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Item 1. Business

2023-03-01 compared with 2022-03-01 · 110 added, 152 removed, 224 unchanged (54% of the section changed)

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We provide comprehensive data solutions designed to empower organizations across the semiconductor ecosystem to improve the yield and quality of their products and operational efficiency for increased profitability.

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

We derive revenues from two sources, Analytics and Integrated Yield Ramp, by monetizing our offerings through contract fees for on-premise licenses, SaaS, and other professional services and a value-based, variable fee or royalty, which we call Gainshare, on our historical integrated yield ramp (“IYR”) engagements.

Our products and services have been sold to integrated device manufacturers (“IDMs”), fabless semiconductor companies, foundries, equipment manufacturers, electronics manufacturing suppliers (“EMS”), original device manufacturers (“ODMs”), out-sourced semiconductor assembly and test (“OSATs”), and system houses.

We derive revenues from two sources, Analytics and Integrated Yield Ramp.

Our offerings contribute to Analytics revenue through contract fees for on-premise software and hardware system licenses, software-as-a-service (“SaaS”), and other professional services.

Certain of our Characterization services engagements contribute to Integrated Yield Ramp revenue through contract fees and a value-based, variable fee or royalty, which we call Gainshare.

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

Our products and services are used by many Fortune 500 companies across the semiconductor ecosystem to achieve smart manufacturing goals by connecting and controlling equipment, collecting data generated during manufacturing and test operations, and performing advanced analytics and machine learning to enable profitable, high-volume manufacturing.

Our customers include Fortune 500 companies across the semiconductor ecosystem.

These companies use our products and services to achieve various goals depending on whether they are integrated device manufacturers (“IDMs”), fabless semiconductor companies, foundries, equipment manufacturers, electronics manufacturing suppliers (“EMS”), original device manufacturers (“ODMs”), out-sourced semiconductor assembly and test (“OSATs”), or system houses.

For example, our foundry customers generate and analyze key manufacturing data using our solutions to shorten the time necessary for technology development and to provide their fabless customers with a higher yielding process with improved electrical performance, which are both critical metrics for market success.

Higher yields in less time can also mean less total raw materials and process runs, which help lower customers’ total cost and minimize environmental impact.

Also, for example, equipment manufacturers and factories use our connectivity products to implement evolving industry standards for their equipment or operations, respectively, with required quality and stability.

By way of further example, our IDM and fabless customers use our solutions to generate unique, differentiated data that can be analyzed with our machine learning (or ML) and artificial intelligence (or AI) algorithms to predict downstream manufacturing issues, resulting in shorter time for designs to meet performance requirements with fewer iterations and faster time-to-market.

Also, equipment manufacturers and factories use our connectivity products to implement evolving industry standards for their equipment or operations, respectively, with required quality and stability.

By way of further example, our IDM and fabless customers use our solutions to generate unique, differentiated data that can be analyzed with our machine learning (“ML”) and artificial intelligence (“AI”) algorithms to predict downstream manufacturing issues, resulting in shorter time for designs to meet performance requirements with fewer iterations and faster time-to-market.

For final example, our foundry and OSAT customers use the AI and ML applications of our software to optimize for process control, assembly, and/or test.

Our long-term business strategy is to be the data solutions provider of choice for the semiconductor and electronics ecosystems.

To achieve this, we intend to:

Our mission is to provide innovative solutions to create, access, and organize data to enable analysis and control for semiconductor and electronics companies to achieve better time-to-market, yields, quality, and operational efficiencies.

Our strategy to achieve this is as follows:

● Offer a Common, Flexible Platform for a Broad Group of Customers Across the Supply Chain .

As semiconductor and electronics products are made with the efforts of equipment manufacturers, front end foundries, chip and system designers, design automation, IP providers, and OSATs, there is a need to analyze the data across this whole chain to optimize yields, operational efficiencies, time to market, quality, and reliability.

The Exensio platform is designed to provide a common platform - whether deployed in the cloud (SaaS) or on premise - to enable these different participants to analyze the relevant end-to-end data in near real-time, with data stores from 10s to 100s of terabytes (TBs) and flexible configurations for IDM, foundry, fabless, and OSAT specific needs.

As semiconductor and electronics products are made with the efforts of equipment manufacturers, front-end foundries, chip and system designers, design automation, intellectual property (“IP”) providers, and OSATs, there is a need to analyze the data across this whole chain to optimize yields, operational efficiencies, time to market, quality, and reliability.

The Exensio platform is designed to provide a common platform - whether deployed in the cloud or on premise - to enable these different participants to analyze the relevant end-to-end data in near real-time, with data stores from 10s to 100s of terabytes (TBs) and flexible configurations for IDM, foundry, fabless, and OSAT specific needs.

Our ML solutions combine professional services with the Exensio platform to further enable our customers to push their analytics “to the edge” of their global supply chains and shift the analysis and decision-making processes closer to where their data is being generated.

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We believe that driving installation of our software products at the tool level will provide an infrastructure of connected equipment and help to enable smart factories.

In July 2020, we entered into a strategic partnership with Advantest Corporation through its wholly-owned subsidiary, Advantest America, Inc., (which

we collectively refer to as Advantest) that includes the development of cloud-based applications for Advantest tools that leverage our Exensio software analytics.

We believe this will allow us to increase the network of tools connected with PDF software and provide Advantest tool customers with increased data management and analytics.

In December 2020, we acquired Cimetrix Incorporated (or Cimetrix) and began providing software products based on open standards for equipment control and connectivity to equipment manufacturers and factories.

In July 2020, we entered into a strategic partnership with Advantest Corporation through its wholly-owned subsidiary, Advantest America, Inc., (collectively, “Advantest”), and have since released Exensio analytics applications that run on Advantest test and computer hardware.

In April 2022, we announced an additional collaboration with a leading back-end test and assembly provider.

We believe these relationships will allow us to increase the network of tools connected with

PDF software and provide Advantest and other tool customers with increased data management and analytics.

In December 2020, we acquired Cimetrix Incorporated (“Cimetrix”) and began providing software products based on open standards for equipment control and connectivity to equipment manufacturers and factories.

We believe that in the smart manufacturing era, the industry will demand the increased equipment connectivity and control our products and solutions offer.

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Historically, companies have only used data that was generated from their manufacturing and test process to drive improvements.

We offer unique IP (such as Characterization Vehicle ® (CV ® ) test chips) that is not part of an IC’s functionality, but significantly improves the manufacturing process by improving yield learning and reducing time to market.

Also, our Design-for-Inspection™ (DFI™) system provides on-chip instrumentation and measurement applications from 28 nanometer (nm) down to 7nm and smaller - designed to identify blockers that impact product yield and quality months earlier than any other hardware- or software-based methodology.

We offer unique IP (such as Characterization Vehicle® test chips, also branded CV® test chips) that is not part of an IC’s functionality, but significantly improves the manufacturing process by improving yield learning and reducing time to market.

Also, our Design-for-Inspection™ system (also branded DFI™ system) identifies blockers that impact product yield and quality months earlier than any other hardware- or software-based methodology from proprietary e-beam measurement of product layout or provided on-chip instrumentation.

We believe that in the More-than-Moore (“MtM”) era, the differentiated data we provide can play an important role in enabling our customers to bring new products to market faster and with higher quality and performance, and, ultimately, more profitability.

● Collaborate with Other Industry Leaders to Bring Additional Unique Data to Our Platform and Enable New and Differentiated Applications .

We believe that the value we bring to semiconductor manufacturing can be leveraged with additional data and through differentiated applications.

For example, in December 2021, we announced a collaboration with Siemens to connect integrated circuit test and yield data with manufacturing and test data collected and managed by our Exensio® analytics platform, to enable customers to rapidly analyze and identify yield correlations that are otherwise undetectable quickly, and in some cases automatically.

In July 2022, we announced a collaboration with SAP to connect factory data, including data collected and managed by our Exensio® analytics platform, to the enterprise resource planning (ERP) data in SAP S/4HANA® to enable greater efficiencies in semiconductor manufacturing.

Relationships such as these are intended to provide more ways for mutual customers to leverage their process and product data as part of their Industry 4.0 initiatives.

Differentiated applications that make use of this shared data are designed to provide unique insights to help customers achieve sustained profitability in their manufacturing.

Brief History

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In July 2000, we reincorporated in Delaware, and in July 2001, we completed an initial public offering.

Our shares of common stock are currently traded on the Nasdaq Global Market as PDFS.

We do not have any multi-class voting stock or any non-voting stock.

Our shares of common stock are currently traded on the Nasdaq Global Market under the symbol “PDFS”.

From 2000 through 2009, we expanded our technology footprint and our operations in various countries through acquisitions.

From 2009 to 2019, we primarily focused on the pervasive application of our technology to leading edge logic manufacturing and achieving yield targets with our clients that maximized Gainshare royalties.

In 2013, we leveraged our extensive experience in yield simulation software and CV ® test chip development and started research and development on an e-beam solution for non-contact, inline electrical characterization and process control for wafer inspection.

In 2013, we leveraged our extensive experience in yield simulation software and CV® test chip development and started research and development on an e-beam solution for non-contact, inline electrical inspection and process control for wafer inspection.

The first-generation e-beam tool for DFI™ was completed in 2015, and the second generation was commercially deployed in 2019.

In a parallel effort, starting in 2014, we re-architected our point-solution software tools into a new generation, highly-integrated data analytics Exensio platform, which resulted in accelerated growth in software through 2019.

In December 2020, we completed the acquisition of Cimetrix and began providing software products based on open standards for equipment control and connectivity to equipment manufacturers and factories.

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Today there are many different business models across the semiconductor industry:

products that follow the traditional life cycle just described, products targeted towards fast-moving market segments like Internet of Things (or IoT) – which utilize mature process nodes and requires a fast ramp to volume with a relatively short life cycle –, and products focused on long term market segments like automotive and industrial where product life cycles can last a decade or longer.

products that follow the traditional life cycle just described, products targeted towards

fast-moving market segments like Internet of Things (“IoT”) – which utilize mature process nodes and requires a fast ramp to volume with a relatively short life cycle, and products focused on long term market segments like automotive and industrial where product life cycles can last a decade or longer.

There is a lot of variation across these business models depending on the level of design complexity and the maturity of the process node used for product implementation.

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Some products and market segments, however, are content to utilize older process nodes.

Regardless of the process node used for implementation or how long the product will be sold in the market, success for every semiconductor company is predicated, among other things, on fast product yield ramp and the ability to optimize manufacturing and test metrics, such as yield

reclamation, product quality, and test efficiency, throughout a product’s life cycle.

Thus, technologies or capabilities that can accelerate yield ramp, improve product quality, and optimize production efficiencies are highly sought after because they typically lead to cost reduction and revenue generation concurrently, causing a leveraged effect on profitability.

