What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-05-12 compared with 2021-11-09 · 115 added, 160 removed, 168 unchanged (62% of the section changed)

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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.

In some cases, you can identify forward-looking statements by terminology such as “may,” “could,” “projected,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential”, “target” or “continue,” the negative effect of terms like these or other similar expressions.

These statements include, but are not limited to, statements concerning:

expectations about the effectiveness of our business and technology strategies;

expectations regarding global economic trends;

the impact of inflation, expectations regarding recent and future acquisitions;

current semiconductor industry trends;

expectations of the success and market acceptance of our intellectual property and our solutions;

the continuing impact of the coronavirus (COVID-19) on the semiconductor industry and our business and our ability to obtain additional financing if needed.

These forward-looking statements are only predictions.

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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.

Our offerings include proprietary software, professional services based on proven methodologies and using third-party cloud-hosting platforms for software-as-a-service (“SaaS”), electrical measurement hardware tools, and physical intellectual property (“IP”) for integrated circuit (“IC”) designs.

We derive revenues from two sources, Analytics and Integrated Yield Ramp, by monetizing our offerings through contract fees for on-premise licenses, SaaS, and other professional services and a value-based, variable fee or royalty, which we call Gainshare, on some Characterization services engagements.

Our products and services 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.

We are headquartered in Santa Clara, California and also operate worldwide with offices in Canada, China, France, Germany, Italy, Japan, Korea, and Taiwan.

Industry Trends

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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, 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.

We continue to closely monitor the COVID-19 situation and expect to ask employees to return to working in 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 made it harder for us to sell complex or new technologies to some customers during these periods.

We believe the lack of an ability to meet in person during most of 2021 and to some degree the first quarter of 2022 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.

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.

To date, one effect of the COVID-19 pandemic is a global shortage in semiconductors due primarily to supply chain disruptions and many companies, including in the automotive industry, have announced shortages in production.

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.

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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.

Other trends may continue to affect our characterization services business and Integrated Yield Ramp revenue specifically.

The logic foundry market at the leading-edge nodes, such as 10nm, 7nm, and smaller, underwent significant change over the past few years.

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

This trend will likely continue to impact our characterization services 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.

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.

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.

For further instance, the ongoing Russo-Ukrainian war is negatively impacting the global supply chain

generally, e.g., reducing the production of millions of new cars and trucks, which indirectly impacts the global semiconductor market, and also affecting global energy markets and causing shortages and rising prices of semiconductors directly.

Ukraine and Russia are both top suppliers of neon gas that is used in lasers and chip manufacturing, and Russia is a major producer of palladium, a rare metal used in computer components, sensors, and fuel cells.

Limitations on the supply of these two elements can severely affect the global supply chain, which is already scarce in semiconductors.

Russia also supplies much of the world’s premium nickel, which is used by electronics manufacturers to make batteries.

If these trends continue or worsen, we may face a shortage of critical components for our own tools and our business may suffer if the business of our customers decreases.

Rising prices of semiconductors may mean increased royalties to us and increased Integrated Yield Ramp revenue.

government continues to expand and intensify export controls and sanctions, including the addition of many P.R.C.

and Russian companies to the U.S.

Export Administration Regulations (“EAR”) Entity List.

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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.

Some customers in the P.R.C., in particular, 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.

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.

and/or Russian 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 (with respect to U.S.-P.R.C.

tensions) and financial results in general (with respect to global tensions).

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.

● 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.

Financial highlights for the three months ended March 31, 2022, are as follows:

● Total revenues were $33.5 million, an increase of $9.3 million, or 38%, compared to the three months ended March 31, 2021.

Analytics revenue was $30.4 million, an increase of $11.0 million, or 57%, compared to the three months ended March 31, 2021.

The increase in Analytics revenue was driven by increases in revenue from CV systems and DFI systems across multiple contracts and customers, and increases in revenues from Exensio and Cimetrix software licenses.

Integrated Yield Ramp revenue decreased $1.7 million, or 36%, compared to the year-ago period primarily due to a decrease due to the end of Gainshare periods, partially offset by an increase in hours worked on fixed fees engagements.

