What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-11-10 compared with 2022-08-11 · 138 added, 99 removed, 210 unchanged (53% of the section changed)

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expectations regarding global economic trends;

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

the impact of rising inflation and global interest rates, 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 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, supply chain disruptions, possible impacts from the evolving trade regulatory environment and geopolitical tensions and our ability to obtain additional financing if needed.

These forward-looking statements are only predictions.

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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 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 continue to closely monitor the COVID-19 situation with a focus on our employees’ safety as our employees, who were working in-office prior to COVID-19, have continued to return to working in-office for a certain number of days each week, subject to any current and future local restrictions.

In addition, our personnel worldwide can 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 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.

As we continue 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 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.

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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.

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 People’s Republic of China (“P.R.C.”) and Russian companies to the U.S.

Export Administration Regulations (“EAR”) Entity List.

We are also actively monitoring the macroeconomic environment, including the potential impact of inflationary pressures and increasing global interest rates, for impacts on our material, labor and other costs.

government continues to expand and intensify export controls and sanctions.

This includes 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 or Unverified List.

These listings restrict supply to designees of items that are subject to the EAR.

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government could potentially interrupt their ability to make use of our products or services.

In October 2022, the U.S.

government issued an interim final rule (87 Fed.

62186) with additional export control regulations that may be relevant to our business.

Among several changes, the U.S.

government imposed restrictions on supply, to any P.R.C.

fabrication facility that produces certain advanced logic or memory ICs, when the supply involves a product or technology (“Item”) that is “subject to the EAR” or involves a “U.S.

person” in providing, facilitating providing, or servicing an Item that is “not subject to the EAR.” Another change is a restriction on supply of an item “subject to the EAR” destined for use in P.R.C.

development or production of certain IC manufacturing equipment.

Industry members, including our Company, continue to generate questions and evaluate the effects of the new regulations.

government has committed to “rolling guidance” to resolve issues and answer questions in the coming months.

In addition, the U.S.

government expanded the “foreign direct product rule,” together with EAR jurisdiction and restrictions, to additional foreign-produced Items of certain types or in connection with additional restricted parties in the P.R.C.

Based on our current assessments, we expect the impact of these expanded trade restrictions on our business to be limited.

We will continue to monitor for any further trade restrictions, other regulatory or policy changes by the U.S.

or foreign governments and any actions in response, and remain committed to complying with applicable law.

The uncertainty caused by these recent regulations and the potential for additional future restrictions could, nonetheless, negatively affect our future sales in the P.R.C.

Geopolitical tension between the U.S.

continues to increase, with both governments taking actions and making statements that lean in the direction of confrontation, including on the issue of Taiwan.

Growing tension also increases risk of unintended mishap, mistake, or accident leading to escalation and global supply chain disruption.

The continuing tension between the U.S.

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Financial Highlights

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.

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

● Total revenues were $39.9 million, an increase of $10.3 million, or 35%, compared to the three months ended September 30, 2021.

Analytics revenue was $32.9 million, an increase of $5.7 million, or 21%, compared to the three months ended September 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.

Integrated Yield Ramp revenue increased $4.6 million, or 196%, compared to the three months ended September 30, 2021, primarily due to an increase in Gainshare royalty from increased customer wafer shipments at non-leading edge nodes and hours worked on fixed fee engagements.

● Costs of revenues increased $1.5 million, compared to the three months ended September 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.

● Net income was $1.4 million, compared to a $2.4 million loss for the three months ended September 30, 2021.

The increase in net income 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, cloud-services related costs, subcontractor costs, and an increase in income tax expense.

Financial highlights for the nine months ended September 30, 2022, are as follows:

● Total revenues were $108.0 million, an increase of $26.9 million, or 33%, compared to the nine months ended September 30, 2021.

Analytics revenue was $94.4 million, an increase of $28.3 million, or 43%, compared to the nine months ended September 30, 2021.

Integrated Yield Ramp revenue decreased $1.4 million, or 9%, compared to the nine months ended September 30, 2021, primarily due to the end of Gainshare periods, partially offset by an increase in hours worked on fixed fee engagements.

● Costs of revenues increased $3.6 million, compared to the nine months ended September 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 royalties, and license expenses.

● Net loss was $3.9 million, compared to a $14.5 million loss for the nine months ended September 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, cloud-services related costs and subcontractor costs, and an increase in income tax expense.

● Cash, cash equivalents and short-term investments decreased $24.1 million to $116.1 million at September 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 for the 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, 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.

There were no material changes during the nine months ended September 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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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 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.

federal and state net deferred tax assets (“DTAs”), primarily driven by a cumulative loss incurred over the 12-quarter period ended September 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 September 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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This process involves significant management judgment about assumptions that are subject to change from period to period based on changes in tax laws or variances between future projected operating performance and actual results.

Changes in the net DTAs, less offsetting valuation allowance, in a period are recorded through the income tax provision and could have a material impact on the Condensed Consolidated Statements of Comprehensive Loss.

Our income tax calculations are based on application of applicable U.S.

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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 June 30, 2022, no deferred taxes have been provided on undistributed earnings from our international subsidiaries.

At September 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 June 30, 2022.

As such, we have not provided for any foreign withholding taxes on the earnings of foreign subsidiaries as of September 30, 2022.

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

in the year earned under the Global Intangible Low-Taxed Income rules implemented under 2017 Tax Cuts and Jobs Act.

The Inflation Reduction Act of 2022 (the “Act”) was signed into U.S.

law on August 16, 2022.

The Act includes various tax provisions, including an excise tax on stock repurchases, expanded tax credits for clean energy incentives, and a corporate alternative minimum tax that generally applies to U.S.

corporations with average adjusted financial statement income over a three year period in excess of $1 billion.

While the details of the computation of the tax and implementation of the incentives will be subject to regulations that have not yet been released by the U.S.

Department of the Treasury, the Company does not expect the Act to materially impact its financial statements.

The Creating Helpful Incentives to Produce Semiconductors Act (the “CHIPS Act”) was signed into U.S.

law on August 9, 2022.

CHIPS Act is intended to increase domestic competitiveness in semiconductor manufacturing capacity, increase research and development in computing, artificial intelligence, clean energy, and nanotechnology through federal government programs and incentives over the next ten years.

CHIPS Act includes an advanced manufacturing tax credit equal to 25% of qualified investments in property purchased for an advanced manufacturing facility.

We are evaluating the potential benefits of CHIPS Act to our business.

Valuation of Long-lived Assets including Goodwill and Intangible Assets

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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 and six months ended June 30, 2022.

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

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

Recent Accounting Pronouncements and Accounting Changes

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Results of Operations

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

Discussion of Financial Data for the Three and Nine Months ended September 30, 2022

Revenues, Costs of Revenues, and Gross Margin

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

(Dollars in thousands)

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Analytics Revenue

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.

Analytics revenue increased $5.7 million for the three months ended September 30, 2022, compared to the three months ended September 30, 2021.

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

Analytics revenue increased $28.3 million for the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021.

Integrated Yield Ramp Revenue

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.

Integrated Yield Ramp revenue increased $4.6 million for the three months ended September 30, 2022, compared to the prior year period, primarily due to an increase in Gainshare royalty from increased customer wafer shipments at non-leading edge nodes and hours worked on fixed fee engagements.

Integrated Yield Ramp revenue decreased $1.4 million for the nine months ended September 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.

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

new markets, and further penetration of our current customer base.

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

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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.

Service costs include material, personnel-related costs 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 $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.

The increase in costs of revenues of $1.5 million for the three months ended September 30, 2022, compared to the three months ended September 30, 2021, was primarily due to (i) a $0.9 million increase in personnel-related costs due to worldwide merit increases, increases in benefit costs, stock-based compensation expense, and bonus expense, (ii) a $0.4 million increase in cloud-delivery costs, and (iii) a $0.2 million increase in subcontractor costs.

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

The increase in costs of revenues of $3.6 million for the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021, was primarily due to (i) a $2.6 million increase in personnel-related costs due to worldwide merit increases, increases in benefit costs, stock-based compensation expense, and bonus expense, (ii) a $1.2 million increase in cloud-delivery costs, and (iii) a $0.6 million increase in subcontractor costs.

These were partially offset by (i) a $0.7 million decrease in facilities and information technology-related costs including depreciation expense and (ii) a $0.1 million decrease in software royalties and license expenses.

Gross margin increased 6 percentage points for the three months ended September 30, 2022, to 69%, compared to 63% for the three months ended September 30, 2021.

The higher gross margin during the three months ended September 30, 2022 was primarily due to higher total revenue when compared to the year-ago period.

Gross margin increased 7 percentage points for the nine months ended September 30, 2022, to 67%, compared to 60% for the nine months ended September 30, 2021.

The higher gross margin during the nine months ended September 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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September 30,

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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 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.

Research and development expenses increased for the three months ended September 30, 2022, compared to the three months ended September 30, 2021, primarily due to (i) a $2.7 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 $0.6 million increase in subcontractor expenses primarily related to DFI systems and Cimetrix software, (iii) a $0.1 million increase in facilities and information technology-related costs including depreciation expense, and (iv) a $0.1 million increase in travel expenses.

Research and development expenses increased for the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021, primarily due to (i) a $7.3 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 $1.1 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 including depreciation expense, and (iv) a $0.3 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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September 30,

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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 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.

Selling, general, and administrative expenses increased for the three months ended September 30, 2022, compared to the three months ended September 30, 2021, primarily due to (i) a $2.2 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, (iii) a $0.3 million increase in travel and other expenses, and (iv) a $0.2 million increase in legal fees related to the arbitration proceeding over a disputed customer contract.

These were partially offset by a $0.5 million decrease in subcontractor expenses.

Selling, general, and administrative expenses increased for the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021, primarily due to (i) a $4.0 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 $0.4 million increase in facilities and information technology-related costs including depreciation expense, (iii) a $0.4 million increase in third-party cloud-services related costs, and (iv) a $0.2 million increase in travel expenses.

These were partially offset by a (i) a $0.7 million decrease in subcontractor expenses, and (ii) a $0.2 million decrease in legal fees related to the arbitration proceeding over a disputed customer contract.

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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Six Months Ended

Nine Months Ended

September 30,

(Dollars in thousands)

Amortization of acquired intangible assets

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

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

Interest and Other Expense (Income), Net

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

(Dollars in thousands)

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

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.

Interest and other expense (income), net increased for the three and nine months ended September 30, 2022, compared to the year-ago periods, primarily due to a higher foreign currency exchange gain resulting from a net favorable fluctuation in foreign exchange rates and interest income.

Income Tax Expense

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

(Dollars in thousands)

Income tax expense

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.

Income tax expense increased for the three and nine months ended September 30, 2022, compared to the three and nine months ended September 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 generally accepted accounting principles and the effectiveness of our tax planning strategies.

Liquidity and Capital Resources

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.

As of September 30, 2022, our working capital, defined as total current assets less total current liabilities, was $128.1 million, compared to $144.7 million as of December 31, 2021.

Total cash and cash equivalents, and short-term investments were $116.1 million as of September 30, 2022, compared to cash and cash equivalents of $140.2 million as of December 31, 2021.

As of September 30, 2022, and December 31, 2021, cash and cash equivalents held by our foreign subsidiaries were $6.9 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.

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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 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.

During the nine months ended September 30, 2022, the Company repurchased 218,858 shares under the 2020 Program at an average price of $26.40 per share, for a total price of $5.8 million.

Through April 10, 2022, under the 2020 Program, the Company repurchased a total of 470,070 shares 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.

During the nine months ended September 30, 2022, the Company repurchased 714,600 shares under the 2022 Program at an average price of $23.36 per share, for a total price of $16.7 million.

Cash Flow Data

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

Six Months Ended June 30,

Nine Months Ended September 30,

(In thousands)

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Net Cash Flows Provided by Operating Activities

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;

Cash flows provided by operating activities during the nine months ended September 30, 2022, consisted of net loss, adjusted for certain non-cash items which primarily consisted of depreciation and amortization, stock-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 $4.2 million increase in cash flows from operating activities for the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021, was driven primarily by a $10.6 million decrease in net loss, a $11.4 million decrease in net change from operating assets and liabilities, and a $5.0 million increase in non-cash adjustments to net loss, which mainly resulted from an increase in stock-based compensation expense of $5.1

million and an increase in amortization of costs capitalized to obtain revenue contracts of $0.6 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 nine months ended September 30, 2022, were as follows:

● Accounts receivable increased by $15.0 million, primarily due to contractual invoicing activity partially offset by collections from customers;

● Prepaid expense and other current assets increased by $2.8 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;

● Other non-current assets decreased by $1.5 million primarily due to the amortization of non-current prepaid expenses, deferred costs to obtain contracts with customers and lower unbilled accounts receivable;

● Accounts payable decreased by $2.9 million primarily due to the timing of payments of vendor invoices;

● Accrued and other liabilities increased by $2.6 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.

● Accrued compensation and related benefits increased by $3.6 million primarily due to accrued bonuses, unused vacation, and accrued sales commissions, partially offset by a decrease in accrual due to exercise of purchase rights under employee stock purchase plans;

● Deferred revenue increased by $2.3 million, primarily due to the timing of billing and revenue recognition.

Net Cash Flows Provided by Investing Activities

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.

Cash provided by investing activities increased by $41.1 million for the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021.

For the nine months ended September 30, 2022, cash provided by investing activities primarily related to proceeds from maturities and sales of short-term investments of $136.0 million, partially offset by purchases of short-term investments of $45.8 million, and purchases of and prepayments for property and equipment of $6.7 million primarily related to our DFI systems and CV systems.

For the nine months ended September 30, 2021, cash provided by investing activities primarily related to proceeds from maturities and sales 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 our DFI systems.

Net Cash Flows Used in Financing Activities

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.

Net cash used in financing activities increased by $18.7 million for the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021.

For the nine months ended September 30, 2022, net cash used in financing activities primarily consisted of $22.5 million for the repurchase of shares of our common stock and $5.8 million in cash payments for taxes related to net share settlement of equity awards, partially offset by $4.1 million of proceeds from our employee stock purchase plans and exercise of stock options.

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.

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