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In addition, through yield, performance, and reliability improvement services over more than 20 years, we have accumulated a vast library of physical IP in the form of test structures.

As part of our DFI and CV systems, our engineers create designs of experiments (or DOEs) and layouts for targeted fail modes.

As part of our DFI and CV systems, our engineers create designs of experiments (“DOEs”) and layouts for targeted fail modes.

We have also developed electrical measurement hardware tools and proprietary extraction, design, and analysis software.

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Exensio products are designed to enable real-time rapid diagnosis and understanding of key manufacturing and test metrics during both inline and end-of-line wafer processing, helping customers reduce product variability and cost simultaneously.

By integrating silos of data and applying AI and ML, Exensio products resolve the limitation of local optimization and provide better foresight across the entire production process, reducing the time it takes to make critical decisions that can drive higher product yield, quality and reliability.

higher product yield, quality and reliability.

Our collaboration with strategic partners is intended to also integrate data from those partners’ products to make it available in Exensio and also to develop new applications to inter-operate with those products and enhance the value to mutual customers.

Exensio products are available as either an on-premise license or SaaS and are offered in four main, separately-offered Exensio products targeting the needs of the customer’s business model:

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however, there are common features, functionality, and purpose across some of the key modules as follows:

● Manufacturing Analytics (formerly Exensio Yield) – This module uses our proprietary database schema to store collected data in a common environment with a consistent view.

● Manufacturing Analytics – This module uses our proprietary database schema to store collected data in a common environment with a consistent view.

For example, product engineers use it to identify and analyze production yield, performance, reliability and other issues.

Elements of this module are designed to

handle very large and complex data sets that are commonplace in the semiconductor industry.

Elements of this module are designed to handle very large and complex data sets that are commonplace in the semiconductor industry.

To support the multi-dimensional product requirements of our customers, the powerful, interactive visualization and analysis capabilities in this product are highly flexible and user-configurable.

● Process Control (formerly Exensio Control) – This module provides failure detection and classification (or FDC) capabilities for monitoring, alarming, and control of manufacturing tool sets.

● Process Control – This module provides failure detection and classification (“FDC”) capabilities for monitoring, alarming, and control of manufacturing tool sets.

These capabilities include proprietary data collection and analysis of tool sensor trace data and summary indicators designed to rapidly identify sources of process variations and manufacturing excursions.

When used together with Manufacturing Analytics and related modules, the accretive data mining and correlation capabilities are designed to enable identification of tool level sources of yield loss and process variation and enable predictive and proactive optimization decisions for process control, process adjustments, PM scheduling, tool corrective actions, wafer dispatching, and wafer level and final test to impact end of line product yield, performance, and reliability.

● Test Operations (formerly Exensio Test) – This module provides comprehensive data collection and analysis capabilities for data generated during manufacturing test operations designed to optimize test operations management overall, including improving test productivity, performing part average test, supporting test floor operations, and implementing adaptive test.

When used together with Manufacturing Analytics and related modules, the accretive data mining and correlation capabilities are designed to enable identification of tool level sources of yield loss and process variation and enable predictive and proactive optimization decisions for process control, process adjustments, preventive maintenance scheduling, tool corrective actions, wafer dispatching, and wafer level and final test to impact end of line product yield, performance, and reliability.

● Test Operations – This module provides comprehensive data collection and analysis capabilities for data generated during manufacturing test operations designed to optimize test operations management overall, including improving test productivity, performing part average test, supporting test floor operations, and implementing adaptive test.

Test Operations is also designed to provide predictive insights based on proprietary analytics during test, assembly and packaging to maximize the efficiency of test operations, productivity improvements and yield reclamation.

● Assembly Operations (formerly Exensio ALPS) – This module provides the capability to link assembly and packaging data with other product lifecycle data, including fabrication and characterization data, across the product life cycle.

● Assembly Operations – This module provides the capability to link assembly and packaging data with other product lifecycle data, including fabrication and characterization data, across the product life cycle.

Data sources could include manufacturing, wafer acceptance test, wafer sort, test and assembly, final test, and field use.

The proprietary data linkage enabled by Assembly Operations is also designed to enable device manufacturers to maintain full traceability of their finished products back to the source wafer without the need for Electronic Chip IDs (or ECIDs).

This capability is becoming an essential requirement for safety-critical market segments such as automotive and military-aerospace.

Design-for-Inspection (or DFI) System.

Our DFI System is designed to enable customers to achieve non-contact, inline electrical characterization and more effective process control.

This system also enables electrical characterization of customers’ product chip layout structures, contactless measurement, and powerful data processing and analysis of relevant product patterns.

The electrical measurements augment and enhance existing inline defect inspection and metrology methods.

The DFI system leverages our production-proven design and analysis infrastructure.

The primary software and hardware elements of the DFI system are as follows:

● DFI On-Chip Instruments – Our on-chip measurement instruments are developed using our proprietary FIRE™ layout analysis software and are tuned to capture key features of our customers’ product layouts.

As part of the system offering, we generally provide design services to create these instruments.

Design-for-Inspection System.

Our DFI™ System leverages our production-proven design and analysis infrastructure and is designed to enable customers to achieve non-contact, inline electrical inspection of either our proprietary on-chip instruments or their product chip layout structures.

The electrical measurements augment and enhance existing inline defect inspection and metrology methods for more effective process control and inline, direct inspection of product wafers.

The DirectScan application of the DFI system includes our proprietary Exensio Characterization and Fire™ layout analysis software and the eProbe® non-contact e-beam tool.

The original application of the DFI system also included our on-chip instruments.

These elements are described as follows:

● Fire™ Feature Analysis Software – This proprietary software, which may also be part of our Exensio platform, is designed to analyze layout features.

In particular, this software helps to determine which parts of the product layout to inspect.

● DFI On-Chip Instruments – Our on-chip measurement instruments are tuned to capture key features of our customers’ product layouts.

As part of the system offering, we generally provide design services to create these

These DFI instruments are designed to be placed in test chips, scribe lines, or in product die, without any area penalty, and to exhibit specific electrical responses.

● eProbe® Non-Contact E-Beam Tool – Our eProbe e-beam tools are designed to measure the electrical response of the DFI instruments and suitable product layout structures.

● eProbe® Non-Contact E-Beam Tool – Our eProbe e-beam tools are designed for contactless measurement of the electrical response of the DFI instruments and suitable product layout structures.

As part of the system offering, we generally provide tool support services to customers to operate this tool.

The second generation tool includes orders of magnitude advances in throughput and accuracy that now enable DFI on-chip instruments to be used for inline control for leading-edge semiconductor process nodes.

The third generation tool includes advances in accuracy and sensitivity and, in addition to enabling DFI on-chip instruments to be used for inline control for leading-edge semiconductor process nodes, is designed to enable customers to see defects in product wafers inline within acceptable queue time and much higher throughput.

● Exensio Characterization Software – This software, which is also a part of our Exensio platform, is designed to analyze the billions of measurements collected using the eProbe tool.

As part of the system offering, we generally provide analysis services to customers to perform this analysis and provide summary findings and recommendations.

As part of the system offering, we generally provide to our customers analysis services, a summary of our findings and recommendations.

Characterization Vehicle (“CV”) System.

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◾ Our DirectProbe™ CV test chips are designed to enable ultra-fast yield learning for new product designs by allowing our clients to measure components of actual product layout.

◾ Our VarScan™ CV test chips are designed for front-end or through-silicon via (or TSV) application with a focus on high resolution resistance variation analysis for mass production.

◾ Our VarScan™ CV test chips are designed for front-end or through-silicon via (“TSV”) application with a focus on high resolution resistance variation analysis for mass production.

● pdFasTest ® Electrical Tester – Our proprietary test hardware is optimized to quickly test our CV test chips, enabling fast defect and parametric characterization of manufacturing processes.

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The products are sold via perpetual licenses and runtime royalties.

● Equipment Factory Connectivity – Our products for equipment connectivity primarily include the following:

● Equipment Factory Connectivity – Our products for equipment factory connectivity primarily include the following:

◾ CIMConnect ™ is designed for general purpose equipment connectivity and enables production equipment in the semiconductor and electronics industries to communicate data to the factory’s host computer through the SECS/GEM and PV2 standards.

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CIMConnect is used in semiconductor wafer fabrication, semiconductor back-end (test, assembly, and packaging), PV, HB-LED, disk drive, flat panel displays, printed circuit boards and other electronics manufacturing.

◾ CIM300 ™ is a software development kit (or SDK) used by manufacturers of 300mm semiconductor equipment that is designed to enable quick implementation of the required 300mm SEMI standards, including E39, E40, E87, E90, E94, E116, E148, and E157.

◾ CIM300 ™ is a software development kit (“SDK”) used by manufacturers of 300mm semiconductor equipment that is designed to enable quick implementation of the required 300mm SEMI standards, including E39, E40, E87, E90, E94, E116, E148, and E157.

These SEMI standards allow for the full automation required in manufacturing 300mm wafers.

The CIM300 SDK includes CIMConnect, TESTConnect, and SECSConnect.

◾ CIMPortal ™ Plus is an SDK for equipment manufacturers that allows for quick implementation of the Interface A, also known as EDA (Equipment Data Acquisition), and other SEMI standards, including E120, E125, E132, E134, E138, E147, and E164.

◾ CIMPortal ™ Plus is an SDK for equipment manufacturers that allows for quick implementation of the Interface A, also known as EDA (Equipment Data Acquisition), which includes SEMI standards E120, E125, E132, E134, E138, E147, and E164.

Interface A specifies a new port on equipment that provides detailed structured data that can be used for advanced process control, e-diagnostics, and other equipment engineering service applications.

These software applications are becoming critical to the fabs as shorter ramp times are required.

● Equipment Control – Our primary equipment control product is the CIMControlFramework ™ software, which is based on the latest Microsoft.NET technology.

● Equipment Control – Our equipment control product is the CIMControlFramework ™ (“CCF”) software, which is based on Microsoft.NET technology.

It is designed to enable equipment manufacturers to meet the supervisory control, material handling, platform and process control, and factory automation requirements of the fabrication facilities or fabs.

Developers can leverage framework components through configuration and extension or customize when unique requirements exist.

CIMControlFramework, unlike one-off solutions, is supported and maintained with upgrades, improvements, and performance enhancements.

CCF, unlike one-off solutions, is supported and maintained with upgrades, improvements, and performance enhancements.

With a data-driven architecture at the core of the framework, data generated at any point on the equipment is designed to be quickly and easily accessed by any other module or external application.

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For example, when the remote software is updated, the customer’s interface is also updated for all users.

