What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-08-11 compared with 2022-05-12 · 108 added, 82 removed, 201 unchanged (49% of the section changed)

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expectations regarding global economic trends;

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

the impact of rising 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.

the continuing impact of 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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“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, 2021, filed with the Securities and Exchange Commission on March 1, 2022.

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.

Cimetrix, CV, DFI, Exensio, PDF Solutions and the PDF Solutions logo are trademarks or registered trademarks of PDF Solutions, Inc.

or its subsidiaries.

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Industry Trends

The COVID-19 pandemic has significantly affected how we and our customers operate our businesses.

The ongoing 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.

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.

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 and its variants, including travel restrictions and stay-at-home orders.

We continue to closely monitor the COVID-19 situation and expect to ask employees who were working in-office prior to COVID-19 and have not yet returned to working in their offices at least a minimum number of days a week, subject 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 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.

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.

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

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 its 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 and many companies, including in the automotive industry, have announced shortages in production.

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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.

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.

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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.

Foundries that participate at leading edge nodes are expected to continue to invest in new technologies such as memory, packaging, and multi-patterned and extreme ultraviolet lithography, as well as new innovations in process control and variability management.

We expect China’s investment in semiconductors to continue.

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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.

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.

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.

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.

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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.

government continues to expand and intensify export controls and sanctions, including the addition of many People’s Republic of China (“P.R.C.”) and Russian companies to the U.S.

Export Administration Regulations (“EAR”) Entity List.

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Financial Highlights

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.

Financial highlights for the three months ended June 30, 2022, are as follows:

● Total revenues were $34.7 million, an increase of $7.2 million, or 26%, compared to the three months ended June 30, 2021.

Analytics revenue was $31.1 million, an increase of $11.5 million, or 59%, compared to the three months ended June 30, 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 revenue from Cimetrix and Exensio software licenses.

Integrated Yield Ramp revenue decreased $4.3 million, or 55%, compared to the three months ended June 30, 2021, primarily due to the end of Gainshare periods, partially offset by an increase in hours worked on fixed fees engagements.

● Costs of revenues increased $1.3 million, compared to the three months ended June 30, 2021, primarily due to increases in personnel-related costs, subcontractor costs, and cloud-delivery costs.

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

● Net loss was $1.1 million, compared to $4.5 million for the three months ended June 30, 2021.

The decrease in net loss was primarily attributable to an increase in total revenues and other income from net foreign currency exchange gain, 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, subcontractor costs, and cloud-services related costs, and an increase in income tax expense.

Financial highlights for the six months ended June 30, 2022, are as follows:

● Total revenues were $68.2 million, an increase of $16.5 million, or 32%, compared to the six months ended June 30, 2021.

Analytics revenue was $61.5 million, an increase of $22.6 million, or 58%, compared to the six months ended June 30, 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 Cimetrix and Exensio software licenses.

Integrated Yield Ramp revenue decreased $6.0 million, or 48%, compared to the six months

ended June 30, 2021 primarily due to the end of Gainshare periods, partially offset by an increase in hours worked on fixed fees engagements.

● Costs of revenues increased $2.1 million, compared to the six months ended June 30, 2021, primarily due to increases in personnel-related costs, cloud-delivery costs, and subcontractor costs.

These increases were partially offset by decreases in facilities and information technology-related costs, including depreciation expenses, software royalty, and licenses expense.

● Net loss was $5.3 million, compared to $12.1 million for the six months ended June 30, 2021.

The decrease in net loss was primarily attributable to an increase in total revenues and other income from net foreign currency exchange gain, 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, which were primarily related to increases in personnel-related costs, subcontractor costs, and cloud-services related costs, and an increase in income tax expense.

● Cash, cash equivalents and short-term investments decreased $23.0 million to $117.2 million at June 30, 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, 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.

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, filed with the SEC on March 1, 2022.

There were no material changes during the six months ended June 30, 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 Part II, Item 7 of 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.

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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.

Integrated Yield Ramp revenue is derived from our Integrated Yield Ramp engagements that include Gainshare royalties 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.

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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.

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.

The Gainshare royalty contained in the Integrated 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.

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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.

federal and state net deferred tax assets (“DTAs”), primarily driven by a cumulative loss incurred over the 12-quarter period ended June 30, 2022, and the likelihood that we may not utilize tax attributes before they expire.

The valuation allowance was approximately $51.6 million as of June 30, 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

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 March 31, 2022, no deferred taxes have been provided on undistributed earnings from our international subsidiaries.

At June 30, 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 March 31, 2022.

