.5 | % |
| | | | | | | | | | | | |
Single wafer cleaning, Tahoe and semi-critical cleaning equipment | | $ | 26,033 | | | $ | 32,413 | | | | -19.7 | % |
ECP (front-end and packaging), furnace and other technologies | | | 12,248 | | | | 5,550 | | | | 120.7 | % |
Advanced packaging (excluding ECP), services & spares | | | 3,905 | | | | 5,769 | | | | -32.3 | % |
Total Revenue By Product Category | | $ | 42,186 | | | $ | 43,732 | | | | -3.5 | % |
| | | | | | | | | | | | |
Wet cleaning and other front-end processing tools | | $ | 31,702 | | | $ | 31,900 | | | | -0.6 | % |
Advanced packaging, other processing tools, services and spares | | | 10,484 | | | | 11,832 | | | | -11.4 | % |
Total Revenue Front-end and Back-End | | $ | 42,186 | | | $ | 43,732 | | | | -3.5 | % |
Revenue decreased by $1.5 million in the three months ended March 31, 2022 as compared to the same period in 2021. The decrease was due to a $0.2 million decrease in revenue from advanced packaging and other back-end processing tools, services and spares, and a $1.3 million decrease in revenue from wet cleaning and other front-end processing tools.
Cost of Revenue and Gross Margin
| | Three Months Ended March 31, | | | | |
| | 2022 | | | 2021 | | | % Change 2022 v 2021 | |
| | (in thousands) | | | | |
Cost of revenue | | $ | 22,500 | | | $ | 25,687 | | | | -12.4 | % |
Gross profit | | | 19,686 | | | | 18,045 | | | | 9.1 | % |
Gross margin | | | 46.7 | % | | | 41.3 | % | | 540 bps | |
Cost of revenue decreased $3.2 million and gross profit increased $1.6 million in the three months ended March 31, 2022 as compared to the corresponding period in 2021 due to the decreased sales volume, more than offset by a 540 basis point increase in gross margin, that reflected differences in product mix.
Gross margin may vary from period to period, primarily related to the level of utilization and the timing and mix of purchase orders. We expect gross margin to be between 40.0% and 45.0% for the foreseeable future, with direct manufacturing costs approximating 50.0% to 55.0% of revenue and overhead costs totaling 5.0% of revenue.
Operating Expenses
| | Three Months Ended March 31, | | | | |
| | 2022 | | | 2021 | | | % Change 2022 v 2021 | |
| | (in thousands) | | | | |
Sales and marketing expense | | $ | 6,697 | | | $ | 5,308 | | | | 26.2 | % |
Research and development expense | | | 17,346 | | | | 5,504 | | | | 215.2 | % |
General and administrative expense | | | 4,949 | | | | 3,783 | | | | 30.8 | % |
Total operating expenses | | $ | 28,992 | | | $ | 14,595 | | | | 98.6 | % |
Sales and marketing expense increased by $1.4 million in the three months ended March 31, 2022 as compared to the corresponding period in 2021. The increase was due the addition of resources to our global sales and services teams to further scale our business in mainland China and other regions to support our longer term growth targets.
Sales and marketing expense consists primarily of:
compensation of personnel associated with pre- and after-sale services and support and other sales and marketing activities, including stock-based compensation;
sales commissions paid to independent sales representatives;
fees paid to sales consultants;
cost of trade shows;
travel and entertainment; and
allocated overhead for rent and utilities.
Research and development expense increased by $11.8 million in the three months ended March 31, 2022 as compared to the corresponding period in 2021, principally as a result of increases in new product development, testing fees and personnel costs related to the introduction of product line extensions and new product categories and the cost of tools built for product development purposes.
Research and development expense represented 41.1% and 12.6% of our revenue in the three months ended March 31, 2022 and 2021, respectively. Without reduction by grant amounts received from PRC governmental authorities (see “—Government Research and Development Funding”), gross research and development expense totaled $17.4 million, or 41.4% of total revenue, in the three months ended March 31, 2022 and $7.4 million, or 17.1% of revenue, in the corresponding period in 2021. Research and development expense relates to the development of new products and processes and encompasses our research, development and customer support activities. Research and development expense consists primarily of:
compensation of personnel associated with our research and development activities, including stock based compensation;
costs of components and other research and development supplies;
costs of tools built for product development purposes;
travel expense associated with customer support;
amortization of costs of software used for research and development purposes; and
allocated overhead for rent and utilities.
General and administrative expense increased $1.2 million in the three months ended March 31, 2022 as compared to the corresponding period in 2021. General and administrative expense consists primarily of:
compensation of executive, accounting and finance, human resources, information technology, and other administrative personnel, including stock-based compensation;
professional fees, including accounting and corporate legal and defense fees;
other corporate expenses including insurance; and
allocated overhead for rent and utilities.
We expect that, for the foreseeable future, general and administrative expenses will increase in dollars, as we incur additional costs associated with growing our business and operating public companies in the United States and the PRC.
Unrealized loss from trading securities
| | Three Months Ended March 31, | | | | |
| | 2022 | | | 2021 | | | % Change 2022 v 2021 | |
| | (in thousands) | | | | |
Unrealized loss on trading securities | | $ | (3,858 | ) | | $ | (1,047 | ) | | | 268.5 | % |
We recorded an unrealized loss of $3.9 million for the three months ended March 31, 2022, as compared to an unrealized loss of $1.0 million for the same period in 2021, based on a change in market value of ACM Shanghai’s indirect investment in SMIC shares on the STAR Market as is described in note 15 to the condensed consolidated financial statements included in this report.
Other Income and Expenses
| | Three Months Ended March 31, | | | | |
| | 2022 | | | 2021 | | | % Change 2022 v 2021 | |
| | (in thousands) | | | | |
Interest Income | | $ | 1,805 | | | $ | 49 | | | | 3583.7 | % |
Interest Expense | | | (261 | ) | | | (189 | ) | | | 38.1 | % |
Interest Income (expense), net | | $ | 1,544 | | | $ | (140 | ) | | | -1202.9 | % |
| | | | | | | | | | | | |
Other income (expense), net | | $ | 237 | | | $ | 469 | | | | -49.5 | % |
Interest income consists of interest earned on our cash and equivalents and restricted cash accounts, offset by interest expense incurred from outstanding short-term borrowings. We realized $1.5 million of interest income (expense), net in the three months ended March 31, 2022 as compared to ($140,000) of interest income (expense), net in the corresponding period in 2021. This was a result of a higher balance of cash and equivalents and higher interest rates on these balances, and a lower combined balance of short-term and long-term bank loans.
Other income, net primarily reflects (a) gains or losses recognized from the impact of exchange rates on our foreign currency-denominated working-capital transactions and (b) depreciation of assets acquired with government subsidies, as described under “—Government Research and Development Funding” above. Other income (expense), declined by $232,000 in the three months ended March 31, 2022 as compared to Other income (expense) in the corresponding period in 2021, due primarily to a realized loss of $22,000 resulting from changes in the RMB-to-U.S. dollar exchange rate, compared to a realized gain of $411,000 in the prior year period, offset by other items.
Income Tax Benefit (Expense)
The following presents components of income tax benefit (expense) for the indicated periods:
| | Three Months Ended March 31, | |
| | 2022 | | | 2021 | |
| | | | | | |
Total income tax benefit | | $ | 4,011 | | | $ | 2,770 | |
We recognized a tax benefit of $4.0 million for the three months ended March 31, 2022 as compared to a tax benefit of $2.8 million for prior year period. The benefit in 2022 primarily resulted from the tax effect of the operating loss generated. The increase in our effective income tax rate for the three months ended March 31, 2022 compared to the same period of the prior year was primarily due to a new requirement to capitalize and amortize previously deductible research and experimental expenses resulting from a change in Section 174 made by the Tax Cuts and Jobs Act of 2017 (the “TCJA”) which became effective on January 1, 2022, and a decrease in discrete tax benefits associated with stock-based compensation deductions. Under the TCJA, the Company is required to capitalize, and subsequently amortize R&D expenses over fifteen years for research activities conducted outside of the U.S. The capitalization of overseas R&D expenses resulted in a significant increase in the Company’s global intangible low-taxed income inclusion. Congress is considering legislation, but legislation has not passed, that would defer the capitalization requirement to later years.
Our effective tax rate differs from statutory rates of 21% for U.S. federal income tax purposes and 12.5% to 25% for Chinese income tax purposes due to the treatment of stock-based compensation including the impact from stock option exercises and non-US research expenses. Our two PRC subsidiaries, ACM Shanghai and ACM Research (Wuxi), Inc., are liable for PRC corporate income taxes at the rates of 12.5% and 25%, respectively. Pursuant to the Corporate Income Tax Law of the PRC, our PRC subsidiaries generally would be liable for PRC corporate income taxes as a rate of 25%. According to Guoshuihan 2009 No. 203, an entity certified as an “advanced and new technology enterprise” is entitled to a preferential income tax rate of 12.5%. ACM Shanghai was certified as an “advanced and new technology enterprise” in 2012 and again in 2016 and 2018, with an effective period of three years.
We file income tax returns in the United States and state and foreign jurisdictions. Those federal, state and foreign income tax returns are under the statute of limitations subject to tax examinations for 1999 through 2021. To the extent we have tax attribute carryforwards, the tax years in which the attribute was generated may still be adjusted upon examination by the Internal Revenue Service or state or foreign tax authorities to the extent utilized in a future period.
Net Income Attributable to Non-Controlling Interests
| | Three Months Ended March 31, | | | | |
| | 2022 | | | 2021 | | | % Change 2022 v 2021 | |
| | (in thousands) | | | | |
Net income (loss) attributable to non-controlling interests and redeemable non-controlling interests | | $ | (1,657 | ) | | $ | 352 | | | | -570.7 | % |
In 2019 ACM Shanghai sold a total number of shares representing 8.3% of its outstanding ACM Shanghai shares, after which ACM Research held the remaining 91.7% of ACM Shanghai’s outstanding shares. In 2021 ACM Shanghai sold a total number shares representing an additional 10% of its outstanding ACM Shanghai shares in its STAR IPO, after which ACM Research held the remaining 82.5% of ACM Shanghai’s outstanding shares. As a result, we reflect, the portion of our net income allocable to the minority holders of ACM Shanghai shares as net income attributable to non-controlling interests.
In the three months ended March 31, 2022, this amount totaled ($1.7 million) as compared to $352,000 in the corresponding period in 2021.
Liquidity and Capital Resources
During the first three months of 2022, we funded our technology development and operations principally through our beginning cash balance and short-term borrowings by ACM Shanghai from local financial institutions.
We believe our existing cash and cash equivalents, including proceeds from the STAR IPO, our cash flow from operating activities, and short-term bank borrowings by ACM Shanghai will be sufficient to meet our anticipated cash needs for at least the next twelve months. We do not expect that our anticipated cash needs for the next twelve months will require our receipt of any PRC government subsidies. Our future working capital needs will depend on many factors, including the rate of our business and revenue growth, the payment schedules of our customers, and the timing of investment in our research and development as well as sales and marketing. To the extent our cash and cash equivalents, cash flow from operating activities and short-term bank borrowings are insufficient to fund our future activities in accordance with our strategic plan, we may determine to raise additional funds through public or private debt or equity financings or additional bank credit arrangements. We also may need to raise additional funds in the event we determine in the future to effect one or more acquisitions of businesses, technologies and products. If additional funding is necessary or desirable, we may not be able to obtain bank credit arrangements or to affect an equity or debt financing on terms acceptable to us or at all.
In 2020 ACM Shanghai, through its wholly owned subsidiary Shengwei Research (Shanghai), Inc., entered into a Grant Contract for State-owned Construction Land Use Right in Shanghai City (Category of R&D Headquarters and Industrial Projects), or the Grant Agreement, with the China (Shanghai) Pilot Free Trade Zone Lin-gang Special Area Administration. Shengwei Research (Shanghai), Inc. obtained rights to use approximately 43,000 square meters (10.6 acres) of land in the Lingang Heavy Equipment Industrial Zone of Lin-gang Special Area of China (Shanghai) Pilot Free Trade Zone for a period of fifty years, commencing on the date of delivery of the land in July 2020, which we refer to as the Delivery Date.
In exchange for its land use rights, Shengwei Research (Shanghai), Inc. paid aggregate grant fees of RMB 61.7 million ($9.5 million), and a performance deposit of RMB 12.3 million ($1.9 million), which is equal to 20% of the aggregate grant fees, to secure its achievement of the following performance milestones:
the start of construction within 6 months after the Delivery Date (60% of the performance deposit);
the completion of construction within 30 months after the Delivery Date (20% of the performance deposit); and
the start of production within 42 months after the Delivery Date (20% of the performance deposit).
Upon satisfaction of a milestone, the portion of the performance deposit attributable to that milestone will be repayable to Shengwei Research (Shanghai), Inc. within ten business days. If the achievement of any of the above milestones is delayed or abandoned, Shengwei Research (Shanghai), Inc. may be subject to additional penalties and may lose its rights to both the use of the granted land and any partially completed facilities on that land.
Covenants in the Grant Agreement require that, among other things, Shengwei Research (Shanghai), Inc. will be required to pay liquidated damages in the event that (a) it does not make a total investment (including the costs of construction, fixtures, equipment and grant fees) of at least RMB 450.0 million ($63.4 million) or (b) within six years after the Delivery Date, we do not (i) generate a minimum specified amount of annual sales of products manufactured on the granted land or (ii) pay to the PRC at least RMB 157.6 million ($22.2 million) in annual total taxes (including value-added taxes, corporate income tax, personal income taxes, urban maintenance and construction taxes, education surcharges, stamp taxes, and vehicle and shipping taxes) as a result of operations in connection with the granted land.
Sources of Funds
Equity and Equity-related Securities. During the three months ended March 31, 2022, we received proceeds of $0.7 million from sales of Class A common stock pursuant to option exercises.
Short-Term and Long-Term Loan Facilities. We have short-term and long-term borrowings with five banks, as follows:
Lender | | Agreement Date | | Maturity Date | | Annual Interest Rate | | | Maximum Borrowing Amount(1) | | | Amount Outstanding at March 31, 2022 | |
| | | | | | | | | (in thousands) | |
Bank of Shanghai Pudong Branch | | June 2021 | | June 2022 | | | 2.70 | % | | RMB100,000 | | | RMB29,313 | |
| | | | | | | | | | $ | 15,750 | | | $ | 4,617 | |
China Everbright Bank | | July 2021 | | October 2022 | | | 1.95 | % | | RMB150,000 | | | RMB21,637 | |
| | | | | | | | | | $ | 23,625 | | | $ | 3,408 | |
Bank of Communications | | October 2021 | | October 2022 | | | 3.85 | % | | RMB60,000 | | | RMB10,000 | |
| | | | | | | | | | $ | 9,450 | | | $ | 1,575 | |
China Merchants Bank | | November 2020 | | Repayable by installments and the last installments repayble in November 2030 | | | 4.65 | % | | RMB128,500 | | | RMB114,611 | |
| | | | | | | | | | $ | 20,239 | | | $ | 18,051 | |
Bank of China | | June 2021 | | Repayable by installments and the last installments repayble in June 2024 | | | 2.60 | % | | RMB10,000 | | | RMB9,500 | |
| | | | | | | | | | $ | 1,575 | | | $ | 1,497 | |
Bank of China | | September, 2021 | | Repayable by installments and the last installments repayble in September 2021 | | | 2.60 | % | | RMB35,000 | | | RMB33,250 | |
| | | | | | | | | | $ | 5,512 | | | $ | 5,237 | |
| | | | | | | | | | $ | 76,151 | | | $ | 34,385 | |
(1) | Converted from RMB to dollars as of March 31, 2022. All of the amounts owing under the line of credit with Bank of Shanghai Pudong Branch are guaranteed CleanChip Technologies LTD, a wholly owned subsidiary of ACM Shanghai. The loan from China Merchant’s bank is pledged by the property of Shengwei and guaranteed by ACM Shanghai.