Cloud computing is designed to eliminate incompatibilities between different software versions and allow us to make incremental updates without requiring software downloads.

Cloud computing is designed to eliminate incompatibilities between different software

versions and allow us to make incremental updates without requiring software downloads.

Additionally, our customers can save data to a central online location, which is designed to allow increased project collaboration.

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These services include environment set-up and configuration, system health monitoring, data integration maintenance, integration monitoring, system updates, security, and data upload/download, and license administration.

Software Related Services – We provide software maintenance and support (or M&S), data management services, various value-added services (or VAS) to install, configure, or create analysis templates, and other professional services to achieve customers’ specific outcomes using our software.

Software Related Services – We provide software maintenance and support (“M&S”), data management services, various value-added services (“VAS”) to install, configure, or create analysis templates, and other professional services to achieve customers’ specific outcomes using our software.

We call this last type of services our solutions offering and, in these cases, we tailor the use of one or more Exensio products to achieve a desired result.

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For example, VAS includes our data cleaning and monitoring services.

One requirement of big data analytics is to have clean,

harmonized data to analyze.

One requirement of big data analytics is to have clean, harmonized data to analyze.

This service offering outsources the data wrangling and management effort to free the customer to focus their efforts on analysis, which has a greater ROI to the company than data management.

Characterization Services – These services are designed to characterize key product and/or process elements, primarily into CV test structures or DFI on-chip measurement instruments, and typically do not include performance incentives based on the customers’ yield achievement.

We provide these services, typically together with all of the elements of our CV system, to foundry customers in connection with new process technology development and/or yield ramp.

We provide these services, typically together with all elements of our CV system, to foundry customers in connection with new process technology development and/or yield ramp.

In Characterization engagements, we generally provide the analysis of our CV test chips and provide summary findings and recommendations to the customer.

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In general, our customer contracts are non-cancellable.

Two customers accounted for 27% of our revenues for 2021, and one customer accounted for 23% of our revenues for 2020.

Two customers accounted for 41% of our revenues for 2022, two customers accounted for 27% of our revenues for 2021 and one customer accounted for 23% of our revenues for 2020.

No other customer accounted for 10% or more of our revenues in 2022, 2021 and 2020.

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Our sales strategy is primarily to pursue targeted accounts through a combination of our direct sales force, our service teams, and strategic alliances.

After we are engaged by a customer and early in the services process, our engineers seek to establish relationships in the organization and gain an understanding of our customers’ business issues.

After we are engaged by a customer and early in the services process, our engineers seek to

establish relationships in the organization and gain an understanding of our customers’ business issues.

Our direct sales and service teams combine their efforts to deepen our customer relationships by expanding our penetration across customers’ products, processes, and technologies.

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Research and Development

and enhancements to our existing solutions, such as field applications for DFI and CV.

Our research and development focuses on developing and introducing new proprietary technologies, including our Exensio platform, Cimetrix connectivity and control products, and DFI and CV systems, as well as other software products and enhancements to our existing solutions, such as field applications for DFI and CV and new applications targeted to inter-operate with strategic partner products.

We use a rapid-prototyping paradigm in the context of the customer engagement to achieve these goals.

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Our training also extends to focusing on ways to enhance client service skills.

Although it fluctuates, we can have up to one quarter of our research and development engineers operating in the field, partnered with solution services engineers, in a deliberate strategy to provide direct feedback between technology development and customer needs.

Although it fluctuates, we can have up to one quarter of our research and development engineers assigned to one or more projects, partnered with solution services engineers, in a deliberate strategy to provide direct feedback between technology development and customer needs.

We also utilize a variety of skilled independent contractors for specialized development.

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Some providers of semiconductor manufacturing software, inspection equipment, electronic design automation, or design IP may seek to broaden their product offerings and compete with us.

In addition, companies providing general ML and analytics software may focus on semiconductor companies and compete with us.

In each of the market segments we compete in, we face competition from established and potential competitors, some of whom may have greater financial, research, engineering, manufacturing and marketing resources than we have.

We currently face indirect competition from the internal groups at IC companies and direct competition from providers of (i) yield management and/or prediction systems, such as KLA-Tencor, Siemens AG (or Siemens), Onto Innovation, Inc.

(or Onto), and Synopsys, Inc.

We currently face indirect competition from the internal groups at IC companies and direct competition from providers of (i) yield management and/or prediction systems, such as KLA Corporation (“KLA”), Siemens AG (“Siemens”), Onto Innovation, Inc.

(“Onto”), and Synopsys, Inc.

(“Synopsys”);

(ii) semiconductor manufacturing software, such as Applied Materials, Synopsys, Invantest, Inc., NI, Inc., Onto, and Siemens;

(iii) inline inspection, metrology and electrical test equipment providers, such as Applied Materials and Keysight Technologies, Inc.;

and, (iv) connectivity software or integration products/services supporting factory equipment connectivity or control needs of customers, such as PEER Group, Inc., Kontron AIS, GmbH, Yokogawa Electric Corp., and Kornic Automation Co.

(ii) semiconductor manufacturing software, such as Applied Materials, Inc (“Applied Materials”), Synopsys, Invantest, Inc., NI, Inc., Onto, and Siemens;

(iii) inline inspection, metrology and electrical test equipment providers, such as ASML Holding N.V.

(“ASML”), Applied Materials, KLA, and Keysight Technologies, Inc.;

There may be other providers of competitive commercial solutions of which we are not aware, and we may compete with the products or offerings of these named companies or additional companies if we expand our offerings through acquisition or development.

