What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-11-09 compared with 2021-08-10 · 104 added, 108 removed, 224 unchanged (49% of the section changed)

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states and countries worldwide imposed in 2020, and may continue to impose from time-to-time for the foreseeable future, restrictions on the physical movement of people to limit the spread of COVID-19, including travel restrictions and stay-at-home orders.

As a result, from January to April 2020, our Shanghai office was temporarily shut down and our local employees were restricted from traveling to customer sites or visiting our other offices.

As a result, during portions of 2020, many of our offices were temporarily shut down and our local employees were restricted from traveling to customer sites or visiting our other offices.

Several other impacted locations were temporarily closed partially or fully in 2020, with minimal staffing only for essential activities including, for example, supporting essential businesses with our U.S.

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We are closely monitoring the COVID-19 situation and are currently planning to reopen our corporate headquarters in the United States in the fourth quarter of 2021 and other offices according to local restrictions, in each case, with a focus on our employees’ safety.

In addition, our personnel worldwide continue to be subject to various country-

to-country travel restrictions, which limits the ability of some employees to travel to other offices or customer sites.

We believe the lack of an ability to meet in person during most of 2020 and the first half of 2021 may have made it harder for us to sell complex or new technologies to such customers during these periods.

If we can again begin to meet with customers in person, we may improve traction with these customers.

In addition, our personnel worldwide continue to be subject to various country-to-country travel restrictions, which limits the ability of some employees to travel to other offices or customer sites.

We believe the lack of an ability to meet in

person during most of 2020 and the first half of 2021 made it harder for us to sell complex or new technologies to some customers during these periods.

Once we can again begin to meet with these customers in person, we believe we may improve traction with them.

To date, we have been able to provide uninterrupted access to our products and services due to our globally distributed workforce, many of whom were working remotely prior to the pandemic, and our pre-existing infrastructure, which supports secure access to our internal systems.

The total duration and full extent of the impact from the COVID-19 pandemic depends on future developments that cannot be accurately predicted at this time, such as the ultimate severity and transmission rate of the virus and variants, the extent and effectiveness of containment actions and vaccinations, and the impact of these and other factors on our employees, customers, partners, and suppliers.

To date, one effect of the COVID-19 pandemic is a global shortage in semiconductors due primarily to supply chain disruptions.

Many companies have announced shortages in production, e.g., the automotive industry of semiconductors used in their products.

Although this shortage has not materially affected our business, this trend may affect our future business opportunities, particularly future Gainshare and Cimetrix run-time licenses, if our customers’ production volumes decrease.

Certain other trends may affect our Analytics revenue specifically.

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The leading foundry continues to dominate market share as other foundries may have started later than originally forecast in some cases.

This trend will likely continue to negatively impact our Integrated Yield Ramp business on these nodes.

This trend has and will likely continue to negatively impact our Integrated Yield Ramp business on these nodes.

We expect most logic foundries to invest in derivatives of older process nodes, such as 28nm and 14nm, to extract additional value as many of their customers will not move to advanced nodes due to either technological barriers or restrictive economics.

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To meet these demands, IC manufacturers and designers are constantly challenged to improve the overall performance of their ICs by designing and manufacturing ICs with more embedded applications to create greater functionality while lowering power and cost per transistor.

As this trend continues, companies will continually be challenged to improve process capabilities to optimally produce ICs with minimal random and systematic yield loss, which is driven by the lack of compatibility between the

design and its respective manufacturing process.

As this trend continues, companies will continually be challenged to improve process capabilities to optimally produce ICs with minimal random and

systematic yield loss, which is driven by the lack of compatibility between the design and its respective manufacturing process.

We believe that these difficulties will continue to create a need for our products and services that address yield loss across the IC product life cycle.

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governments in trade and security matters or the perception of that tension could lead to disruptions or reductions in international trade, deter or prevent purchasing activity of customers, and negatively impact our China sales and financial results.

Our Strategic Partnership with Advantest

On July 29, 2020, we entered into a strategic partnership with Advantest Corporation through its wholly-owned subsidiary, Advantest America, Inc., (collectively, “Advantest”) that includes:

(i) a significant agreement for our assistance in development of cloud-based applications for Advantest tools that leverage our Exensio software analytics platform;

(ii) a commercial agreement providing for the license to third parties of solutions that result from the development work that combine Advantest’s testing applications and our Exensio platform;

(iii) a 5-year cloud-based subscription for our Exensio analytics platform and related services;

and (iv) the purchase of 3,306,924 shares of our common stock, for aggregate gross proceeds of $65.2 million.

Concurrent with the share purchase, Advantest Corporation also entered into multi-year voting and lock-up agreements.

We entered into this partnership to expand test and measurement solutions throughout the semiconductor value chain.

We believe that the combination of our Exensio platform with Advantest’s advanced testing equipment will provide Advantest tool users with the ability to connect, test, measure, and analyze manufacturing data generated by the tools at any point in the semiconductor value chain, helping customers increase yield and reduce testing costs.

Further, we believe collaboration with Advantest’s technology, direct connection to its customer relationships, and the breadth of its global footprint will enable us to both accelerate our technology roadmap and customer adoption of our AI-driven data analytics solutions across the supply chain.

Cimetrix Acquisition

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Financial Highlights

Financial highlights for the three months ended June 30, 2021, are as follows:

● Total revenues were $27.4 million, an increase of $6.0 million, or 28%, compared to the three months ended June 30, 2020.

Analytics revenue was $19.6 million, an increase of $4.4 million compared to the three months ended June 30, 2020.

The increase in Analytics revenue was primarily driven by a $9.0 million increase in revenue from Cimetrix connectivity products and Exensio licenses due to higher demand from customers, partially offset by a $4.6 million reduction in revenue from CV systems and DFI systems, which decrease in CV systems was due to a decrease in hours worked across multiple contracts and customers.

Integrated Yield Ramp revenue increased $1.6 million compared to year-ago period primarily due to higher hours worked on fixed fees engagements, partially offset by a decrease in Gainshare royalty from the 14nm technology node that was not completely offset by a slight increase from 28nm technology node.

● Costs of revenues increased $1.8 million, compared to the three months ended June 30, 2020, primarily due to increases in personnel-related costs due to higher headcount resulting from the acquisition of Cimetrix, royalties and software expenses and cloud-delivery related costs, amortization of other acquired intangible assets.

These increases were partially offset by decreases in facilities and information technology costs, depreciation expenses and subcontractor expenses.

● Net loss was $4.5 million, compared to $3.7 million for the three months ended June 30, 2020.

The increase in net loss was primarily attributable to increases in costs of revenues, and in operating expenses related primarily to our research and development, sales and marketing activities, general and administrative expenses related to increases in personnel-related costs due to higher headcount as a result of the Cimetrix acquisition, subcontractor costs, facilities and information technology-related costs and fees for legal services for the arbitration proceeding over a disputed customer contract, partially offset by increases in total revenues and decreases in general legal fees and income tax expense.

● Cash, cash equivalents and short-term investments decreased $6.1 million to $139.2 million at June 30, 2021, from $145.3 million at December 31, 2020, primarily due to cash used in our operating activities, the purchase of property and equipment, repurchases of common stock and payments for taxes related to net share settlement of equity awards partially offset by proceeds from the exercise of stock options and proceeds from purchases under our employee stock purchase plan.

Financial highlights for the six months ended June 30, 2021, are as follows:

● Total revenues were $51.6 million, an increase of $9.1 million, or 21%, compared to the six months ended June 30, 2020.

Analytics revenue was $39.0 million, an increase of $10.6 million compared to the six months ended June 30, 2020.

The increase in Analytics revenue was primarily driven by a $17.2 million increase in revenue from Cimetrix connectivity products and Exensio licenses due to higher demand from customers, partially offset by a $6.6 million reduction in revenue from CV system and DFI systems, which decrease in CV systems revenue was due to a reduction in hours worked across multiple contracts and customers.

Integrated Yield Ramp revenue decreased $1.5 million compared to year-ago period primarily due to a reduction in hours worked on fixed fees engagements,

partially offset by a decrease in Gainshare royalty from the 14nm technology node that was not completely offset by a slight increase from 28nm technology node.

● Costs of revenues increased $4.0 million, compared to the six months ended June 30, 2020, primarily due to increases in personnel-related costs due to higher headcount resulting from the acquisition of Cimetrix, amortization of other acquired intangible assets and royalties and software expenses and cloud-delivery related costs.

These increases were p artially offset by decreases in direct costs due mainly from hardware expense, shipping costs and the timing of deferral of contract costs, facilities expenses and depreciation, a

decrease in travel expenses resulting from reduced business travel as a result of the global COVID-19 pandemic, and a decrease in subcontractor expense.

● Net loss was $12.1 million, compared to $4.2 million for the six months ended June 30, 2020.

The increase in net loss was primarily attributable to increases in costs of revenues, operating expenses related primarily to our research and development, sales and marketing activities, general and administrative expenses related to increases in personnel-related costs due to higher headcount as a result of the Cimetrix acquisition, subcontractor costs, facilities and information technology-related costs and fees for legal services for the arbitration proceeding over a disputed customer contract, and amortization expense of other acquired intangibles assets, partially offset by increases in total revenues and decreases in general legal fees and income tax expense.

Financial highlights for the three months ended September 30, 2021, are as follows:

● Total revenues were $29.6 million, an increase of $6.4 million, or 28%, compared to the three months ended September 30, 2020.

Analytics revenue was $27.2 million, an increase of $12.8 million, or 90%, compared to the three months ended September 30, 2020.

The increase in Analytics revenue was primarily driven by an $8.4 million increase in revenue from Cimetrix and Exensio software licenses due to higher demand from customers, and by a $4.5 million increase in revenue from CV systems and DFI systems due to an increase in hours worked across multiple contracts and customers.

Integrated Yield Ramp revenue decreased $6.4 million, or 73%, compared to year-ago period primarily due to lower hours worked on fixed fees engagements, and a decrease in Gainshare royalty from certain customers due to the end of Gainshare periods.