|
Government Research and Development Grants. As described under “—Key Components of Results of Operations—PRC Government Research and Development Funding,” ACM Shanghai has received research and development grants from local and central PRC governmental authorities. ACM Shanghai received no cash payments related to such grants in the first three months of 2022, as compared to cash receipts of $0.6 million in the same period of 2021. Not all grant amounts are received in the year in which a grant is awarded. Because of the nature and terms of the grants, the amounts and timing of payments under the grants are difficult to predict and vary from period to period. In addition, we expect to apply for additional grants when available in the future, but the grant application process can extend for a significant period of time and we cannot predict whether, or when, we will determine to apply for any such grants.
Working Capital. The following table sets forth selected working capital information:
| | March 31, 2022 | |
| | (in thousands) | |
Cash and cash equivalents | | $ | 380,311 | |
Accounts receivable, less allowance for doubtful amounts | | | 106,351 | |
Inventory | | | 271,538 | |
Working capital | | $ | 758,200 | |
Our cash and cash equivalents at March 31, 2022 were unrestricted and held for working capital purposes. ACM Shanghai, our only direct PRC subsidiary, is, however, subject to PRC restrictions on distributions to equity holders. We currently intend for ACM Shanghai to retain all available funds any future earnings for use in the operation of its business and do not anticipate its paying any cash dividends. We have not entered into, and do not expect to enter into, investments for trading or speculative purposes. Our accounts receivable balance fluctuates from period to period, which affects our cash flow from operating activities. Fluctuations vary depending on cash collections, client mix, and the timing of shipment and acceptance of our tools.
We have never declared or paid cash dividends on our capital stock. We intend to retain all available funds and any future earnings to support the operation of and to finance the growth and development of our business and do not anticipate paying any cash dividends in the foreseeable future.
Uses of Funds
Cash Flow from Operating Activities. Our operations used cash flow of $27.7 million in the first three months of 2022. Our cash flow from operating activities is influenced by (a) the level of net income, (b) the amount of cash we invest in personnel and technology development to support anticipated future growth in our business, (c) increases in the number of customers using our products, and (d) the amount and timing of payments by customers.
Capital Expenditures. We incurred $3.6 million in capital expenditures during the three months ended March 31, 2022, versus $1.6 million capital expenditures in the same period of 2021. Capital expenditures in the three months ended March 31, 2021 were incurred principally for the addition of production capacity and general maintenance and improvements to our global facilities.
Item 3. | Item 3. Quantitative and Qualitative Disclosures About Market Risks |
Our market risks and the ways we manage them are summarized in the section captioned “Part II, Item 7A. Quantitative and Qualitative Disclosures About Market Risk” in our Annual Report .Report. There have been no material changes in the first three months of 20222023 to our market risks or to our management of such risks.
Item 4. | Item 4. Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our company’s disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934, or the Exchange Act, as of March 31, 2022.2023. The evaluation included certain internal control areas in which we have made and are continuing to make changes to improve and enhance controls. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints, and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs. The effectiveness of the disclosure controls and procedures is also necessarily limited by the staff and other resources available to management and the geographic diversity of our company’s operations. As a result of the COVID-19 pandemic, beginning in 20202021, 2022 and 2023, we have faced additional challenges in operating and monitoring our disclosure controls and procedures as a result of employees working remotely and management travel being limited. In addition, we face potential heightened cybersecurity risks as our level of dependence on our IT networks and related systems increases, stemming from employees working remotely, and the number of malware campaigns and phishing attacks preying on the uncertainties surrounding the COVID‑19 pandemic increases.
Based on that evaluation, and as a result of the material weaknesses in internal control over financial reporting described in our Annual Report, our Chief Executive Officer and Chief Financial Officer concluded that, as of March 31, 2022,2023, our company’s disclosure controls and procedures were not effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms, and that such
information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Notwithstanding the material weaknesses in internal control over financial reporting described in our Annual Report, our management, including our Chief Executive Officer and Chief Financial Officer, believes that our consolidated financial statements included in this report present fairly, in all material respects, our financial position, results of operations and cash flows as of and for the periods presented, in conformity with GAAP.
Material Weaknesses in Internal Control Over Financial Reporting
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.
As disclosed in our Annual Report, management identified the following material weaknesses during its assessment of internal controls over financial reporting as of December 31, 2022, and is in the process of remediating them as of March 31, 2023:
•Management did not design and maintain effective risk assessment procedures, and monitoring activities. These deficiencies were attributed to insufficient identification and assessment of risks impacting the design, implementation, and operating effectiveness of internal control over financial reporting, and insufficient evaluation and determination as to whether components of internal control were present and functioning.
•Management did not design and maintain effective information technology controls related to (a) user access controls to ensure appropriate segregation of duties and adequately restrict user and privileged access to financial applications, programs, and data to appropriate personnel, (b) computer operations controls to ensure that critical information is monitored, and data backups are authorized and monitored, (c) appropriate controls to evaluate automated controls, and (d) appropriate controls to validate the completeness and accuracy of key reports used within controls across substantially all financial statement areas.
Although these material weaknesses did not result in any material misstatement of our consolidated financial statements, there is a reasonable possibility that a material misstatement of our consolidated financial statements will not be prevented or detected on a timely basis. Accordingly, management has concluded that these control deficiencies constitute material weaknesses.
Remediation Efforts
We have begun the process of, and are focused on, designing and implementing effective internal control measures to improve our internal control over financial reporting and remediate the material weaknesses. Our internal control remediation efforts include the following:
•Continue engagement with an outside firm to assist management with (i) designing and maintaining effective risk assessment procedures and monitoring activities, (ii) reviewing our current processes, procedures, and systems and assessing the design of controls to identify opportunities to enhance the design of controls that would address relevant risks identified by management to assure the operating effectiveness of internal control over financial reporting, and (iii) enhancing and implementing protocols to retain sufficient documentary evidence of operating effectiveness of such controls.
•Continue to recruit qualified individuals for key positions within our accounting and other support functions that will further enhance internal control capabilities, allow for appropriate segregation of duties, and provide appropriate oversight and reviews.
•Complete the implementation of our new enterprise reporting software and other system integrations and establish effective general controls over these systems to ensure that our automated process level controls and information produced and maintained in our IT systems is relevant and reliable.
•Restrict and monitor user access controls to ensure appropriate segregation of duties and adequately restrict user and privileged access of applications, programs, and data to appropriate personnel, implement computer operations controls to ensure that critical information is monitored, and data backups are authorized and monitored, establish appropriate controls
to evaluate automated controls, and design and monitor appropriate controls to validate the completeness and accuracy of key reports used within controls across substantially all financial statement areas.
We are committed to ensuring that our internal controls over financial reporting are designed and operating effectively. Management believes the planned remediation will improve the effectiveness of our internal control over financial reporting. While these planned actions are subject to ongoing management evaluation and will require validation and testing of the design and operating effectiveness of internal controls over a sustained period of financial reporting cycles, we are committed to the continuous improvement of our internal control over financial reporting and will continue to diligently review our internal control over financial reporting.
Changes in Internal Control over Financial Reporting and Remediation Efforts
There were no changes in our internal control over financial reporting during the three months ended March 31, 20222023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. We will continue to review and document our disclosure controls and procedures, including our internal control over financial reporting and may from time to time make changes to enhance their effectiveness and ensure that our systems evolve with our business.
PART II. OTHER INFORMATION
Item 1. | Item 1. Legal Proceedings |
From time to time, we may become involved in other legal proceedings or may be subject to claims arising in the ordinary course of our business. Although the results of these proceedings and claims cannot be predicted with certainty, we currently believe that the final outcome of these ordinary course matters will not have a material adverse effect on our business, operating results, financial condition or cash flows. Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.
Item 1A. | Item 1A. Risk Factors |
Except as set forth below, there were no material changes to the risk factors discussed in Item 1A,1A. “Risk Factors” of Part I in our Annual Report. In addition to the other information set forth in this report, you should carefully consider those risk factors, which could materially affect our business, financial condition and future operating results. Those risk factors are not the only risks facing our company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may have a material adverse effect on our business, financial condition and operating results.
Substantially allRegulatory Risks
Our ability to sell our tools to customers in the PRC has been impacted, and will likely continue to be materially and adversely impacted, by export license requirements, other regulatory changes, or other actions taken by the U.S. or other governmental agencies.
ACM Shanghai utilizes certain items subject to export controls under the U.S. Export Administration Regulations (EAR) in manufacturing and supplying its products. The EAR applies to exports of our operations,commodities, software and technology from the United States, including for use in manufacturing products outside the United States, as well as significantto certain products manufactured outside the United States that incorporate, or are based on, designated U.S. content, software or technology. The Bureau of Industry and Security of the U.S. Department of Commerce (BIS), which administers the EAR, recently imposed, and may continue to impose, additional restrictions under the EAR on certain exports to the PRC, including restrictions targeting the semiconductor manufacturing industry in the PRC. Many of these restrictions were imposed through licensing requirements with a presumption of denial. These types of restrictions may impact the operations of ACM Shanghai.
As part of the new regulations, BIS imposed a numberseries of restrictions on exports of designated products and exports for specified end uses and end users in connection with the supercomputer, artificial intelligence, integrated circuit (IC) and semiconductor manufacturing sectors in the PRC. These new restrictions have impacted the procurement by ACM Shanghai of certain items from the United States, and of certain items subject to U.S. export controls from outside the
United States, for use in manufacturing its products and, depending on the details of the final implementation of these new restrictions and associated licensing policies, will likely continue to limit to an undetermined extent ACM Shanghai’s ability to supply its products to certain end users and for certain end uses in the PRC.
Alongside these new restrictions, BIS has also continued to designate additional PRC entities, many involved in the semiconductor manufacturing industry, on restricted party lists under the EAR, such as the Entity List and the Unverified List. These designations impose licensing requirements for the supply of products to such entities. In most cases, any items subject to the EAR, including foreign produced products with specified U.S. content, now require an export license from BIS before they can be supplied to the newly listed PRC entities, regardless of their export classification. In December 2020, SMIC, one of the largest chip manufacturers in the PRC and one of our key customers, are located in areaswas one of numerous entities added to the Entity List. Challenges faced by SMIC and its key suppliers as a result of the listing have indirectly impacted SMIC’s demand for, and ACM Shanghai’s ability to supply, ACM Shanghai products. More recently, in October 2022, YMTC, a leading PRC impactedmemory chip company and one of our key customers, was added to the Unverified List of the EAR alongside a number of other Chinese entities. The Unverified List identifies parties for whom BIS has been unable to confirm their bona fides (i.e., legitimacy and reliability about the end-use and end-user of items subject to the EAR). Entities listed on the Unverified List are ineligible to receive items subject to the EAR by means of a license exception if a U.S. export license is required. In December 2022, YMTC was moved from the COVID‑19 pandemic,Unverified List to the Entity List. Challenges faced by YMTC and our operationsits key suppliers as a result of the listing could indirectly impact YMTC’s demand for, or ACM Shanghai’s ability to supply, ACM Shanghai products.
Also in October 2022, BIS announced new rules that significantly expanded U.S. export controls as applied to advanced IC products, related manufacturing equipment and technology, and supercomputers, where the destination or ultimate end user is based in the PRC. In the case of semiconductor manufacturing equipment, the new rules require an export license for the export, re-export, or transfer to or within the PRC of additional types of semiconductor manufacturing equipment, items for use in manufacturing designated types of semiconductor manufacturing equipment (along with other items subject to the
EAR, for use in the development or production of ICs), and semiconductor manufacturing equipment for use at certain IC manufacturing and development facilities in the PRC. In most cases, license applications for these exports are reviewed under a presumption of denial. In addition, BIS imposed new restrictions by which U.S. persons anywhere in the world are effectively barred from engaging in certain activities related to the development and production of semiconductors at PRC fabrication facilities meeting specified criteria, even if no items subject to the EAR are involved.
ACM Shanghai has determined that several of its customers have been,PRC-based facilities that meet the restricted criteria, and
has also determined that several of its products, and/or components, may continue to be, adverselymeet the parameters of export control
classification numbers, or ECCNs, affected by the effectsrestrictions. Accordingly, depending on the details of PRCthe final
implementation of these new restrictions imposedand associated licensing policies, ACM may not be able to import, or may face
substantial restrictions in importing, parts from the United States or parts subject to U.S. export controls from outside the
United States to support tool shipments to such facilities, or to be embedded into tools defined by affected ECCNs. ACM
and ACM Shanghai have implemented modifications to their existing business policies and practices in response to the new
restrictions, including by imposing limitations on the activities of their U.S. persons and undertaking measures in
connection with their supply chains more broadly to comply with the new regulations.
We believe that as a result of the new restrictions, several ACM Shanghai customers have significantly reduced production and related capital spending at facilities meeting the restricted advanced node capabilities. In addition, ACM Shanghai has experienced challenges as the result of COVID‑19.companies in its supply chain adapt their policies to the new regulations. These factors had an adverse impact on ACM Shanghai’s shipments and sales in the three months ended December 31, 2022 and March 31, 2023. We anticipate these factors will continue to have an adverse impact on ACM Shanghai’s shipments and sales in future periods.
We conduct substantially allcannot be certain what additional actions the U.S. government may take with respect to PRC entities, or whether such actions will impact our relationships with our PRC-based customers. Additional actions could take the form of our product development, manufacturing, support and services infurther revisions to the PRC, and those activities have been directly impacted by COVID-19 and relatedEntity List or Unverified List, new export restrictions, on transportation and public appearances. In March 2022 several regions in China began to experience elevated levels of COVID-19 infections, and the PRC government instituted policies to restrict the spread of the virus. The policies began with an increase of “spot lockdowns,” under which a positive polymerase chain reaction, or PCR,additional tariffs or other tests would resulttrade restrictions. It is also possible that other countries could adopt similar semiconductor-focused export controls to align with the October 2022 U.S. actions.
During the three months ended March 31, 2023, two prominent exporters of advanced semiconductor manufacturing equipment, the Netherlands and Japan, announced plans to join the United States in imposing semiconductor-focused export controls. ACM Shanghai currently procures certain items from the quarantining of individual buildings, groups of buildings, or even full neighborhoods. The policies were later expanded to full-city lockdowns, including in the City of Shanghai, where substantially all of our operations are located. COVID-19 related restrictions in Shanghai began to limit employee access to,Netherlands and logistics activities of, our offices and production facilities in the Pudong district of Shanghai during in the first quarter of 2022, and therefore limited our ability to ship finished products to customers and to produce new products. Spot lockdowns in mid-March 2022 began to impact a number of our employees and led to a closure of our administrative and R&D offices in Zhangjiang in the Pudong district. A subsequent lockdown of the entire Pudong region of Shanghai was imposed in late March 2022 andJapan that may be impacted the operation of our Chuansha production facility.
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