For example, through our acquisition of Cimetrix in late 2020, we now face competition in the connectivity and integration products/services supporting factory equipment connectivity or control.

For example, through our acquisition of Cimetrix in late 2020, we now face competition in the connectivity and integration products/services supporting factory equipment

connectivity or control.

The demand for solutions that address the need for better integration between the silicon design and manufacturing processes may encourage direct competitors to enter into our market.

For example, in 2020, two of our competitors were acquired by larger entities, Synopsys, Inc.

acquired Qualtera and NI, Inc.

acquired Optimal+, which may enable greater investment or marketing of these competitive applications.

For example, in 2020, two of our competitors were acquired by larger entities, Synopsys acquired Qualtera and NI, Inc.

acquired Optimal+, and each has increased marketing or pricing competition with us.

This competition in our market may intensify in the future, which could lead to increased pricing pressure, negatively impacting our revenues, and slow our ability to grow or execute our strategy.

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We are heavily reliant on our technology and infrastructure, as well as the public cloud to an increasing degree, to provide our products and services to our customers.

As a result, we have developed an information security program (referred to as our InfoSec Program) to enhance our network security measures, identify and mitigate information security risk, and protect and preserve the confidentiality, integrity, and continued availability of critical information owned by us and that of our customers and suppliers that is in our care.

As a result, we have developed an information security program (our “InfoSec Program”) to enhance our network security measures, identify and mitigate information security risk, and protect and preserve the confidentiality, integrity, and continued availability of critical information owned by us and that of our customers and suppliers that is in our care.

Our InfoSec Program includes development, implementation, and continual improvement of policies and procedures to safeguard information and ensure availability of critical data and systems.

The program also includes annual information security awareness training for employees involved in our systems and processes that handle customer data and audits of our systems and enhanced training for specialized personnel and we have instituted regular phishing email simulations for all employees and all contractors with access to corporate email systems to enhance awareness and responsiveness to such possible threats Our InfoSec Program further includes review and assessment by external, independent third-parties, who certify and report on our weaknesses and internal response preparedness with respect to the entire company.

Accordingly, we have instituted periodic network access penetration (or PEN) testing no less than once per year both for our corporate network resources and our SaaS cloud-based offerings.

In May 2021, we successfully completed our Type II System and Organization Control (SOC 2) audit of our cloud-based offerings under the framework put forth by the American Institute of Certified Public Accountants (AICPA) in which independent, third-party auditors assess and test controls relating to the Trust Services Criteria (TSC) of Security, Availability, and Confidentiality and no qualified findings were found during the audit period.

In February 2022, we started our next Type II SOC 2 audit with external auditors and started the audit process leading to ISO 27001 certification.

Our InfoSec Program further includes review and assessment by external, independent third-parties, who certify and report on our weaknesses and internal response preparedness with respect to the entire company.

Accordingly, we have instituted periodic network access penetration (“PEN”) testing no less than once per year both for our corporate network resources and our SaaS cloud-based offerings.

In May 2022, we successfully completed our annual Type II System and Organization Control (“SOC 2”) audit of our cloud-based offerings under the framework put forth by the American Institute of Certified Public Accountants (“AICPA”) in which independent, third-party auditors assess and test controls relating to the Trust Services Criteria (“TSC”) of Security, Availability, and Confidentiality and no qualified findings were found during the audit period.

In January 2023, we started our next annual Type II SOC 2 audit with external auditors and continued the audit process leading to ISO 27001 certification.

To date, we have not managed ITAR-designated data, technology, or information.

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As described in the Audit Committee Charter, the Audit Committee is tasked with oversight of certain risk issues, including cybersecurity.

This Committee is comprised entirely of independent directors, two of whom have significant work experience related to information security issues or oversight.

Management reports security instances to the Committee as they occur, if material, and provides a summary multiple times per year to the Committee as well as the full Board about periodic assessment of our InfoSec Program, our internal response preparedness, and assessments led by outside advisors.

The Audit Committee is comprised entirely of independent directors, two of whom have significant work experience related to information security issues or oversight.

Management reports security instances to the Audit Committee as they occur, if material, and provides a summary multiple times per year to the Audit Committee as well as the full Board about periodic assessment of our InfoSec Program, our internal response preparedness, and assessments led by outside advisors.

We carry insurance that provides some protection against the potential losses arising from a cybersecurity incident.

In the last three years, the expenses we have incurred from information security breach incidences, including penalties and settlements, of which there were none, were immaterial.

Environmental, Social & Governance (ESG) Initiatives

We have assembled a cross-functional team of leaders representing operations, human resources, supply chain, regulatory compliance, finance, marketing communications, investor relations, facilities, and the legal department with a focus on ESG issues relevant to the Company or that we can impact as a Company.

In 2021, we formalized our corporate values as follows:

Uphold the Highest Ethical Standards in everything we do

Treat Everyone with Respect

Keep Our Commitments

Encourage Open and Vibrant Communications

Safeguard Company IP

Promote Creative Solutions

Move Forward Together

Embrace Change and Drive Innovation

Provide Passionate Dedication to Customer Success

Pursue Long-term Profitable Growth

Deliver the Highest Quality Products and Support

Take Responsibility for Personal Growth

Fiercely Protect Customer IP

Although we are not a member of the Responsible Business Alliance (or RBA) (formerly, the Electronics Industry Citizenship Coalition or EICC), in 2021 in an effort to further our ESG efforts, we adopted the RBA Code of Conduct to supplement our Code of Ethics, including the specific policies of the RBA Code relating to the five critical areas of corporate social responsibility:

labor, health and safety, environment, management systems, and ethics.

Guided by our above values and the following initial priorities, we believe we can achieve our business objectives and long-term stockholder value while doing our part in each of these areas.

For additional information, see “Human Capital Management” in this Report below.

Care for Our People

● We believe in upholding the principle of human rights, worker safety, and observing fair labor practices within our organization and our supply chain.

● We embrace diverse viewpoints and perspectives, recognizing that greater inclusion fosters innovation and achieves better decision making and financial results.

We have and plan to continue to undertake actions around organizational training, formalized company values, and a revitalized recruitment strategy.

● We are committed to ensuring that proper working conditions exist for the safety of our employees, such as developing, implementing, and continuously improving health and safety systems and conditions, and providing appropriate preparation, education, reporting, and controls.

For example, we have Illness Prevention and Hazard Communication programs and an Emergency Action Plan for worker safety at our clean room facility.

Environmental Responsibility

● We are committed to protecting the natural environment and our community by complying with all applicable legal and regulatory requirements.

For example, in 2020, we began the process of ISO14001 certification of our clean room facility, which specifies the requirements for the formulation and maintenance of an environmental management systems (EMS) and a specific framework for implementing relevant sustainable practices.

● We ask our employees to help us accomplish this by looking for opportunities to conserve energy, reduce consumption of natural resources, preserve air, soil, and water quality, manage waste properly, and reuse and recycle, and reduce the use of toxic substances in our operations where possible, including, in particular, in our clean room and lab facilities.

Our clean room facility does not produce any off gas or emissions and the only reportable, hazardous material that we use at that facility is liquid nitrogen, which is in a tank external to our building and monitored using telematics by an independent third party specializing in such activity.

● We look for ways to reduce energy consumption in our facilities around the world, including upgrades and or retrofits to LED and/or motion detector lighting and smart HVAC system.

Ethics & Corporate Responsibility

● We are committed to ensuring ethical organizational governance, promoting business ethics and integrity, and embracing diversity, and inclusion in the board room and throughout the organization.

● We are committed to observing fair, transparent, and accountable operating practices.

● We seek to create and foster a healthy, balanced, and ethical work environment for everyone in our organization.

To this end, we promote a positive work-life balance and ethical organizational culture and encourage all employees, regardless of position or level, to raise questions or concerns about actual or potential ethical issues and company policies and to offer suggestions about how we can make our organization better to address concerns.

● We have a Whistleblower Ethics Hotline that includes global telephone and web access together with local language support.

The web portal enables online reporting of concerns, where allowed by local law, and a place to ask questions or quickly access ethics and compliance policies.

● We believe these efforts strengthen our ethics and compliance efforts and foster an environment where employees can express concerns and have them resolved.

● In our view, the goals of providing value to stockholders and upholding the principle of human rights and treating people fairly and with dignity are integrally interconnected.

We are committed to promoting equality and supporting racial justice in the communities where we do business.

Supply Chain Responsibility

● We request that our suppliers adhere to the RBA Code of Conduct or its equivalent by flowing this requirement through our commercial contracts.

● We also support Rule 13p-1 under the Exchange Act (known as the Conflict Minerals Law) and efforts to avoid sourcing conflict minerals that directly or indirectly finance or benefit armed groups in the Democratic Republic of Congo (or DRC) and in adjoining countries.

Consistent with the Conflict Minerals Law and the OECD Due Diligence Guidance concerning conflict minerals, we adopted the Conflict Free Sourcing Initiative Due Diligence reporting process and seek to obtain conflict minerals content declarations from our suppliers each year, all in an effort to promote supply chain transparency.

We do not directly source tin, tantalum, tungsten, or gold (collectively referred to as 3TG) from mines, smelters or refiners, and we are in most cases several or more levels removed from these supply chain participants.

● We therefore expect:

o our suppliers to source 3TG only from smelters and refiners validated as being conflict free and that do not directly or indirectly benefit or finance armed groups in the DRC or other covered country;

o our suppliers to fully-comply with the Conflict Minerals Law and provide all necessary declarations;

o our suppliers to pass these requirements through to their supply chain and determine the source and chain of custody of specified minerals, including 3TG;

o any suppliers not willing to comply with these requirements to be reviewed by global procurement with regard to future business and sourcing declarations.

This conflict minerals policy encourages our suppliers to respect and protect human rights throughout the world.

In the last three years, the expenses we have incurred from information security breach incidences were immaterial and included no penalties or settlements.

Environmental, Social & Governance (“ESG”) Matters

We have recently taken key strategic steps to further develop our ESG program.

In 2021, we established formal board oversight of ESG by revising our Board committee charters, and in 2022, we advanced our approach to ESG by conducting

an ESG Priority Assessment to identify the ESG priority topics that are important to internal and external stakeholders.

In addition, in February 2023, we formed a management-level ESG Steering Committee comprised of representatives from various functions, including product development, engineering, operations, finance, human resources and purchasing.

The ESG Steering Committee was formed to (i) establish programs, policies and practices relating to ESG matters and (ii) assist the Nominating and Corporate Governance Committee of the Company’s Board of Directors in fulfilling its oversight responsibilities with respect to ESG matters.

Going forward, we plan to publish our inaugural ESG report in 2023 and to work to identify and advance key ESG workstreams.

Human Capital Management

We believe we have a responsibility to foster a healthy, balanced, and ethical work environment for everyone in our organization through sound ethical and organizational governance, by promoting business ethics and integrity, and by embracing equality, diversity, and inclusion throughout our organization and even extending to the board room.

additional information, see “Environmental, Social & Governance (ESG) Initiatives—Ethics & Corporate Responsibility,” in Part I, Item 1 of this Report.

We established a cross-functional advisory team of company leaders at the onset of the COVID-19 pandemic to ensure that promoting the health and safety of our employees in accordance with the World Health Organization (WHO) and the U.S.

Centers for Disease Control and Prevention (CDC) guidelines remains a constant focal point.

Work in our offices and travel policies are in compliance with local, state, and national requirements.

For employees working remotely, we encouraged them to tell us what home office equipment and IT support they needed to set up a home office for healthy and productive work.

For a small number of employees on-site at our clean room facility, we set up strict COVID safety protocols.

To stay connected while working remotely, beginning in April 2020, our Chief Executive Officer and other members of the executive team have led virtual meetings twice a month with the various sales, research and development, engineering, and administrative teams to discuss developments and business updates and answer questions.

Safety protocols, such as attendance capacity, temperature checking requirements, 6-feet distancing, managed traffic flows, providing and requiring appropriate masks to be worn while in the office, eliminating/spacing out eating in common areas, limiting attendance in conference rooms, accessible hand sanitation stations throughout the office, and visitor prescreening have been put in place in worldwide offices as advised by the CDC and required by local regulations when local regulations have allowed employees to be in the office.

For additional information, see “Environmental, Social & Governance (“ESG”) Initiatives—Ethics & Corporate Responsibility,” in Part I, Item 1 of this Report.

We support employee action to protect the natural environment and the communities in which we operate through pollution prevention, conservation, responsible use, charitable giving, and sustainable practices.

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As of December 31, 2022, we had 458 employees worldwide, including 158 field application engineers and consultants, 155 in research and development, 85 in sales and marketing, and 60 in general and administrative functions.

Of these employees, 218 are located in the United States and Canada, 157 in Asia, and 32 in Europe.

Of these employees, 258 are located in the North America, 166 in Asia, and 34 in Europe.

None of our employees are represented by a labor union.

8 unchanged sentences

Executive Vice President, Finance and Chief Financial Officer

Kimon Michaels, Ph.D.

Executive Vice President, Products and Solutions

Michaels, Ph.D.

Executive Vice President, Products and Solutions and Director

Adrzej Strojwas, Ph.D.

2 unchanged sentences

, one of our founders, has served as President since November 1991 and has served as our Chief Executive Officer since July 2000.

Kibarian has served as a director since December 1992.

Kibarian has served as a director on our Board of Directors since December 1992.

Kibarian received a B.S.

5 unchanged sentences

Prior to that, Mr.

Raza served in various roles at Synaptics Inc., a developer of human interface technologies, including as Senior Vice President of Corporate Development from

August 2017 to June 2019 and Vice President of Corporate Development from February 2015 to August 2017.

Prior roles include technology investment banking at Goldman, Sachs & Co.

Raza served in various roles at Synaptics Inc., a developer of human interface technologies, including as Senior Vice President of Corporate Development from August 2017 to June 2019 and Vice President of Corporate Development from February 2015 to August 2017.

include technology investment banking at Goldman, Sachs & Co.

and UBS Investment Bank, strategic advising at Blackreef Capital, engineering and marketing at Azanda Network Devices, and engineering at Lucent Technologies.

4 unchanged sentences

in Electrical Engineering from Valparaiso University.

Kimon Michaels, Ph.D.

Michaels, Ph.D.

, one of our founders, has served as Vice President, Products and Solutions since July 2010 and was designated as an Executive VP in February 2019.

1 unchanged sentence

Prior to that, Dr.

Michaels served as Vice President, Field Operations for Manufacturing Process Solutions from January 2006 through May 2007, and has been a Director since November 1995.

Michaels served as Vice President, Field Operations for Manufacturing Process Solutions from January 2006 through May 2007, and has served as a director on our Board of Directors since November 1995.

From March 1993 through December 2005, he served in various vice presidential capacities.

He also served as Chief Financial Officer from November 1995 to July 1998.

He also served as Chief Financial Officer of the Company from November 1995 to July 1998.

Michaels received a B.S.

2 unchanged sentences

Andrzej Strojwas, Ph.D.

, served as a technical advisor to the Company since our founding, as chief technologist from 1997 to 2021.

He joined the Company as an employee in July 2021 as Vice President and Technical General Manager, and was appointed by the Board of Directors to be our Chief Technology Officer effective December 2021.

, served as a technical advisor to the Company from our founding until 2021 and as chief technologist from 1997 to 2021.

He joined the Company as an employee in July 2021 as Vice President and Technical General Manager, and was appointed Chief Technology Officer effective December 2021.

From October 1982 to July 2021, Dr.

1 unchanged sentence

In addition, Dr.

Strojwas has held senior technical positions at Harris Semiconductor Co., AT&T Bell Labs, Texas Instruments, NEC, Hitachi, SEMATECH, and KLA-Tencor.

Strojwas has held senior technical positions at Harris Semiconductor Co., AT&T Bell Labs, Texas Instruments, NEC, Hitachi, SEMATECH, and KLA.

He holds an M.S.

8 unchanged sentences

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-K

Item 1. Business