● Costs of revenues increased $1.6 million, compared to the three months ended September 30, 2020, primarily due to increases in personnel-related costs due to higher headcount resulting from the acquisition of Cimetrix and higher benefit costs, cloud-delivery costs, software royalty and licenses expense, and amortization of other acquired intangible assets.

These increases were partially offset by decreases in facilities and information technology-related costs, depreciation expenses and due to timing of deferral of contract costs.

● Net loss was $2.4 million, compared to $2.7 million for the three months ended September 30, 2020.

The decrease in net loss was primarily attributable to an increase in total revenues and a decrease in general legal fees, partially offset by increases in costs of revenues and in operating expenses related primarily to our research and development, sales and marketing activities, general and administrative expenses related to increases in personnel-related costs due to higher headcount as a result of the Cimetrix acquisition and higher benefit costs, subcontractor costs, facilities and information technology-related costs, and an increase in income tax expense.

● Cash, cash equivalents and short-term investments decreased $4.1 million to $141.2 million at September 30, 2021, from $145.3 million at December 31, 2020, primarily due to cash used to purchase property and equipment, repurchases of common stock and pay for taxes related to net share settlement of equity awards, partially offset by proceeds from the exercise of stock options and proceeds from purchases under our employee stock purchase plan and cash provided by operating activities.

Financial highlights for the nine months ended September 30, 2021, are as follows:

● Total revenues were $81.2 million, an increase of $15.5 million, or 24%, compared to the nine months ended September 30, 2020.

Analytics revenue was $66.2 million, an increase of $23.4 million, or 55%, compared to the nine months ended September 30, 2020.

The increase in Analytics revenue was primarily driven by a $25.9 million increase in revenue from Cimetrix and Exensio software licenses due to higher demand from customers, partially offset by a $2.2 million reduction in revenue from CV system and DFI systems due to a reduction in hours worked across multiple contracts and customers.

Integrated Yield Ramp revenue decreased $7.9 million, or 34%, compared to the year-ago period primarily due to a decrease in Gainshare royalty from certain customers due to the end of Gainshare periods and lower hours worked on fixed fee arrangements.

● Costs of revenues increased $5.6 million, compared to the nine months ended September 30, 2020, primarily due to increases in personnel-related costs due to higher headcount resulting from the acquisition of Cimetrix, higher benefit costs and merit increases, cloud-delivery costs, software royalty and licenses expense, and amortization of other acquired intangible assets.

These increases were p artially offset by decreases in facilities and information technology-related costs including depreciation expense , travel expenses , and due to timing of deferral of contract costs.

● Net loss was $14.5 million, compared to $6.9 million for the nine months ended September 30, 2020.

The increase in net loss was primarily attributable to increases in costs of revenues, operating expenses related primarily to our research and development, sales and marketing activities, general and administrative expenses related to increases in personnel-related costs due to higher headcount as a result of the Cimetrix acquisition, higher benefit costs and merit increases, subcontractor costs, facilities and information technology-related costs and fees for legal services for the arbitration proceeding over a disputed customer contract, and amortization expense of other acquired intangibles assets, and increase in income tax expense, partially offset by increases in total revenues and decreases in general legal fees.

Critical Accounting Policies and Estimates

See Note 1, Summary of Significant Accounting Policy , to our condensed consolidated financial statements in this Quarterly Report on Form 10-Q, for a description of recent accounting pronouncements and accounting changes, including the expected dates of adoption and estimated effects, if any, on our condensed consolidated financial statements, and to Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2020.

There were no material changes during the six months ended June 30, 2021, to the items that we disclosed as our critical accounting policies and estimates in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2020.

There were no material changes during the nine months ended September 30, 2021, to the items that we disclosed as our critical accounting policies and estimates in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2020.

The following is a brief discussion of the more significant accounting policies and methods that we use.

Our discussion and analysis of our financial conditions, results of operations and cash flows are based on our condensed consolidated financial statements, which have been prepared in conformity with accounting principles generally accepted in the United States of America.

Our preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods.

Our preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting

We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances.

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Revenue from post-contract support is recognized over the contract term on a straight-line basis, because we are providing (i) support and (ii) unspecified software updates on a when-and-if available basis over the contract term.

Revenue from time-based-licensed software is allocated to each performance obligation and is recognized either at a point in time or over time as

Revenue from time-based-licensed software is allocated to each performance obligation and is recognized either at a point in time or over time as follows.

The license component is recognized at the time when control transfers to customers, with the post-contract support component recognized ratably over the committed term of the contract.

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Based on all available evidence, both positive and negative, we determined a full valuation allowance was appropriate for our federal and state net deferred tax assets (“DTAs”) in the fourth quarter of 2020, primarily driven by a cumulative loss incurred over the 12-quarter period ended December 31, 2020, and the likelihood that we may not utilize tax attributes before they begin to expire at the end of 2022.

The valuation allowance was approximately $41.9 million as of June 30, 2021, and December 31, 2020.

The valuation allowance was approximately $41.9 million as of September 30, 2021 and December 31, 2020.

We will continue to evaluate the need for a valuation allowance and may change our conclusion in a future period based on changes in facts (e.g., 12-quarter cumulative profit, significant new revenue, etc.).

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To the extent the final tax liabilities are different than the amounts originally accrued, the increases or decreases are recorded as income tax expense or benefit in the Condensed Consolidated Statements of Comprehensive Loss.

At June 30, 2021, no deferred taxes have been provided on undistributed earnings from our international subsidiaries.

At September 30, 2021, no deferred taxes have been provided on undistributed earnings from our international subsidiaries.

We intend to reinvest the earnings of our non-U.S.

subsidiaries in those operations indefinitely.

As such, we have not provided for any foreign withholding taxes on the earnings of foreign subsidiaries as of June 30, 2021.

As such, we have not provided for any foreign withholding taxes on the earnings of foreign subsidiaries as of September 30, 2021.

The earnings of our foreign subsidiaries are taxable in the U.S.

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If the carrying amount exceeds its fair value, an impairment loss would be recognized equal to the amount of excess, limited to the amount of total goodwill.

There was no goodwill impairment for the three and six months ended June 30, 2021.

There was no goodwill impairment for the three and nine months ended September 30, 2021.

Our long-lived assets, excluding goodwill, consist of property and equipment and intangible assets.

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If it is determined that an asset group is not recoverable, an impairment loss is recorded in the amount by which the carrying amount of the asset group exceeds its fair value.

There was no impairment of long-lived assets for the three and six months ended June 30, 2021.

There was no impairment of long-lived assets for the three and nine months ended September 30, 2021.

Recent Accounting Pronouncements and Accounting Changes

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Results of Operations

Discussion of Financial Data for the three and six months ended June 30, 2021 and 2020

Discussion of Financial Data for the Three and Nine Months ended September 30, 2021 and 2020

Revenues, Costs of Revenues, and Gross Margin

Three Months Ended

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Analytics Revenue

Analytics revenue increased $4.4 million for the three months ended June 30, 2021, compared to the three months ended June 30, 2020.

The increase in Analytics revenue was primarily driven by a $9.0 million increase in revenue from Cimetrix connectivity products and Exensio licenses due to higher demand from customers, partially offset by a $4.6 million reduction in revenue from CV systems and DFI systems, which decrease in CV systems was due to a reduction in hours worked across multiple contracts and customers.

Analytics revenue increased $10.6 million for the six months ended June 30, 2021, compared to the six months ended June 30, 2020.

Analytics revenue was $39.0 million, which was an increase of $10.6 million compared to the six months ended June 30, 2020.

The increase in Analytics revenue was primarily driven by a $17.2 million increase in revenue from Cimetrix connectivity products and Exensio licenses due to higher demand from customers, partially offset by a $6.6 million reduction in revenue from CV systems and DFI systems, which decrease in CV systems revenue was due to a reduction in hours worked across multiple contracts and customers.

Analytics revenue increased $12.8 million for the three months ended September 30, 2021, compared to the three months ended September 30, 2020.

The increase in Analytics revenue was primarily driven by an $8.4 million increase in revenue from Cimetrix and Exensio software licenses due to higher demand from customers and a $4.5 million increase in revenue from CV systems and DFI systems due to an increase in hours worked across multiple contracts and customers.

Analytics revenue increased $23.4 million for the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020.

The increase in Analytics revenue was primarily driven by a $25.9 million increase in revenue from Cimetrix and Exensio software licenses due to higher demand from customers, partially offset by a $2.2 million reduction in revenue from CV systems and DFI systems due to a reduction in hours worked across multiple contracts and customers.

Integrated Yield Ramp Revenue

Integrated Yield Ramp revenue increased $1.6 million for the three months ended June 30, 2021, compared to the three months ended June 30, 2020, due primarily to higher hours worked on fixed fees engagements partially offset by decreased Gainshare royalty from the 14nm technology node and that was not completely offset by a slight increase from the 28nm technology node.

Integrated Yield Ramp revenue decreased $1.5 million for the six months ended June 30, 2021, compared to the six months ended June 30, 2020, due primarily to lower hours worked on fixed fees engagements and decreased Gainshare royalty from the 14nm technology node that was not completely offset by a slight increase from the 28nm technology node.

Integrated Yield Ramp revenue decreased for the three and nine months ended September 30, 2021, compared to the prior year periods, due to a decrease in Gainshare royalty from certain customers due to the end of Gainshare periods and lower hours worked on fixed fees engagements.

Our Integrated Yield Ramp revenue may continue to fluctuate from period to period primarily due to the contribution of Gainshare royalty, which is dependent on many factors that are outside our control, including among others, continued production of ICs by our customers at facilities at which we generate Gainshare, sustained yield improvements by our customers, and our ability to enter into new contracts containing Gainshare.

Our Analytics and Integrated Yield Ramp revenues may fluctuate in the future and are dependent on a number of factors, including the semiconductor industry’s continued acceptance of our products, services and solutions, the timing of purchases by existing and new customers, cancellations by existing customers, and our ability to attract new customers and penetrate new markets, and further penetration of our current customer base.

Fluctuations in future results may also

occur if any of our significant customers renegotiate pre-existing contractual commitments, including due to adverse changes in their own business.

Fluctuations in future results may also occur if any of our significant customers renegotiate pre-existing contractual commitments, including due to adverse changes in their own business.

Costs of Revenues

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Software license costs consist of costs associated with licensing third-party software used by us in providing services to our customers in solution engagements, or sold in conjunction with our software products.

The increase in costs of revenues of $1.8 million for the three months ended June 30, 2021, compared to the three months ended June 30, 2020, was primarily due to (i) a $0.9 million increase in cloud-delivery costs, software royalty and licenses expense, and hardware costs (ii) a $0.8 million increase in personnel-related costs due to higher headcount as a result of the Cimetrix acquisition and higher benefit costs, partially offset by a decrease in stock compensation costs, and (iii) a $0.4 million increase amortization of other acquired intangible assets.

These were partially offset by (i) a $0.2 million decrease in facilities and information technology-related costs including depreciation expense, and (ii) a $0.1 million decrease in subcontractor expense.

The increase in costs of revenues of $4.0 million for the six months ended June 30, 2021, compared to the six months ended June 30, 2020, was primarily due to (i) a $2.8 million increase in personnel-related costs due to higher headcount as a result of the Cimetrix acquisition, higher benefit costs, merit increases, partially offset by a decrease in stock compensation costs, (ii) a $1.4 million increase in cloud-delivery costs, software royalty and licenses expense, and hardware costs, and (iii) a $0.4 million increase in amortization of other acquired intangibles assets.

These were partially offset by (i) a $0.3 million decrease in facilities and information technology-related costs including depreciation expense, (ii) a $0.2 million decrease in travel expenses resulting from reduced business travel due to the global COVID-19 pandemic, (iii) a $0.2 million decrease in subcontractor expense, and timing of deferral of contract costs.

Gross margin for the three months ended June 30, 2021, was 61% compared to 58% for the year-ago period.

The higher gross margin during the three months ended June 30, 2021, was primarily due to higher Analytics revenue partially offset by an increase in costs of revenue.

Gross margin for the six months ended June 30, 2021, was 58% compared to 59% for the year-ago period.

The lower gross margin during the six months ended June 30, 2021, was primarily due to lower Integrated Yield Ramp revenue, primarily due to a decrease in Gainshare royalty, and an increase in costs of revenues.

The increase in costs of revenues of $1.6 million for the three months ended September 30, 2021, compared to the three months ended September 30, 2020, was primarily due to (i) a $1.3 million increase in personnel-related costs due to higher headcount as a result of the Cimetrix acquisition and higher benefit costs, partially offset by a decrease in stock-based compensation expense, (ii) a $0.5 million increase in cloud-delivery costs, software royalty and licenses expense, and (iii) a $0.3 million increase amortization of other acquired intangible assets.

These were partially offset by (i) a $0.3 million decrease in facilities and information technology-related costs including depreciation expense, and (ii) a $0.2 million decrease due to timing of deferral of contract costs.

The increase in costs of revenues of $5.6 million for the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020, was primarily due to (i) a $4.1 million increase in personnel-related costs due to higher headcount as a result of the Cimetrix acquisition, higher benefit costs, and merit increases, partially offset by a decrease in stock-based compensation expense, (ii) a $1.6 million increase in cloud-delivery costs, software royalty and licenses expense, and hardware costs, and (iii) a $1.1 million increase in amortization of other acquired intangibles assets.

These were partially offset by (i) a $0.6 million decrease in facilities and information technology-related costs including depreciation expense, (ii) a $0.4 million decrease due to timing of deferral of contract costs, and (iii) a $0.2 million decrease in travel and other expenses.

Gross margin increased for the three and nine months ended September 30, 2021, compared to the prior year periods, primarily due to higher Analytics revenue partially offset by an increase in costs of revenues.

Operating Expenses:

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Six Months Ended

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Research and development expenses consist primarily of personnel-related costs to support product development activities, including compensation and benefits, outside development services, travel, facilities cost allocations, and stock-based compensation charges.

Research and development expenses increased for the three months ended June 30, 2021, compared to the year-ago period, primarily due to (i) a $2.4 million increase in personnel-related costs due to higher headcount as a result of the Cimetrix acquisition, higher benefit costs, and higher stock-based compensation, (ii) a $0.8 million increase in subcontractor expenses primarily related to our DFI systems, Exensio and Cimetrix software, (iii) a $0.2 million increase in facilities, information technology-related costs including depreciation expense, and (iv) a $0.1 million increase in cloud-services related costs.

These were partially offset by (i) a $0.2 million decrease in software maintenance expense and other expenses.

Research and development expenses increased for the six months ended June 30, 2021, compared to the year-ago period, primarily due to (i) a $4.2 million increase in personnel-related costs due to higher headcount as a result of the Cimetrix acquisition, higher benefit costs, merit increases and higher stock-based compensation, (ii) a $1.4 million increase in subcontractor expenses primarily related to our DFI systems, Exensio and Cimetrix software, and (iii) a $0.2 million increase in cloud-services related costs.

These were partially offset by a $0.3 million decrease in software maintenance expense.

Research and development expenses increased for the three months ended September 30, 2021, compared to the year-ago period, primarily due to (i) a $1.7 million increase in personnel-related costs due to higher headcount as a result of the Cimetrix acquisition, higher benefit costs, and higher stock-based compensation expense, (ii) a $0.4 million increase in subcontractor expenses primarily related to our DFI systems and Exensio and Cimetrix software, and (iii) a $0.2 million increase in cloud-services related costs.

Research and development expenses increased for the nine months ended September 30, 2021, compared to the year-ago period, primarily due to (i) a $5.9 million increase in personnel-related costs due to higher headcount as a result of the Cimetrix acquisition, higher benefit costs, merit increases and higher stock-based compensation expense, (ii) a $1.8 million increase in subcontractor expenses primarily related to our DFI systems and Exensio and Cimetrix software, (iii) a $0.4 million increase in cloud-services related costs, and (iv) a $0.3 million increase in facilities and information technology-related costs.

These were partially offset by (i) a $0.3 million decrease in software maintenance expense, and (ii) a $0.2 million decrease in other expenses.

We anticipate our expenses in research and development will fluctuate in absolute dollars from period to period due to the timing of product development projects.

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Selling, general, and administrative expenses consist primarily of compensation and benefits for sales, marketing and general and administrative personnel, legal and accounting services, marketing communications, travel and facilities cost allocations, and stock-based compensation charges.

Selling, general and administrative expenses increased for the three months ended June 30, 2021, compared to the year-ago period, primarily due to (i) a $1.5 million increase in personnel-related costs due to higher headcount as a result of the Cimetrix acquisition and higher benefit costs, (ii) a $0.4 million increase in facilities and information technology-related costs including rent and depreciation expense, (iii) a $0.2 million increase in legal fees, primarily related to fees for legal services for the arbitration proceeding over a disputed customer contract, (iv) a $0.1 million increase in cloud-services related costs and (v) a $0.1 million increase in travel expenses.

These were partially offset by (i) a $0.3 million decrease in general legal expenses, (ii) a $0.2 million decrease in subcontractor expenses and (iii) a $0.2 million decrease in other expenses.

Selling, general and administrative expenses increased for the six months ended June 30, 2021, compared to the year-ago period, primarily due to (i) a $2.5 million increase in personnel-related costs due to higher headcount as a result of the Cimetrix acquisition, higher benefit costs, merit increases and higher stock-based compensation, (ii) a $0.8 million increase in facilities and information technology-related costs including rent and depreciation expense, (iii) a $0.4 million increase in legal fees, primarily related to fees for legal services for the arbitration proceeding over a disputed customer contract, (iv) a $0.2 million increase in accounting and related fees, and (v) a $0.2 million increase in cloud-services related costs.

Selling, general, and administrative expenses increased for the three months ended September 30, 2021, compared to the year-ago period, primarily due to (i) a $1.5 million increase in personnel-related costs due to higher headcount as a result of the Cimetrix acquisition, higher benefit costs and higher stock-based compensation expense, (ii) a $0.3 million increase in facilities and information technology-related costs including rent and depreciation expense, and (iii) a $0.1 million increase in cloud-services related costs.

These were partially offset by (i) a $0.7 million decrease in general legal expenses, and (ii) a $0.1 million decrease in subcontractor expenses.

Selling, general, and administrative expenses increased for the nine months ended September 30, 2021, compared to the year-ago period, primarily due to (i) a $4.0 million increase in personnel-related costs due to higher headcount as a result of the Cimetrix acquisition, higher benefit costs, merit increases and higher stock-based compensation expense, (ii) a $1.1 million increase in facilities and information technology-related costs including rent and depreciation expense, (iii) a $0.4 million increase in legal fees, primarily related to fees for legal services for the arbitration proceeding over a disputed customer contract, (iv) a $0.1 million increase in accounting and related fees, and (v) a $0.3 million increase in cloud-services related costs.

These were partially offset by (i) a $1.3 million decrease in general legal expenses, and (ii) a $0.2 million decrease in other expenses.

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Amortization of other acquired intangible assets consists of amortization of intangibles acquired as a result of certain business combinations.

The increase in amortization of other acquired intangible assets for the three and six months ended June 30, 2021, compared to the year-ago period, was primarily related to amortization of other acquired intangible assets related to the Cimetrix acquisition.

The increases in amortization of other acquired intangible assets for the three and nine months ended September 30, 2021, compared to the year-ago periods, were primarily related to amortization of other acquired intangible assets related to the Cimetrix acquisition.

Interest and Other Expense (Income), Net

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Interest and other expense (income), net

Interest and other expense (income), net, primarily consists of interest income, gains and losses from foreign currency forward contracts, and foreign currency transaction exchange gains and losses.

Interest and other expense (income), net increased for the three months ended June 30, 2021, compared to the year-ago period, primarily due to a higher net unfavorable fluctuation in foreign exchange rates and an increase in loss related to foreign currency forward contracts.

Interest and other expense (income), net decreased for the six months ended June 30, 2021, compared to the year-ago period, primarily due to a higher net favorable fluctuations in foreign exchange rates, a decrease in loss related to foreign currency forward contracts, partially offset by a decrease in interest income due to lower interest rates.

In fiscal 2021, interest and other expense (income), net, primarily consists of interest income, and foreign currency transaction exchange gains and losses.

In fiscal 2020, interest and other expense (income), net, primarily consists of interest income, foreign currency transaction exchange gains and losses, and gains and losses from foreign currency forward contracts.

Interest and other expense (income), net decreased for the three months ended September 30, 2021, compared to the year-ago period, primarily due to a higher net favorable fluctuation in foreign exchange rates, partially offset by a decrease in other income.

Interest and other expense (income), net decreased for the nine months ended September 30, 2021, compared to the year-ago period, primarily due to a higher net favorable fluctuations in foreign exchange rates, and a decrease in loss related to foreign currency forward contracts, partially offset by a decrease in interest income due to lower interest rates and a decrease in other income.

Income Tax Expense (Benefit)

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Income tax expense (benefit)

Income tax expense decreased for the three months ended June 30, 2021, compared to the same year-ago period, primarily due to the full valuation allowance placed against United States federal and state net deferred tax assets in the fourth quarter of 2020 and also due to the loss limitation calculation rules outlined in ASC 740.

Absent such rules, the Company would have recorded an income tax benefit during the three months ended June 30, 2020.

After the adoption of ASU 2019-12 at the beginning of 2021, the Company is no longer subject to the loss limitation calculation rules under ASC 740.

Income tax expense recorded during the three months ended June 30, 2021, is primarily due to foreign taxes and changes in reserves for uncertain tax positions.

Income tax expense increased for the six months ended June 30, 2021, compared to the year-ago period, is primarily due to the full valuation allowance against United States federal net deferred tax assets in the six months ended June 30, 2021, and one-time benefits in the first quarter of 2020, pursuant to the provisions of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) passed on March 27, 2020, which provided for an income tax benefit in the six months ended June 30, 2020.

Income tax expense increased for the three months ended September 30, 2021, compared to the same year-ago period, primarily due to the full valuation allowance placed against United States federal and state net deferred tax assets in the fourth quarter of 2020.

Income tax expense recorded during the three months ended September 30, 2021 is primarily due to foreign taxes and changes in reserves for uncertain tax positions.

Income tax expense increased for the nine months ended September 30, 2021, compared to the year-ago period, primarily due to the full valuation allowance against United States federal net deferred tax assets in the nine months ended September 30, 2021, and one-time benefits in the first quarter of 2020, pursuant to the provisions of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) passed on March 27, 2020, which provided for an income tax benefit in the nine months ended September 30, 2020.

Liquidity and Capital Resources

As of June 30, 2021, our working capital, defined as total current assets less total current liabilities, was $141.9 million, compared to $151.2 million as of December 31, 2020.

Total cash and cash equivalents, and short-term investments were $139.2 million as of June 30, 2021, compared to cash and cash equivalents of $145.3 million as of December 31, 2020.

As of June 30, 2021, and December 31, 2020, cash and cash equivalents held by our foreign subsidiaries were $3.3 million and $4.0 million, respectively.

As of September 30, 2021, our working capital, defined as total current assets less total current liabilities, was $144.1 million, compared to $151.2 million as of December 31, 2020.

Total cash and cash equivalents, and short-term investments were $141.2 million as of September 30, 2021, compared to cash and cash equivalents of $145.3 million as of December 31, 2020.

As of September 30, 2021 and December 31, 2020, cash and cash equivalents held by our foreign subsidiaries were $7.8 million and $4.0 million, respectively.

We believe that our existing cash resources and anticipated funds from operations will satisfy our cash requirements to fund our operating activities, capital expenditures, and other obligations for at least the next twelve months.

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In 2020, the Company held back $3.5 million of the purchase price (the “Holdback Amount”) to satisfy adjustments to the closing balance sheet and claims for indemnity arising out of breaches of certain representations, warranties and covenants, and certain other enumerated items in the merger agreement.

During the six months ended June 30, 2021, the Company recorded a measurement period adjustment, which reduced the Holdback Amount to $3.0 million.

During the nine months ended September 30, 2021, the Company recorded a measurement period adjustment, which reduced the Holdback Amount to $3.0 million.

The Holdback Amount, as adjusted, is expected to be paid to the participating equity holders in December 2021.

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On June 4, 2020, the Company’s Board of Directors adopted a new stock repurchase program (the “2020 Program”) to repurchase up to $25.0 million of the Company’s common stock both on the open market and in privately negotiated transactions, including through Rule 10b5-1 plans, over the next two years.

During the six months ended June 30, 2021 , 251,212 shares were repurchased at an average price of $18.01 per share, for a total price of $4.5 million under the 2020 Program.

During the nine months ended September 30, 2021 , 251,212 shares were repurchased at an average price of $18.01 per share, for a total price of $4.5 million under the 2020 Program.

Cash Flow Data

The following table summarizes our cash flows for the periods presented:

Six Months Ended June 30,

Nine Months Ended September 30,

(In thousands)

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Net increase in cash and cash equivalents

Net Cash Flows (Used in) Provided by Operating Activities

Cash flow used in operating activities during the six months ended June 30, 2021, consisted of net loss, adjusted for certain non-cash items which primarily consisted of depreciation and amortization, share-based compensation expense and deferred tax assets, and net change in operating assets and liabilities.

The $10.8 million decrease in cash flows from operating activities for the six months ended June 30, 2021, compared to the year-ago period, was driven primarily by a $8.2 million decrease in net change from operating assets and liabilities, and a $7.9 million increase in net loss, which was partially offset by a $5.3 million increase in non-cash adjustments to net loss, which was primarily due to an increase in deferred taxes of $4.5 million, and an increase in amortization of acquired intangible assets of $1.1 million.

The major contributors to the net change in operating assets and liabilities for the six months ended June 30, 2021 were as follows:

● Account receivable decreased by $4.0 million, primarily due to increases in collections during the first half of 2021,

● Accounts payable decreased by $1.7 million primarily due to the timing of payments of invoices,

● Prepaid expense and other current assets decreased by $1.2 million, primarily due to the timing of billing of contract assets related to fix-price service contracts, and

● Accrued compensation and related benefits decreased by $1.0 million, primarily due to the timing of payments of accrued bonuses, sales commissions and accrued payroll taxes.

Net Cash Flows Provided by Operating Activities

Cash flows provided by operating activities during the nine months ended September 30, 2021, consisted of net loss, adjusted for certain non-cash items which primarily consisted of depreciation and amortization, share-based compensation expense and deferred tax assets, and net change in operating assets and liabilities.

The $7.0 million decrease in cash flows from operating activities for the nine months ended September 30, 2021, compared to the year-ago period, was driven primarily by a $6.1 million decrease in net change from operating assets and liabilities, and a $7.6 million increase in net loss, which was partially offset by a $6.7 million increase in non-cash adjustments to net loss, which was primarily due to an increase in amortization of acquired intangible assets of $1.5 million and a decrease in deferred taxes of $5.4 million.

The major contributors to the net change in operating assets and liabilities for the nine months ended September 30, 2021 were as follows:

● Prepaid expense and other current assets decreased by $1.8 million, primarily due to the timing of billing of contract assets related to fix-price service contracts,

● Other non-current assets increased by $1.2 million, primarily due to an increase in capitalized direct sales commission costs and prepaid expenses related to software licenses and cloud-subscription agreements,

● Accounts payable decreased by $2.0 million primarily due to the timing of payments of vendor invoices,

● Deferred revenues increased by $3.5 million primarily due to timing of billing and revenue recognition, and

● Billing in excess of recognized revenues decreased by $1.3 million primarily due to timing of billing and revenue recognition.

Net Cash Flows Provided by (Used in) Investing Activities

Cash provided by investing activities increased by $65.8 million for the six months ended June 30, 2021, compared to the year-ago period.

For the six months ended June 30, 2021, cash provided by investing activities primarily related to proceeds from maturities of short-term investments of $109.0 million, offset by purchases of short-term investments of $46.0 million and property and equipment of $1.1 million.

For the six months ended June 30, 2020, cash flows used in investing activities of $3.9 million related to property and equipment purchased primarily related to the construction of our DFI solution, including construction of additional eProbe tools.

Net Cash Flows Used in Financing Activities

Net cash used in financing activities increased by $4.3 million for the six months ended June 30, 2021 compared to the year-ago period.

For the six months ended June 30, 2021, net cash used in financing activities primarily consisted of $4.5 million for the repurchase of shares of our common stock and $2.4 million in cash payments for taxes related to net share settlement of equity awards, partially offset by $1.7 million of proceeds from our Employee Stock Purchase Plan and exercise of stock options.

For the six months ended June 30, 2020, net cash used in financing activities primarily consisted of $2.3 million in cash payments for taxes related to net share settlement of equity awards, partially offset by $1.4 million of proceeds from our Employee Stock Purchase Plan and exercise of stock options.

Cash provided by investing activities increased by $97.7 million for the nine months ended September 30, 2021, compared to the year-ago period.

For the nine months ended September 30, 2021, cash provided by investing activities primarily related to proceeds from maturities of short-term investments of $136.0 million, offset by purchases of short-term investments of $91.0 million and property and equipment of $2.7 million primarily related to the construction of additional eProbe tools.

For the nine months ended September 30, 2020, net cash used in investing activities primarily related to purchases of about $50.0 million short-term investments and a $5.4 million property and equipment purchased and prepayment for our DFI solution, including construction of additional eProbe tools.

Net Cash Flows Provided by (Used in) Financing Activities

Net cash used in financing activities increased by $70.7 million for the nine months ended September 30, 2021 compared to the year-ago period.

For the nine months ended September 30, 2021, net cash used in financing activities primarily consisted of $4.5 million for the repurchase of shares of our common stock and $3.3 million in cash payments for taxes related to net share settlement of equity awards, partially offset by $2.3 million of proceeds from our employee stock purchase plan and exercise of stock options.

For the nine months ended September 30, 2020, net cash provided by financing activities primarily consisted of $65.0 million net proceeds from issuance of common stock in connection with the Securities Purchase Agreement with Advantest, and $3.5 million of proceeds from our employee stock purchase plan and exercise of stock options, partially offset by $3.3 million of cash payments for taxes related to net share settlement of equity awards.

Related Party Transactions

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis