Item 2. Management’s Discussion and Analysis
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
The following discussion of our financial condition and results of operations contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements other than statements of historical fact may be forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may,” “could,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential”, “target” or “continue,” the negative effect of terms like these or other similar expressions. Any statement concerning future financial performance (including future revenues, earnings or growth rates), ongoing business strategies, prospects, or the time required of our executive management for, and expenses related to, as well as the success of the our strategic growth opportunities and partnerships, including our partnership with Advantest Corporation, possible actions taken by us or our subsidiaries, and the continuing impact of the COVID-19 pandemic on our business, which may be provided by us are also forward-looking statements. These forward-looking statements are only predictions. Forward-looking statements are based on current expectations and projections about future events and are inherently subject to a variety of risks and uncertainties, many of which are beyond our control, which could cause actual results to differ materially from those anticipated or projected. All forward-looking statements included in this document are based on information available to us on the date of filing and we further caution investors that our business and financial performance are subject to substantial risks and uncertainties. We assume no obligation to update any such forward-looking statements. In evaluating these statements, you should specifically consider various factors, including the risk factors set forth in Item 1. “Business” and Item 7. “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, filed with the Securities and Exchange Commission on March 11, 2021. All references to “we”, “us”, “our”, “PDF”, “PDF Solutions” or “the Company” refer to PDF Solutions, Inc.
Cimetrix, CV, DFI, Exensio, PDF Solutions, the PDF Solutions logo are trademarks or registered trademarks of PDF Solutions, Inc. or its subsidiaries.
Overview
We provide comprehensive data solutions designed to empower organizations across the semiconductor ecosystem to improve the yield and quality of their products and operational efficiency for increased profitability. We derive revenues from two sources: Analytics and Integrated Yield Ramp. Our offerings include proprietary software, physical intellectual property (“IP”) for Integrated Circuits (“IC”) designs, electrical measurement hardware tools, and professional services. We primarily monetize our offerings through license fees, contract revenue for professional services, and increasingly recently, time-based fees for software as a service (“SaaS”). In some cases, especially on our historical integrated yield ramp (“IYR”) engagements, we also receive a value-based royalty that we call Gainshare. Our products, services, and solutions have been sold to integrated device manufacturers (“IDMs”), fabless semiconductor companies, foundries, equipment manufacturers, electronics manufacturing suppliers (“EMS”), original device manufacturers (“ODMs”), out-sourced semiconductor assembly and test (“OSATs”), and system houses.
Industry Trends
The COVID-19 pandemic has significantly affected how we and our customers operate our businesses. For example, most U.S. 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, 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. clean room facility. By the third quarter of 2020, our offices in Canada, France, Korea, and Japan had generally reopened with some restrictions returning temporarily at the end of 2020. 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
28
Table of Contents
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. In particular, the confluence of Industry 4.0 (i.e. the fourth industrial revolution, or the automation and data exchange in manufacturing technologies and processes) and cloud computing (i.e. the on-demand availability of computing resources and data storage without direct active management by the user) is driving increased innovation in semiconductor and electronics manufacturing and analytics, as well as in the organization of IT networks and computing at semiconductor and electronics companies across the ecosystem. First, the ubiquity of wireless connectivity and sensor technology enables any manufacturing company to augment its factories and visualize its entire production line. In parallel, the cost per terabyte of data storage has continually decreased year to year. The combination of these two trends means that more data is collected and stored than ever before. Further, semiconductor companies are striving to analyze these very large data sets in real-time to make rapid decisions that measurably improve manufacturing efficiency and quality. In parallel, the traditional practice of on-site data storage, even for highly sensitive data, is changing. The ability to cost-effectively and securely store, analyze, and retrieve massive quantities of data from the cloud versus on-premise enables data to be utilized across a much broader population of users, frequently resulting in greater demands on analytics programs. The combination of these latter two trends means that cloud-based, analytic programs that effectively manage identity management, physical security, and data protection are increasingly in demand for insights and efficiencies across the organizations of these companies. We believe that all these trends will continue for the next few years, and the challenges involved in adopting Industry 4.0 and secure cloud computing will create opportunities for our combination of advanced analytics capabilities, proven and established supporting infrastructure, and professional services to configure our products to meet customers’ specialized needs.
Other business trends may continue to affect our Integrated Yield Ramp revenue specifically. The logic foundry market at the leading-edge nodes, such as 10nm and 7nm, underwent significant change over the past few years. The leading foundry continues to dominate market share as other foundries may have started later than originally forecast in some cases. 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. Foundries that participate at leading edge nodes are expected to continue to invest in new technologies such as memory, packaging, and multi-patterned and EUV lithography, as well as new innovations in process control and variability management. We expect China’s investment in semiconductors to continue. In order for these trends to provide opportunities for us to increase our business leveraging electrical characterization, Chinese semiconductors manufacturers will need to increase their production volumes on advanced technology nodes and continue to engage foreign suppliers, subject to compliance with changing U.S. export restrictions. As a result of these market developments, we have chosen to focus our resources and investments in products, services, and solutions for analytics.
There are other business trends that may affect our business opportunities generally. For instance, the demand for consumer electronics, communications devices, and high-performance computing continues to drive technological innovation in the semiconductor industry as the need for products with greater performance, lower power consumption, reduced costs, and smaller size continues to grow with each new product generation. In addition, advances in computing systems and mobile devices continue to fuel demand for higher capacity memory chips. 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
29
Table of Contents
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.
Early decisions by the Biden U.S. Presidential Administration confirm continuity of a bipartisan consensus in the U.S. government favoring increased confrontation of China in trade practices and economic matters, national security, and human rights. The Biden Administration views technology as a domain of strategic competition in which the U.S. and allies must stay ahead of China. The Administration has reaffirmed the U.S. government consensus identifying semiconductor, artificial intelligence, and 5G technologies, and protection of U.S. supply chains, as priority efforts. It appears that the Administration may now augment ongoing U.S. efforts by enlisting the cooperation of allied countries in both advanced development and protection against P.R.C. use of U.S. and allied advances. The prior U.S. presidential administration expanded and intensified export controls and sanctions, including the addition of many P.R.C. companies to the U.S. Export Administration Regulations (“EAR”) Entity List. These listings restrict supply to designees of items that are subject to the EAR. After an internal evaluation, we determined that a large percentage of our software products are not of U.S. origin and are, thus, not subject to the EAR. Our standard operations include development, distribution processes, software download sites, and professional service centers and processes located in various geographies around the world to better serve our customers. Some customers have nonetheless expressed concerns to us that continued action by the U.S. government could potentially interrupt their ability to make use of our products or services. The continuing tension between the U.S. and P.R.C. 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.
Cimetrix Acquisition
On December 1, 2020, we completed the acquisition of Cimetrix Incorporated. The combination of Cimetrix connectivity products with our Exensio platform, which leverages machine learning, is intended to enable IC, assembly, and equipment manufacturer customers to extract more intelligence from their tools, not just data, to build more reliable chips and systems at lower manufacturing costs. For further information about this acquisition, see Note 4, Business Combination , to our condensed consolidated financial statements of this Quarterly Report on Form 10-Q.
Financial Highlights
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.
30
Table of Contents
● 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 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.
General
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 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
31
Table of Contents
periods. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. The most significant estimates and assumptions relate to revenue recognition, valuation of long-lived assets including goodwill and intangible assets, and the realization of deferred tax assets. Actual amounts may differ from such estimates under different assumptions or conditions.
Revenue Recognition
We derive revenue from two sources: Analytics and Integrated Yield Ramp.
Analytics Revenue
Analytics revenue is derived from the following primary offerings: licenses and services for standalone Software (which consists primarily of Exensio and Cimetrix products), SaaS (which consists primarily of Exensio products), and DFI and CV systems that do not include performance incentives based on customers’ yield achievement.
Revenue from standalone software is recognized depending on whether the license is perpetual or time-based. Perpetual (one-time charge) license software is recognized at the time of the inception of the arrangement when control transfers to the customers, if the software license is distinct from the services offered by us. 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 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. For contracts with any combination of licenses, support, and other services, distinct performance obligations are accounted for separately. For contracts with multiple performance obligations, we allocate the transaction price of the contract to each performance obligation on a relative basis using the standalone selling price (“SSP”) attributed to each performance obligation.
Revenue from SaaS arrangements, which allow for the use of a cloud-based software product or service over a contractually determined period of time without taking possession of software, is accounted for as subscriptions and is recognized as revenue ratably, on a straight-line basis, over the subscription period beginning on the date the service is first made available to customers.
Revenue from DFI systems and CV systems that do not include performance incentives based on customers’ yield achievement is recognized primarily as services are performed. Where there are distinct performance obligations, we allocate revenue to all deliverables based on their SSPs. For these contracts with multiple performance obligations, we allocate the transaction price of the contract to each performance obligation on a relative basis using SSP attributed to each performance obligation. Where there are not discrete performance obligations, historically, revenue is primarily recognized as services are performed using a percentage of completion method based on costs or labor-hours inputs, whichever is the most appropriate measure of the progress towards completion of the contract. The estimation of percentage of completion method is complex and subject to many variables that require significant judgment.
Integrated Yield Ramp Revenue
Integrated Yield Ramp revenue is derived from our yield ramp engagements that include Gainshare or other performance incentives based on customers’ yield achievement.
Revenue under these project–based contracts, which are delivered over a specific period of time typically for a fixed fee component paid on a set schedule, is recognized as services are performed using a percentage of completion method based on costs or labor-inputs, whichever is the most appropriate measure of the progress towards completion of the contract. Where there are distinct performance obligations, we allocate revenue to all deliverables based on their SSPs and allocate the transaction price of the contract to each performance obligation on a relative basis using SSP. Similar to the services provided in connection with DFI systems and CV systems that are contributing to Analytics revenue, due to the nature of the work performed in these arrangements, the estimation of percentage of completion method is complex and subject to many variables that require significant judgment.
32
Table of Contents
The Gainshare royalty contained in yield ramp contracts is a variable fee related to continued usage of our IP after the fixed-fee service period ends, based on the customers’ yield achievement. Revenue derived from Gainshare is contingent upon our customers reaching certain defined production yield levels. Gainshare royalty periods are generally subsequent to the delivery of all contractual services and performance obligations. We record Gainshare as a usage-based royalty derived from customers’ usage of intellectual property and record it in the same period in which the usage occurs.
Income Taxes
We are required to assess whether it is “more-likely-than-not” that we will realize our deferred tax assets. If we believe that they are not likely to be fully realizable before the expiration dates applicable to such assets, then to the extent we believe that recovery is not likely, we must establish a valuation allowance. 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 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.). If we conclude that we are more likely than not to utilize some or all of our U.S. DTAs, we will release some or all of our valuation allowance and our tax provision will decrease in the period in which we make such determination.
We evaluate our DTAs for realizability considering both positive and negative evidence, including our historical financial performance, projections of future taxable income, future reversals of existing taxable temporary differences, tax planning strategies and any carryback availability. In evaluating the need for a valuation allowance, we estimate future taxable income based on management approved business plans. This process involves significant management judgment about assumptions that are subject to change from period to period based on changes in tax laws or variances between future projected operating performance and actual results. Changes in the net DTAs, less offsetting valuation allowance, in a period are recorded through the income tax provision and could have a material impact on the Condensed Consolidated Statements of Comprehensive Loss.
Our income tax calculations are based on application of applicable U.S. federal, state, or foreign tax law. Our tax filings, however, are subject to audit by the respective tax authorities. Accordingly, we recognize tax liabilities based upon our estimate of whether, and the extent to which, additional taxes will be due when such estimates are more-likely-than-not to be sustained. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. 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 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 September 30, 2021. The earnings of our foreign subsidiaries are taxable in the U.S. in the year earned under the Global Intangible Low-Taxed Income rules implemented under 2017 Tax Cuts and Jobs Act.
Valuation of Long-lived Assets including Goodwill and Intangible Assets
We record goodwill when the purchase consideration of an acquisition exceeds the fair value of the net tangible and identified intangible assets as of the date of acquisition. We have one operating segment and one operating unit. We perform an annual impairment assessment of goodwill during the fourth quarter of each calendar year or more frequently, if required to determine if any events or circumstances exist, such as an adverse change in business climate or a decline in the overall industry demand, that would indicate that it would more likely than not reduce the fair value of a reporting unit below its carrying amount, including goodwill. If events or circumstances do not indicate that the fair value of a reporting unit is below its carrying amount, then goodwill is not considered to be impaired and no further testing is required. 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 nine months ended September 30, 2021.
33
Table of Contents
Our long-lived assets, excluding goodwill, consist of property and equipment and intangible assets. We periodically review our long-lived assets for impairment. For assets to be held and used, we initiate our review whenever events or changes in circumstances indicate that the carrying amount of a long-lived asset group may not be recoverable. Recoverability of an asset group is measured by comparison of its carrying amount to the expected future undiscounted cash flows that the asset group is expected to generate. 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 nine months ended September 30, 2021.
Recent Accounting Pronouncements and Accounting Changes
See Note 1, Summary of Significant Accounting Policy , to our condensed consolidated financial statements of 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.
Results of Operations
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
Nine Months Ended
September 30,
Change
September 30,
Change
2021
2020
$
%
2021
2020
$
%
(Dollars in thousands)
Revenues:
Analytics
$
27,194
$
14,346
$
12,848
90
%
$
66,165
$
42,766
$
23,399
55
%
Integrated Yield Ramp
2,361
8,766
(6,405)
(73)
%
15,009
22,912
(7,903)
(34)
%
Total revenues
29,555
23,112
6,443
28
%
81,174
65,678
15,496
24
%
Costs of revenues
11,070
9,493
1,577
17
%
32,518
26,926
5,592
21
%
Gross profit
$
18,485
$
13,619
$
4,866
36
%
$
48,656
$
38,752
$
9,904
26
%
Gross margin
63
%
59
%
60
%
59
%
Analytics revenue as a percentage of total revenues
92
%
62
%
82
%
65
%
Integrated Yield Ramp revenue as a percentage of total revenues
8
%
38
%
18
%
35
%
Analytics Revenue
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.
34
Table of Contents
Integrated Yield Ramp Revenue
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.
Costs of Revenues
Costs of revenues consist of costs incurred to provide and support our services, costs recognized in connection with licensing our software, and amortization of acquired technology. Services costs consist of material, employee compensation and related benefits, overhead costs, travel and allocated facilities-related costs. 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 $1.6 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
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.
35
Table of Contents
Operating Expenses:
Research and Development
Three Months Ended
Nine Months Ended
September 30,
Change
September 30,
Change
(Dollars in thousands)
2021
2020
$
%
2021
2020
$
%
Research and development
$
10,657
$
8,328
$
2,329
28
%
$
32,562
$
24,672
$
7,890
32
%
As a percentage of total revenues
36
%
36
%
40
%
38
%
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 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.
Selling, General, and Administrative
Three Months Ended
Nine Months Ended
September 30,
Change
September 30,
Change
(Dollars in thousands)
2021
2020
$
%
2021
2020
$
%
Selling, general and administrative
$
9,609
$
8,420
$
1,189
14
%
$
28,482
$
24,052
$
4,430
18
%
As a percentage of total revenues
33
%
36
%
35
%
37
%
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 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.
36
Table of Contents
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.
We anticipate our selling, general, and administrative expenses will fluctuate in absolute dollars from period to period as a result of cost control initiatives and to support our selling efforts in the future.
Amortization of Other Acquired Intangible Assets
Three Months Ended
Nine Months Ended
September 30,
Change
September 30,
Change
(Dollars in thousands)
2021
2020
$
%
2021
2020
$
%
Amortization of other acquired intangible assets
$
314
$
174
$
140
80
%
$
942
$
521
$
421
81
%
Amortization of other acquired intangible assets consists of amortization of intangibles acquired as a result of certain business combinations. 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
Three Months Ended
Nine Months Ended
September 30,
Change
September 30,
Change
(Dollars in thousands)
2021
2020
$
%
2021
2020
$
%
Interest and other expense (income), net
$
(194)
$
361
$
(555)
(154)
%
$
(391)
$
530
$
(921)
(174)
%
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.
37
Table of Contents
Income Tax Expense (Benefit)
Three Months Ended
Nine Months Ended
September 30,
Change
September 30,
Change
(Dollars in thousands)
2021
2020
$
%
2021
2020
$
%
Income tax expense (benefit)
$
506
$
(930)
$
1,436
(154)
%
$
1,549
$
(4,109)
$
5,658
(138)
%
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 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.
There has been no significant impact in respect to Liquidity and Capital Resources from the global COVID-19 pandemic.
Cimetrix Acquisition
On December 1, 2020, the Company completed the acquisition of Cimetrix Incorporated with a total payment made in 2020 of $28.6 million, net of cash acquired. 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 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. See Note 4, Business Combination to our condensed consolidated financial statements in this Quarterly Report on Form 10-Q for further discussion.
Repurchase of Company’s Common Stock
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 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.
38
Table of Contents
Cash Flow Data
The following table summarizes our cash flows for the periods presented:
Nine Months Ended September 30,
2021
2020
$ Change
(In thousands)
Net cash flows provided by (used in):
Operating activities
$
3,827
$
10,876
$
(7,049)
Investing activities
42,302
(55,348)
97,650
Financing activities
(5,495)
65,202
(70,697)
Effect of exchange rate changes on cash and cash equivalents
(192)
51
(243)
Net increase in cash and cash equivalents
$
40,442
$
20,781
$
19,661
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 $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.
39
Table of Contents
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
Refer to Note 3, Strategic Partnership Agreement with Advantest and Related Party Transactions , to our condensed consolidated financial statements in this Quarterly Report on Form 10-Q, for a discussion on related party transactions between the Company and Advantest.
Off-Balance Sheet Agreements
We do not have any off-balance sheet arrangements, investments in special purpose entities or undisclosed borrowings or debt.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.