As such, we have not provided for any foreign withholding taxes on the earnings of foreign subsidiaries as of June 30, 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 impairment of goodwill for the three months ended March 31, 2022.

There was no impairment of goodwill for the three and six months ended June 30, 2022.

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

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

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

There was no impairment of long-lived assets for the three and six months ended June 30, 2022.

Recent Accounting Pronouncements and Accounting Changes

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.

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.

Results of Operations

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

Discussion of Financial Data for the Three and Six Months ended June 30, 2022

Revenues, Costs of Revenues, and Gross Margin

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Analytics Revenue

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.

Analytics revenue increased $11.5 million for the three months ended June 30, 2022, compared to the three months ended June 30, 2021.

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

Analytics revenue increased $22.6 million for the six months ended June 30, 2022, compared to the six months ended June 30, 2021.

Integrated Yield Ramp Revenue

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.

Integrated Yield Ramp revenue decreased $4.3 million for the three months ended June 30, 2022, compared to the prior year period, due to the end of Gainshare periods, partially offset by an increase in hours worked on fixed fees engagements.

Integrated Yield Ramp revenue decreased $6.0 million for the six months ended June 30, 2022, compared to the prior year period, 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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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.

The increase in costs of revenues of $1.3 million for the three months ended June 30, 2022, compared to the three months ended June 30, 2021, was primarily due to (i) a $1.2 million increase in personnel-related costs due to worldwide merit increases, increases in benefit costs, stock-based compensation expense, and bonus expense, (ii) a $0.3 million increase in subcontractor costs, and (iii) a $0.3 million increase in cloud-delivery costs.

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

The increase in costs of revenues of $2.1 million for the six months ended June 30, 2022, compared to the six months ended June 30, 2021, was primarily due to (i) a $1.7 million increase in personnel-related costs due to worldwide merit increases, increases in benefit costs, stock-based compensation expense, and bonus expense, (ii) a $0.8 million increase in cloud-delivery costs, and (iii) a $0.4 million increase in subcontractor costs.

These were partially offset by a $0.5 million decrease in facilities and information technology-related costs including depreciation expense and a $0.2 million decrease in software royalty and licenses expense.

Gross margin increased 4 percentage points for the three months ended June 30, 2022, to 65%, compared to 61% for the three months ended June 30, 2021.

The higher gross margin during the three months ended June 30, 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.

Gross margin increased 7 percentage points for the six months ended June 30, 2022, to 65%, compared to 58% for the six months ended June 30, 2021.

The higher gross margin during the six months ended June 30, 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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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.

Research and development expenses increased for the three months ended June 30, 2022, compared to the three months ended June 30, 2021, primarily due to (i) a $1.9 million increase in personnel-related costs primarily resulting from increases in stock-based compensation expense, headcount, bonus expense, benefit costs, and worldwide merit increases, (ii) a $0.2 million increase in subcontractor expenses primarily related to DFI systems and Cimetrix software, and (iii) a $0.2 million increase in facilities and information technology-related costs.

Research and development expenses increased for the six months ended June 30, 2022, compared to the six months ended June 30, 2021, primarily due to (i) a $4.6 million increase in personnel-related costs primarily resulting from increases in stock-based compensation expense, headcount, bonus expense, benefit costs, and worldwide merit increases, (ii) a $0.5 million increase in subcontractor expenses primarily related to CV systems and Exensio and Cimetrix software, and (iii) a $0.5 million increase in facilities and information technology-related costs, and a $0.2 million increase in travel expense.

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.

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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.

Selling, general, and administrative expenses increased for the three months ended June 30, 2022, compared to the three months ended June 30, 2021, primarily due to (i) a $0.6 million increase in personnel-related costs mainly resulting from increases in stock-based compensation expense, headcount, bonus and commission expenses, benefit costs, and worldwide merit increases, (ii) a $0.2 million increase in facilities and information technology-related costs, including third-party cloud-services related costs, and (iii) a $0.3 million increase in various other expenses.

These were partially offset by (i) a $0.5 million decrease in legal fees related to the arbitration proceeding over a disputed customer contract and (ii) a $0.3 million decrease in general legal expenses.

Selling, general, and administrative expenses increased for the six months ended June 30, 2022, compared to the six months ended June 30, 2021, primarily due to (i) a $1.8 million increase in personnel-related costs mainly resulting from increases in stock-based compensation expense, headcount, bonus and commission expense, benefit costs, and worldwide merit increases, (ii) a $0.2 million increase in facilities and information technology-related costs, and (iii) a $0.3 million increase in cloud-services related costs.