● Costs of revenues increased $0.9 million, compared to the three months ended March 31, 2021, primarily due to increases in personnel-related costs, cloud-delivery costs, software royalty and licenses expense.

These increases were partially offset by decreases in facilities and information technology-related costs including depreciation expenses.

● Net loss was $4.2 million, compared to $7.6 million for the three months ended March 31, 2021.

The decrease in net loss was primarily attributable to an increase in total revenues, partially offset by increases in costs of revenues and operating expenses related primarily to our research and development, sales and marketing activities, and general and administrative expenses, all of which were primarily related to increases in personnel-related costs due to higher compensation and benefit costs, and stock-based compensation expense, facilities and information technology-related costs, legal expenses, cloud-services related costs and an increase in income tax expense.

● Cash, cash equivalents and short-term investments decreased $6.0 million to $134.2 million at March 31, 2022, from $140.2 million at December 31, 2021, primarily due to cash used to repurchase shares of common stock and payment for taxes related to net share settlement of equity awards, and purchase of property and equipment, partially offset by proceeds from the exercise of stock options, proceeds from purchases under our employee stock purchase plans and cash provided by operating activities.

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.

See Note 1, Basis of Presentation And Summary of Significant Accounting Policies , 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, 2021.

There were no material changes during the three months ended March 31, 2022, 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, 2021.

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 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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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.

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 (including Characterization services) 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.

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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.

Revenue from DFI systems and CV systems (including Characterization services) 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.

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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.

Based on all available evidence, both positive and negative, we determined a full valuation allowance was still appropriate for our U.S.

federal and state net deferred tax assets (“DTAs”), primarily driven by a cumulative loss incurred over the 12-quarter period ended March 31, 2022, and the likelihood that we may not utilize tax attributes before they expire.

The valuation allowance was approximately $51.6 million as of March 31, 2022, and December 31, 2021.

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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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.

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

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.

At March 31, 2022, 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.

As such, we have not provided for any foreign withholding taxes on the earnings of foreign subsidiaries as of March 31, 2022.

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 nine months ended September 30, 2021.

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

There was no impairment of goodwill for the three months ended March 31, 2022.

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

We periodically review our long-lived assets for impairment.

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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 nine months ended September 30, 2021.

There was no impairment of long-lived assets for the three months ended March 31, 2022.

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.

See Note 1, Basis of Presentation and Summary of Significant Accounting Policies , 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

Discussion of Financial Data for the Three Months ended March 31, 2022

Revenues, Costs of Revenues, and Gross Margin

Three Months Ended

Nine Months Ended

September 30,

(Dollars in thousands)

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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.

Analytics revenue increased $11.0 million for the three months ended March 31, 2022, compared to the three months ended March 31, 2021.

The increase in Analytics revenue was primarily driven by increases in revenue from CV systems and DFI systems across multiple contracts and customer, and increases in revenues from Exensio and Cimetrix software licenses.

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.

Integrated Yield Ramp revenue decreased $1.7 million for the three months ended March 31, 2022, compared to the prior year period, due to a decrease due to the end of Gainshare periods, partially offset by an increase in 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.

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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 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.

Costs of revenues consist primarily of costs incurred to provide and support our services, costs recognized in connection with licensing our software, and amortization of acquired technology.

Service costs include material, employee compensation and related benefits including stock-based compensation expense, subcontractor costs, overhead costs, travel and allocated facilities-related costs.

Software license costs consist of costs associated with cloud-delivery related expenses and 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 $0.9 million for the three months ended March 31, 2022, compared to the three months ended March 31, 2021, was primarily due to (i) a $0.6 million increase in cloud-delivery costs, software royalty, and

licenses expense, and (ii) a $0.4 million increase in personnel-related costs.

These were partially offset by a $0.3 million decrease in facilities and information technology-related costs including depreciation expense.

Gross margin increased 10% for the three months ended March 31, 2022, to 66%, compared to 56% for the year-ago period.

The higher gross margin during three months ended March 31, 2022 was primarily due to higher total revenue and decreases in certain costs of revenues, as discussed above, which decreased the costs of revenues as a percentage of total revenues, when compared to the year-ago period.

Operating Expenses:

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Three Months Ended

Nine Months Ended

September 30,

(Dollars in thousands)

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As a percentage of total revenues

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.

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

Research and development expenses increased for the three months ended March 31, 2022, compared to the year-ago period, primarily due to (i) a $2.7 million increase in personnel-related costs due to higher compensation and benefit costs, and stock-based compensation expense, (ii) a $0.3 million increase in subcontractor expenses primarily related to our DFI systems and Exensio and Cimetrix software, and (iii) a $0.3 million increase in facilities and information technology-related costs.

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

Selling, General, and Administrative

Three Months Ended

Nine Months Ended

September 30,

(Dollars in thousands)

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As a percentage of total revenues

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.

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.

Selling, general, and administrative expenses consist primarily of compensation, benefits and stock-based compensation expense for sales, marketing and general and administrative personnel, legal and accounting services, marketing communications expenses, third-party cloud-services related costs, travel and facilities cost allocations.

Selling, general, and administrative expenses increased for the three months ended March 31, 2022, compared to the year-ago period, primarily due to (i) a $1.1 million increase in personnel-related costs due to higher compensation and benefit costs and stock-based compensation expense, (ii) a $0.2 million increase in general legal expenses, (iii) a $0.2 million increase in legal fees related to the arbitration proceeding over a disputed customer contract, and (iv) a $0.2 million increase in cloud-services related costs.

These were partially offset by a (i) $0.4 million decrease in subcontractor expenses and (ii) a $0.1 million decrease in accounting related fees.

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 increased selling efforts in the future.

Amortization of Other Acquired Intangible Assets

Three Months Ended

Nine Months Ended

September 30,

(Dollars in thousands)

Amortization of other acquired intangible assets

Amortization of acquired intangible assets

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,

(Dollars in thousands)

Interest and other expense (income), net

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)

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

Interest and other expense (income), net decreased for the three months ended March 31, 2022, compared to the year-ago period, primarily due to a lower foreign currency exchange gain resulting from a net favorable fluctuation in foreign exchange rates.

Income Tax Expense

Three Months Ended

Nine Months Ended

September 30,

(Dollars in thousands)

Income tax expense (benefit)

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.

Income tax expense

Income tax expense increased for the three months ended March 31, 2022, compared to the same year-ago period, primarily due to increases in foreign withholding taxes and changes in the geographic mix of worldwide income, which is subject to taxation at different statutory tax rates.

Any significant change in our future effective tax rates could adversely impact our consolidated financial position, results of operations and cash flows.

Our future tax rates may be adversely affected by a number of factors including increase in expenses not deductible for tax purposes, tax legislations in the United States and in foreign countries where we are subject to tax jurisdictions, the geographic composition of our pre-tax income, the amount of our pre-tax income as business activities fluctuate, our ability to use tax attributes such as research and development tax credits and net operation losses, the tax effects of employee stock activity, audit examinations with adverse outcomes, changes in general accepted accounting principles and the effectiveness of our tax planning strategies.

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.

As of March 31, 2022, our working capital, defined as total current assets less total current liabilities, was $138.3 million, compared to $144.7 million as of December 31, 2021.

Total cash and cash equivalents, and short-term investments were $134.2 million as of March 31, 2022, compared to cash and cash equivalents of $140.2 million as of December 31, 2021.

As of March 31, 2022, and December 31, 2021, cash and cash equivalents held by our foreign subsidiaries were $5.6 million and

$5.3 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, 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.

For risk discussion about the continuing impact of global COVID-19 pandemic on our operations or demand for our products, refer to Item 1A, Risk Factors on Part I of our Annual Report for the year ended December 31, 2021, filed with the SEC on March 1, 2022.

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.

On June 4, 2020, the Company’s Board of Directors adopted a 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 three months ended March 31, 2022, 218,858 shares were repurchased at an average price of $26.40 per share, for a total price of $5.8 million under the 2020 Program.

Through April 10, 2022, approximately 470,000 shares had been repurchased at an average price of $21.91 per share, for a total price of $10.3 million under the 2020 Program.

On April 11, 2022, the Board of Directors terminated that 2020 stock repurchase program, and adopted a new program (the “2022 Program”) to repurchase up to $35.0 million of the Company’s common stock both on the open market and in privately negotiated transactions, from time to time, over the next two years.

On April 12, 2022, the Company repurchased approximately 715,000 shares of its common stock in a privately negotiated transaction for $16.7 million under the 2022 Stock Repurchase Program.

The stock repurchase was made in a block trade in compliance with Rule 10b-18 under the Securities Exchange Act of 1934, as amended (the Exchange Act).

Cash Flow Data

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

Nine Months Ended September 30,

Three Months Ended March 31,

(In thousands)

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Effect of exchange rate changes on cash and cash equivalents

Net increase in cash and cash equivalents

Net increase in cash, cash equivalents, and restricted cash

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,

Cash flows provided by operating activities during the three months ended March 31, 2022, consisted of net loss, adjusted for certain non-cash items which primarily consisted of depreciation and amortization, share-based compensation expense, amortization of acquired intangible expense, amortization of costs capitalized to obtain revenue contracts and net change in operating assets and liabilities.

The $11.3 million increase in cash flows from operating activities for the three months ended March 31, 2022, compared to the year-ago period, was driven primarily by a $6.0 million increase in net change from operating assets and liabilities, a $3.4 million decrease in net loss, and a $1.9 million increase in non-cash adjustments to net

loss, which was primarily due to an increase in stock-based compensation expense of $2.2 million, partially offset by a decrease in depreciation and amortization of $0.3 million.

The major contributors to the net change in operating assets and liabilities for the three months ended March 31, 2022, were as follows:

● Accounts receivable decreased by $2.3 million, primarily due to the collections from customers partially offset by an increase in sales and higher contractual invoicing activity during the first quarter of 2022;

● Prepaid expense and other current assets increased by $1.0 million, primarily due to the increase in deferred commission and prepaid expenses related to third party software licenses;

● Accounts payable decreased by $2.1 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.

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.

● Accrued compensation and related benefits decreased by $0.9 million primarily due to the timing of payments of accrued bonuses, accrued sales commissions and accrued payroll taxes, and exercised of purchase rights under employee stock purchase plans, partially offset by an increased in accrued vacation.

Net Cash Flows Provided by Investing Activities

Cash provided by investing activities decreased by $44.1 million for the three months ended March 31, 2022, compared to the year-ago period.

For the three months ended March 31, 2022, cash provided by investing activities primarily related to proceeds from maturities and sales of short-term investments of $32.0 million and $3.0 million, respectively, partially offset by purchases of short-term investments of $21.0 million and property and equipment of $1.8 million primarily related to our DFI systems.

For the three months ended March 31, 2021, cash provided by investing activities primarily related to proceeds from maturities of short-term investments of $68.0 million, offset by purchases of short-term investments of $11.0 million and property and equipment of $0.6 million.

Net Cash Flows Used in Financing Activities

Net cash used in financing activities increased by $2.5 million for the three months ended March 31, 2022 compared to the year-ago period.

For the three months ended March 31, 2022, net cash used in financing activities primarily consisted of $5.8 million for the repurchase of shares of our common stock and $3.4 million in cash payments for taxes related to net share settlement of equity awards, partially offset by $2.2 million of proceeds from our employee stock purchase plans and exercise of stock options.

For the three months ended March 31, 2021, net cash used in financing activities primarily consisted of $4.5 million for the repurchase of shares of our common stock and $1.5 million in cash payments for taxes related to net share settlement of equity awards, partially offset by $1.5 million of proceeds from our 2010 employee stock purchase plan and exercise of stock options.

Related Party Transactions

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What changed 10-Q

Item 2. Management’s Discussion and Analysis