These were partially offset by a (i) a $0.4 million decrease in legal fees related to the arbitration proceeding over a disputed customer contract and (ii) a$0.2 million decrease in subcontractor 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 increased selling efforts in the future.

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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.

We had an interest and net other income of $1.0 million and $1.3 million during the three and six months ended June 30, 2022, respectively, compared to an interest and net other expense of $0.2 million and an interest and net other income of $0.2 million during the three and six months ended June 30, 2021, respectively.

Our net other income increased in both periods primarily due to a higher foreign currency exchange gain resulting from net favorable fluctuation in foreign exchange rates.

Our interest income increased in both periods due to higher interest rates for our money market and short-term investments.

We anticipate interest and other income (expense) will fluctuate in future periods as a result of our projected use of cash, cash equivalents and short-term investments and fluctuations of foreign exchange rates.

Income Tax Expense

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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.

Income tax expense increased for the three and six months ended June 30, 2022, compared to the three and six months ended June 30, 2021, 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.

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 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.

As of June 30, 2022, our working capital, defined as total current assets less total current liabilities, was $122.0 million, compared to $144.7 million as of December 31, 2021.

Total cash and cash equivalents, and short-term investments were $117.2 million as of June 30, 2022, compared to cash and cash equivalents of $140.2 million as of December 31, 2021.

As of June 30, 2022, and December 31, 2021, cash and cash equivalents held by our foreign subsidiaries were $7.0 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.

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.

For risk discussion about the continuing impact of global COVID-19 pandemic on our operations or demand for our products, refer to Part I, Item 1A, “Risk Factors” 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 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).

During the six months ended June 30, 2022, 218,858 shares were repurchased under the 2020 Program 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, 470,070 shares had been repurchased under the 2020 Program at an average price of $21.91 per share, for a total price of $10.3 million.

On April 11, 2022, the Board of Directors terminated the 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.

During the three and six months ended June 30, 2022, 714,600 shares were repurchased under the 2022 Program at an average price of $23.36 per share for an aggregate total price of $16.7 million.

Cash Flow Data

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

Three Months Ended March 31,

Six Months Ended June 30,

(In thousands)

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Net Cash Flows Provided by Operating Activities

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;

Cash flows provided by operating activities during the six months ended June 30, 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 $6.8 million increase in cash flows from operating activities for the six months ended June

30, 2022, compared to the six months ended June 30, 2021, was driven primarily by a $6.8 million decrease in net loss, a $3.0 million decrease in net change from operating assets and liabilities, and a $3.0 million increase in non-cash adjustments to net loss, which mainly resulted from an increase in stock-based compensation expense of $3.3 million and an increase in amortization of costs capitalized to obtain revenue contracts of $0.4 million, partially offset by a decrease in depreciation and amortization of $0.6 million.

The major contributors to the net change in operating assets and liabilities for the six months ended June 30, 2022, were as follows:

● Accounts receivable decreased by $3.9 million, primarily due to collections from customers partially offset by higher contractual invoicing activity;

● Prepaid expense and other current assets increased by $3.2 million, primarily due to the timing of billing of contract assets related to fixed-price service contracts, and increase in deferred commission expense, partially offset by a decrease in prepaid expenses related to third party software licenses and cloud-subscription related costs and a decrease in income tax receivable;

● Other non-current assets decreased by $1.0 million primarily due to the amortization of non-current prepaid expenses and deferred costs to obtain contracts with customers;

● Accounts payable decreased by $3.6 million primarily due to the timing of payments of vendor invoices;

● 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.

● Accrued and other liabilities increased by $2.1 million primarily due to the timing of vendor invoices and accrued income taxes;

● Accrued compensation and related benefits increased by $1.4 million primarily due to accrued bonuses, unused vacation, the timing of payments of accrued sales commissions and accrued payroll taxes;

● Deferred revenue decreased by $4.8 million, primarily due to the timing of billing and revenue recognition.

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.

Cash provided by investing activities increased by $10.1 million for the six months ended June 30, 2022, compared to the six months ended June 30, 2021.

For the six months ended June 30, 2022, cash provided by investing activities primarily related to proceeds from maturities and sales of short-term investments of $112.5 million, partially offset by purchases of short-term investments of $35.9 million, and purchases of and prepayments for property and equipment of $4.6 million primarily related to our DFI™ systems and CV® systems.

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

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.

Net cash used in financing activities increased by $19.2 million for the six months ended June 30, 2022 compared to the six months ended June 30, 2021.

For the six months ended June 30, 2022, net cash used in financing activities primarily consisted of $22.5 million for the repurchase of shares of our common stock and $4.2 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 plans and exercise of stock options.

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

Related Party Transactions

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis