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Item 7. Management’s Discussion and Analysis

2023-03-01 compared with 2022-03-01 · 134 added, 112 removed, 217 unchanged (53% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations

We offer products and services designed to empower engineers and data scientists across the semiconductor ecosystem to connect, collect, manage, and analyze data about design, equipment, manufacturing, and test to improve the yield and quality of their products.

We offer products and services designed to empower organizations across the semiconductor ecosystem to connect, collect, manage, and analyze data about design, equipment, manufacturing, and test to improve the yield and quality of their products.

We derive revenues from two sources:

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Our offerings combine proprietary software, professional services using proven methodologies and third-party cloud-hosting platforms for SaaS, electrical measurement hardware tools, and physical IP for IC designs.

We primarily monetize our offerings through license fees and contract fees for professional services and software as a service (or SaaS).

We primarily monetize our offerings through license fees and contract fees for professional services and SaaS.

In some cases, especially on our historical IYR engagements, we also receive a value-based variable fee or royalty, which we call Gainshare.

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Industry Trend

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

For example, most U.S.

states and countries worldwide imposed in 2020, and may continue to impose from time-to-time for the foreseeable future, restrictions on the physical movement of people to limit the spread of COVID-19, including travel restrictions and stay-at-home orders.

As a result, during portions of 2021, many of our offices were temporarily shut down and our local employees were restricted from traveling to customer sites or visiting our other offices.

We continue to closely monitor the COVID-19 situation and will reopen our corporate headquarters in the United States and other offices according to local restrictions, in each case, with a focus on our employees’ safety.

In addition, our personnel worldwide continue to be subject to various country-to-country travel restrictions, which limits the ability of some employees to travel to other offices or customer sites.

We believe the lack of an ability to meet in person during most of 2020 and 2021 made it harder for us to sell complex or new technologies to some customers during these periods.

Once we can again begin to meet with these customers in person, we believe we may improve traction with them.

To date, we have been able to provide uninterrupted access to our products and services due to our globally distributed workforce, many of whom were working remotely prior to the pandemic, and our pre-existing infrastructure, which supports secure access to our internal systems.

The total duration and full extent of the impact from the COVID-19 pandemic depends on future developments that cannot be accurately predicted at this time, such as the ultimate severity and transmission rate of the virus and variants, the extent and effectiveness of containment actions and vaccinations, and the impact of these and other factors on our employees, customers, partners, and suppliers.

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

Although this shortage has not materially affected our business, this trend may affect our future business opportunities, particularly future Gainshare and Cimetrix run-time licenses, if our customers’ production volumes decrease.

Certain other trends may affect our Analytics revenue specifically.

In particular, the confluence of Industry 4.0 (i.e.

the fourth industrial revolution, or the automation and data exchange in manufacturing technologies and processes) and cloud computing (i.e.

the on-demand availability of computing resources and data storage without direct active management by the user) is driving increased innovation in semiconductor and electronics manufacturing and analytics, as well as in the organization of IT networks and computing at semiconductor and electronics companies across the ecosystem.

Certain trends may affect our Analytics revenue specifically.

In particular, the confluence of Industry 4.0 (i.e., the fourth industrial revolution, or the automation and data exchange in manufacturing technologies and processes) and cloud computing (i.e., the on-demand availability of computing resources and data storage without direct active management by the user) is driving increased innovation in semiconductor and electronics manufacturing and analytics, as well as in the organization of IT networks and computing at semiconductor and electronics companies across the ecosystem.

First, the ubiquity of wireless connectivity and sensor technology enables any manufacturing company to augment its factories and visualize its entire production line.

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The ability to cost-effectively and securely store, analyze, and retrieve massive quantities of data from the cloud versus on-premise enables data to be utilized across a much broader population of users, frequently resulting in greater demands on analytics programs.

The combination of these latter two trends means that cloud-based, analytic programs that effectively manage identity management, physical security, and data protection are increasingly in demand for insights and efficiencies across the organizations of these companies.

We believe that all these trends will continue for the next few years, and the challenges involved in adopting Industry 4.0 and secure cloud

computing will create opportunities for our combination of advanced analytics capabilities, proven and established supporting infrastructure, and professional services to configure our products to meet customers’ specialized needs.

The combination of these latter two trends means that cloud-based, analytic

programs that effectively manage identity management, physical security, and data protection are increasingly in demand for insights and efficiencies across the organizations of these companies.

We believe that all these trends will continue for the next few years, and the challenges involved in adopting Industry 4.0 and secure cloud computing will create opportunities for our combination of advanced analytics capabilities, proven and established supporting infrastructure, and professional services to configure our products to meet customers’ specialized needs.

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

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

This trend will likely continue to impact our characterization services business and Integrated Yield Ramp business on these nodes.

This trend will likely continue to impact our characterization services business on these nodes.

We expect most logic foundries to invest in derivatives of older process nodes, such as 28nm and 14nm, to extract additional value as many of their customers will not move to advanced nodes due to either technological barriers or restrictive economics.

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

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

We expect China’s investment in semiconductors to continue.

In order for these trends to provide opportunities for us to increase our business leveraging electrical characterization, Chinese semiconductors manufacturers will need to increase their production volumes on advanced technology nodes and continue to engage foreign suppliers, subject to compliance with changing U.S.

export restrictions.

Compliance with changing U.S.

export restrictions limit our possible business with Chinese semiconductor manufacturers on advanced nodes with our electrical characterization offering.

As a result of these market developments, we have chosen to focus our resources and investments in products, services, and solutions for analytics.

There are other business trends that may affect our business opportunities generally.

There are other global or business trends that may affect our business opportunities generally as follows:

● Continuing impact of the COVID-19 pandemic .

Although COVID-19 pandemic restrictions are being eased worldwide, the pandemic continues to affect how we and our customers operate our businesses.

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 have in the past been and, in the future, may become subject to various country-to-country travel restrictions, which limits the ability of some employees to travel to other offices or customer sites.

We believe the lack of an ability to meet in person during most of 2020, 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.

As we continue to meet with these customers in person, we believe we may improve traction with them.

The total duration and full extent of the impact from the COVID-19 pandemic depends on future developments that cannot be accurately predicted at this time, such as the ultimate severity and transmission rate of the virus and its variants, the extent and effectiveness of containment actions and vaccinations, and the impact of these and other factors on our employees, customers, partners, and suppliers.

To date, one effect of the COVID-19 pandemic is a global shortage in semiconductors due primarily to supply chain disruptions and some market segments, including automotive semiconductors, continue to have shortages in production.

Although COVID-19 related shortages have not materially affected our business, this trend may affect our future business opportunities, particularly future Gainshare and Cimetrix run-time licenses, if our customers’ production volumes decrease.

● Continuing demand for consumer electronics .

For instance, the demand for consumer electronics, communications devices, and high-performance computing continues to drive technological innovation in the semiconductor industry as the need for products with greater performance, lower power consumption, reduced costs, and smaller size continues to grow with each new product generation.

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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.

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

companies to the U.S.

Export Administration Regulations (“EAR”) Entity List.

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

and global energy markets, which has resulted in inflation, supply chain shortages and rising prices.

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

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

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

If these trends continue or worsen, we or our customers may face a shortage of critical components and our business may suffer.

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

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.

● Changing export controls and sanctions .

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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Our standard operations include development, distribution processes, software download sites, and professional service centers and processes located in various geographies around the world to better serve our customers.

Some customers have nonetheless expressed concerns to us that continued action by the U.S.

Some customers in the P.R.C., in particular, have nonetheless expressed concerns to us that continued action by the U.S.

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

In October 2022, the U.S.

government issued an interim final rule (87 Fed.

62186) with additional export control restrictions.

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 commodity, software or technology (“Item”) that is “subject to the EAR” or when the supply involves a “U.S.

person” even if the Item is not “subject to the EAR.” Another change is a restriction on supply of an item “subject to the EAR” destined for use in the development or production of certain IC manufacturing equipment and certain parts and components of such equipment in the P.R.C.

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 rules,” and thus EAR jurisdiction and restrictions, to additional foreign-produced Items and 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 tensions .

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.

governments in trade and security matters or the perception of that tension could lead to disruptions or reductions in international trade, deter or prevent purchasing activity of customers, and negatively impact our China sales and financial results.

Cimetrix Acquisition

On December 1, 2020, we completed the acquisition of Cimetrix for approximately $31.6 million in cash consideration, net of cash on Cimetrix’s balance sheet as of closing, and other closing adjustments, for all of the outstanding equity of Cimetrix.

The combination of Cimetrix connectivity products with our Exensio platform, which leverages machine learning, is intended to enable IC, assembly, and equipment manufacturer customers to extract more intelligence from their tools, not just data, to build more reliable chips and systems at lower manufacturing costs.

We accounted for this acquisition as a business combination in accordance with FASB ASC Topic 805, Business Combinations.

For further information about this acquisition, see Note 4 of “Notes to Consolidated Financial Statements” (Item 8 of Part II of this Annual Report).

and/or Russian governments in trade and security matters or the perception of that tension could lead to disruptions or reductions in international trade, deter or prevent purchasing activity of customers, and negatively impact our China sales (with respect to U.S.-P.R.C.

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

Financial Highlights

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Analytics revenue was $130.5 million, an increase of $37.1 million, or 40%, compared to the year ended December 31, 2021.

The increase in Analytics revenue was primarily driven by a $30.1 million increase in revenue, of which a substantial amount was from Cimetrix due to full year included results post acquisition and remainder was from Exensio software licenses due to higher demand from customers, and a $6.1 million increase in revenue from CV systems due to higher hours for characterization services worked across multiple contracts and customers.

Integrated Yield Ramp revenue decreased $13.2 million, or 43%, compared to the year ended December 31, 2020, primarily due to a decrease in Gainshare royalty from certain customers due to the end of Gainshare periods on certain contracts and lower hours worked on other contracts.

● Costs of revenues increased $7.4 million for the year ended December 31, 2021, compared to the year ended December 31, 2020, primarily due to increased personnel-related costs due to higher headcount resulting from the acquisition of Cimetrix, cloud-delivery costs, software licenses costs, and amortization of acquired intangible assets.

These increases were partially offset by decreases in facilities and information technology-related costs and due to the timing of deferral of contract costs.

● Net loss was $21.5 million, compared to $40.4 million for the year ended December 31, 2020.

The decrease in net loss was primarily attributable to increases in total revenues and other income, and a $19.1 million decrease in income tax expense, partially offset by increases in costs of revenues and operating expenses.

Our income tax expense in fiscal 2020 was higher due primarily to the recognition of a full valuation allowance against our U.S.

net deferred tax assets.

Increases in operating expenses were related primarily to our research and development, sales and marketing activities, general and administrative expenses primarily due to increase in personnel-related costs due primarily to higher headcount as a result of the Cimetrix acquisition, subcontractor costs, facilities and information technology-related costs, fees for legal services for the arbitration proceeding over a disputed customer contract, amortization expense of acquired intangible assets, and a write-down in value of property and equipment.

● Cash, cash equivalents and short-term investments decreased $5.1 million to $140.2 million at December 31, 2021, from $145.3 million at December 31, 2020, primarily due to repurchases of common stock, cash used to purchase property and equipment, payment for taxes related to net share settlement of equity awards, payment of the holdback amount to Cimetrix shareholders, partially offset by cash provided by operating activities and proceeds from the exercise of stock options and proceeds from purchases under our employee stock purchase plans.

Critical Accounting Policies and Estimates

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

Integrated Yield Ramp revenue increased $0.4 million, or 2%, compared to the year ended December 31, 2021, primarily due to

an increase in hours worked on fixed fee engagements, partially offset by the end of Gainshare periods on certain contracts.

● Costs of revenues increased $3.7 million for the year ended December 31, 2022, compared to the year ended December 31, 2021, primarily due to increases in personnel-related costs, subcontractor costs, third-party cloud-delivery costs, and software licenses and maintenance costs.

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

● Net loss was $3.4 million, compared to a $21.5 million net loss for the year ended December 31, 2021.

The decrease in net loss was primarily attributable to an increase in total revenues, other income from net foreign currency exchange gain and interest income, a decrease in write-downs in value of property and equipment, decreases in property tax expense and depreciation expense, 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 driven by increases in personnel-related costs, cloud-services related costs, subcontractor costs, and legal expenses, and an increase in income tax expense.

● Cash, cash equivalents and short-term investments decreased $1.0 million to $139.2 million at December 31, 2022, from $140.2 million at December 31, 2021, primarily due to cash used to repurchase shares of common stock and payment for taxes related to net share settlement of equity awards, and for the purchase of property and equipment, partially offset by cash provided by operating activities, proceeds from the exercise of stock options and proceeds from purchases under our employee stock purchase plans.

Critical Accounting Estimates

The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires us to make judgments, assumptions, and estimates that affect the amounts reported in the Consolidated Financial Statements and accompanying notes.

Notes 1 and 2 of Notes to Consolidated Financial Statements describe the significant accounting policies and methods used in the preparation of the Consolidated Financial Statements.

Notes 1 and 2 of Notes to the Consolidated Financial Statements describe the significant accounting policies and methods used in the preparation of the Consolidated Financial Statements.

We consider the accounting policies described below to be our critical accounting policies.

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For contracts with any combination of licenses, support, and other services, distinct performance obligations are accounted for separately.

For contracts with multiple performance obligations, we allocate the transaction price of the contract to each performance obligation on a relative basis using the standalone selling price (“SSP”) attributed to each performance obligation.

For contracts with

multiple performance obligations, we allocate the transaction price of the contract to each performance obligation on a relative basis using the standalone selling price (“SSP”) attributed to each performance obligation.

Revenue from SaaS arrangements, which allow for the use of a cloud-based software product or service over a contractually determined period of time without taking possession of software, is accounted for as subscriptions and is recognized as revenue ratably, on a straight-line basis, over the subscription period beginning on the date the service is first made available to customers.

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The Gainshare royalty contained in yield ramp contracts is a variable fee related to continued usage of our IP after the fixed-fee service period ends, based on the customers’ yield achievement.

Revenue derived from Gainshare is contingent

upon our customers reaching certain defined production yield levels.

Revenue derived from Gainshare is contingent upon our customers reaching certain defined production yield levels.

Gainshare royalty periods are generally subsequent to the delivery of all contractual services and performance obligations.

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DTAs, we will release some or all of our valuation allowance and our tax provision will decrease in the period in which we make such determination.

We evaluate our DTAs for realizability considering both positive and negative evidence, including our historical financial performance, projections of future taxable income, future reversals of existing taxable temporary differences, tax planning strategies and any carryback availability.

planning strategies and any carryback availability.

In evaluating the need for a valuation allowance, we estimate future taxable income based on management approved business plans.

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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 Consolidated Statements of Comprehensive Loss.

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

federal, state, or foreign tax law.

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

federal, state, and/or foreign tax law.

Our tax filings, however, are subject to audit by the respective tax authorities.

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

On March 11, 2021, the American Rescue Plan Act of 2021 (“American Rescue Plan”) was signed into law to provide additional relief in connection with the ongoing COVID-19 pandemic.

The American Rescue Plan includes, among other things, provisions relating to Paycheck Protection Program (PPP) loan expansion, defined pension contributions, excessive employee remuneration, and the repeal of the election to allocate interest expense on a worldwide basis.

Under ASC 740 the effects of new legislation are recognized upon enactment.

Accordingly, the American Rescue Plan became effective beginning in the quarter ended March 31, 2021.

Such provisions did not have a material impact on the Company’s consolidated financial statements.

Software Development Costs

Internally developed software is software developed to meet our internal needs to provide certain services to our customers.

Our capitalized software development costs consist of internal compensation related costs and external direct costs incurred during the application development stage and are amortized over their useful lives, which is generally five to six years.

The costs to develop software that is marketed externally have not been capitalized as we believe our current software development process is essentially completed concurrent with the establishment of technological feasibility.

such, all related software development costs are expensed as incurred and included in research and development expense in our Consolidated Statements of Comprehensive Loss.

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 some 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.

The 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.

Stock-Based Compensation

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The estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates.

Allocation of purchase consideration to identifiable assets and liabilities affects our amortization expense, as acquired finite-lived intangible assets are amortized over the useful life, whereas any indefinite lived intangible assets, including IPR&D and goodwill, are not amortized.

Allocation of purchase consideration to identifiable assets and liabilities affects our amortization expense, as acquired finite-lived intangible assets are amortized over their useful life, whereas any indefinite lived intangible assets, including IPR&D and goodwill, are not amortized.

During the measurement period, which is not to exceed one year from the acquisition date, we record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill.

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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 year ended December 31, 2021 and 2020.

There was no impairment of goodwill for the years ended December 31, 2022, 2021 and 2020.

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 intangible assets for the year ended December 31, 2021 and 2020.

There was no impairment of intangible assets for the years ended December 31, 2022, 2021 and 2020.

In fiscal 2021, we wrote down the value of property and equipment aggregating $3.2 million pertaining to our first-generation of e-beam tools for DFI™ systems where carrying values may not be fully recoverable due to lack of market demand and future needs of our customers for these tools.

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Operating lease right-of-use assets, and operating lease liabilities are initially recorded based on the present value of lease payments over the lease term.

Lease terms include the minimum unconditional term of the lease, and may include options to extend or terminate the lease when it is reasonably certain at the commencement date that such options will be exercised.

Lease terms include

the minimum unconditional term of the lease, and may include options to extend or terminate the lease when it is reasonably certain at the commencement date that such options will be exercised.

The decision to include these options involves consideration of our overall future business plans and other relevant business economic factors that may affect our business.

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Analytics revenue was $130.5 million, an increase of $37.1 million, or 40%, compared to the year ended December 31, 2021.

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

Integrated Yield Ramp Revenue

Integrated Yield Ramp revenue was $17.6 million for the year ended December 31, 2021, a decrease of $13.2 million, compared to the year ended December 31, 2020, primarily due to a decrease in Gainshare royalty due to the end of Gainshare periods from certain contracts and lower hours worked on other contracts.

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 whether we enter into new contracts containing Gainshare.

Integrated Yield Ramp revenue was $18.1 million for the year ended December 31, 2022, an increase of $0.4 million, compared to the year ended December 31, 2021, primarily due an increase in hours worked on fixed fees engagements, partially offset by the end of Gainshare periods on certain contracts.

production of ICs by our customers at facilities at which we generate Gainshare, sustained yield improvements by our customers, and whether we enter into new contracts containing Gainshare.

Our revenues may also fluctuate in the future due to other 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, our ability to attract new customers and penetrate new markets, supply chain challenges and further penetration of our current customer base.

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Costs of Revenues

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

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

Costs of revenues consist primarily of costs incurred to provide and support our services, costs recognized in connection with licensing our software, information technology (“IT”) and facilities-related costs and amortization of acquired technology.

Service costs include material, personnel-related costs including compensation, employee benefits, bonus and 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 $7.4 million for the year ended December 31, 2021, compared to the year ended December 31, 2020, was primarily due to (i) a $5.6 million increase in personnel-related costs due to higher headcount as a result of the Cimetrix acquisition, higher benefit costs, and merit increases, partially offset by a decrease in stock-based compensation expense, (ii) a $2.2 million increase in third-party cloud-delivery costs, software licenses costs, and hardware costs, and (iii) a $1.4 million increase in amortization of acquired intangible assets.

These were partially offset by (i) a $1.0 million decrease in facilities and information technology-related costs including depreciation expense, (ii) a $0.4 million decrease due to the timing of deferral of contract costs, and (iii) a $0.3 million decrease in other expenses.

Gross margin for the year ended December 31, 2021, was 60% compared to 58% for the year-ago period, or an increase of 2%.

The higher gross margin during year ended December 31, 2021, was primarily due to higher total revenue growth 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 $3.7 million for the year ended December 31, 2022, compared to the year ended December 31, 2021, was primarily due to (i) a $2.6 million increase in personnel-related costs due to worldwide salary increases, increases in benefit costs, stock-based compensation expense, and bonus expense, (ii) a $1.6 million increase in third-party cloud-delivery costs, software licenses and maintenance costs, and (iii) an $0.8 million increase in subcontractor costs.

These were partially offset by (i) a $1.0 million decrease in facilities and IT-related costs including depreciation expense and (ii) a $0.4 million decrease in hardware costs.

Gross margin for the year ended December 31, 2022, was 68% compared to 60% for the year ended December 31, 2021, or an increase of 8 percentage points.

The higher gross margin during the year ended December 31, 2022, was primarily due to higher total revenue and decreases in certain costs of revenues, as discussed above, which decreased the costs of revenues as a percentage of total revenues, when compared to the year ended December 31, 2021.

Operating Expenses:

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As a percentage of total revenues

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

Research and development expenses increased 26% for the year ended December 31, 2021, compared to the year-ago period, primarily due to (i) a $6.6 million increase in personnel-related costs due to higher headcount as a result of the Cimetrix acquisition, higher benefit costs, merit increases and higher stock-based compensation expense, (ii) a $2.6 million increase in subcontractor expenses primarily related to our characterization services and Exensio and Cimetrix software, (iii) a $0.4 million increase in third-party cloud-services related costs, and (iv) a $0.3 million increase in facilities and information technology-related costs.

These were partially offset by (i) a $0.4 million decrease in software maintenance expense and (ii) a $0.4 million decrease in various other expenses.

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

Research and development expenses increased 28% for the year ended December 31, 2022, compared to the year ended December 31, 2021, primarily due to (i) a $9.9 million increase in personnel-related costs primarily resulting from increases in stock-based compensation expense, headcount, bonus expense, benefit costs, and worldwide salary increases, (ii) a $1.5 million increase in subcontractor expenses primarily related to Cimetrix and Exensio software, and DFI and CV systems, (iii) a $0.4 million increase in facilities and IT-related costs including depreciation expense, and (iv) a $0.4 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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As a percentage of total revenues

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 15% for the year ended December 31, 2021, compared to the year-ago period, primarily due to (i) a $4.1 million increase in personnel-related costs due to higher headcount as a result of the Cimetrix acquisition, higher benefit costs, merit increases and higher stock-based compensation expense, (ii) a $1.5 million increase in facilities and information technology-related costs including rent and depreciation expense, (iii) a $0.9 million increase in legal fees related to the arbitration proceeding over a disputed customer contract, and (iv) a $0.5 million increase in third-party cloud-services related costs.

These were partially offset by (i) a $1.5 million decrease in acquisition related costs, and (ii) a $0.6 million decrease in general legal expenses.

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

Selling, general, and administrative expenses increased 20% for the year ended December 31, 2022, compared to the year ended December 31, 2021, primarily due to (i) a $7.3 million increase in personnel-related costs mainly resulting from increases in stock-based compensation expense, headcount, bonus and commission expense, benefit costs, and worldwide salary increases, (ii) a $1.2 million increase in facilities and IT-related costs including cloud-services related costs, (iii) a $0.4 million increase in general legal expenses, and (iv) a $0.3 million increase in travel expense.

These were partially offset by (i) a $0.9 million decrease in subcontractor expenses, (ii) a $0.4 million decrease in property tax expense, and (iii) a $0.2 million decrease in accounting and auditing fees.

We anticipate our selling, general and administrative expenses will fluctuate in absolute dollars from period to period as a result of cost control initiatives and to support increased selling efforts in the future.

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Amortization of acquired intangible assets

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

The increase in amortization of acquired intangible assets for the year ended December 31, 2021, compared to the year ended December 31, 2020, was primarily related to amortization of acquired intangible assets in the acquisition of Cimetrix.

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

Write-down in value of property and equipment

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

Interest and other expense (income), net resulted in income for the year ended December 31, 2021, compared to a loss in the year-ago period, primarily due to higher net favorable fluctuations in foreign exchange rates, and a decrease in loss related to foreign currency forward contracts, partially offset by a decrease in interest income due to lower interest rates and a decrease in other income.

Interest and other expense (income), net increased for the year ended December 31, 2022, compared to the year ended December 31, 2021, primarily due to higher interest income due to increased interest rates and a higher foreign currency exchange gain resulting from a net favorable fluctuation in foreign exchange rates.

Income Tax Expense

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Income tax expense

Income tax expense decreased for the year ended December 31, 2021, compared to the year-ago period.

Our income tax expense in fiscal 2020 was significantly higher due primarily to the recognition of a full valuation allowance against our U.S.

net deferred tax assets due to the uncertainty of the ultimate realization of the future benefits of such deferred tax assets .

Income tax expense increased 23% for the year ended December 31 , 2022, compared to the year ended December 31 , 2021, primarily due to increases in state tax expense, 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, new or changing tax legislation 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.

Discussion of Financial Data for the years ended December 31, 2021 and 2020

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We believe that our existing cash resources and anticipated funds from operations will satisfy our cash requirements to fund our operating activities, capital expenditures, and other obligations, for at least the next twelve months.

There has been no significant impact to our liquidity and capital resources from the global COVID-19 pandemic.

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

Cimetrix Acquisition

On December 1, 2020, the Company completed the acquisition of Cimetrix with total payments made in fiscal 2021 and 2020 of $31.6 million, net of cash acquired.

The net cash payment for this acquisition which also include the settlement of adjusted Holdback Amount, as discussed below, was funded from the available cash of the Company.

The net cash payment for this acquisition, which also included the settlement of the adjusted Holdback Amount, as discussed below, was funded from the available cash of the Company.

In 2020, the Company held back $3.5 million of the purchase price (the “Holdback Amount”) to satisfy adjustments and claims for indemnity arising out of breaches of certain representations, warranties and covenants, and certain other enumerated items in the merger agreement.

The Holdback Amount was recorded under accrued and other current liabilities account and the corresponding restricted cash was included in the “Prepaid expenses and other current assets” account in the 2020 Consolidated Balance Sheet.

During 2021, the Company recorded a measurement period adjustment that reduced the Holdback Amount to $3.1 million.

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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 year ended December 31, 2021 , 251,212 shares were repurchased under the 2020 Program at an average price of $18.01 per share, for a total price of $4.5 million under the 2020 Program.

During the year ended December 31, 2021, the Company repurchased 251,212 shares under the 2020 Program at an average price of $18.01 per share for an aggregate total price of $4.5 million.

During the year ended December 31, 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.

In total, the Company repurchased 470,070 shares under the 2020 Program at an average price of $21.91 per share, for a total price of $10.3 million.

On April 11, 2022, the Board of Directors terminated the 2020 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 year ended December 31, 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.

Consolidated Statements of Cash Flows Data

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Effect of exchange rate changes on cash and cash equivalents

Net decrease in cash, cash equivalents, and restricted cash

Net increase (decrease) in cash, cash equivalents, and restricted cash

Net Cash Provided by Operating Activities

Cash flow from operating activities during 2021 mostly consisted of net loss from operations, adjusted for certain non-cash items, which primarily consisted of depreciation and amortization, share-based compensation expense, write-down in value of property and equipment, changes in deferred tax assets, and changes in operating assets and liabilities.

Cash generated from operating activities decreased by $17.5 million for the year ended December 31, 2021, compared to the year ended December 31, 2020, driven primarily by (i) a $21.6 million increase in net change in operating assets and liabilities, (ii) a $14.8 million decrease in non-cash adjustments to net loss, primarily due to a decrease in changes of deferred taxes of $19.6 million, an increase in write-down in value of property and equipment of $2.7 million, and an increase in amortization of acquired intangible assets of $1.9 million.

These increases were partially offset by an $18.9 million decrease in net loss.

Cash flows provided by operating activities during 2022, consisted of a 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.

Cash generated from operating activities increased by $28.1 million for the year ended December 31, 2022, compared to the year ended December 31, 2021, primarily driven by a $18.1 million decrease in net loss, a $7.8 million increase in net change from operating assets and liabilities, and a $2.2 million increase in non-cash adjustments to net loss, which mainly resulted from an increase in stock-based compensation expense of $6.7 million and an increase in amortization of costs capitalized to obtain revenue contracts of $0.9 million, partially offset by a decrease in loss on disposal and write-

down in value of property and equipment of $3.2 million, a decrease in deferred taxes of $1.4 million and a decrease in depreciation and amortization of $0.7 million.

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

● Accounts receivable increased by $6.0 million, primarily due to an increase in sales and higher contractual invoicing activity during the fourth quarter of 2021;

● Prepaid expense and other current assets decreased by $1.1 million, primarily due to the timing of billing of contract assets related to fixed-price service contracts, and a decrease in income tax receivables, partially offset by an increase in prepaid expenses related to third party software licenses and cloud-subscription related costs;

● Other non-current assets increased by $1.3 million, primarily due to an increase in capitalized direct sales commission costs and prepaid expenses related to third party software licenses and cloud-subscription related costs;

● Accrued compensation and related benefits increased by $1.3 million, primarily due to the timing of payments of accrued bonuses, accrued sales commissions and accrued payroll taxes, and an increase in contributions to employee stock purchase plans, partially offset by a decreased in accrued vacation;

● Deferred revenues increased by $5.0 million primarily due to timing of billing and revenue recognition, and

● Billings in excess of recognized revenues decreased by $1.3 million, primarily due to the timing of billing and revenue recognition.

Net Cash Used in Investing Activities

Net cash used in investing activities in the year ended December 31, 2021, decreased by $145.8 million compared to the year ended December 31, 2020.

For the year ended December 31, 2021, cash used in investing activities primarily related to (i) purchases of $168.6 million short-term investments, (ii) a $3.1 million payment of the Holdback Amount related to the acquisition of Cimetrix, (refer to above discussion on Cimetrix Acquisition for further details), and (iii) a $4.1 million equipment purchased and prepayment property and equipment, primarily related to our DFI systems, including construction of additional second-generation eProbe tools, partially offset by $171.0 million proceeds from maturities of short-term investments.

For the year ended December 31, 2020, cash used in investing activities primarily related to (i) purchases of $131.5 million short-term investments, (ii) a $28.6 million payment for the acquisition of Cimetrix, and (iii) a $7.0 million for equipment purchased and prepayment property and equipment, primarily related to our DFI systems, including construction of additional second-generation eProbe tools, partially offset by $16.5 million proceeds from maturities of short-term investments.

Net Cash Provided by (Used in) Financing Activities

Net cash used in financing activities was $5.5 million for the year ended December 31, 2021, compared to net cash provided by financing activities of $64.8 million for the year ended December 31, 2020.

● Accounts receivable increased by $2.1 million, primarily due to an increase in sales, an increase in unbilled accounts receivables due to timing of billing and revenue recognition and higher contractual invoicing activity, partially offset by collections from customers;

● Prepaid expense and other current assets increased by $5.8 million, primarily due to the timing of billing of contract assets related to fixed-price service contracts, and increase in deferred costs to obtain contracts with customers, 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 $2.3 million primarily due to the amortization of non-current prepaid expenses and lower unbilled accounts receivable;

● Accounts payable decreased by $1.4 million primarily due to the timing of payments of vendor invoices;

● Accrued and other liabilities increased by $1.7 million primarily due to the timing of vendor invoices, accrued legal fees and accrued income taxes;

● Accrued compensation and related benefits increased by $7.7 million primarily due to accrued bonuses and unused vacation;

● Deferred revenues increased by $1.8 million and billings in excess of recognized revenues increased by $1.9 million, primarily due to the timing of billing and revenue recognition.

Net Cash Provided by (Used in) Investing Activities

Net cash provided by investing activities was $84.6 million for the year ended December 31, 2022, compared to net cash used in investing activities of $4.7 million for the year ended December 31, 2021.

For the year ended December 31, 2022, cash provided by investing activities primarily related to proceeds from maturities and sales of short-term investments of $151.5 million, partially offset by purchases of short-term investments of $58.3 million, and purchases of and prepayments for property and equipment of $8.4 million primarily related to our DFI systems and CV systems.

For the year ended December 31, 2021, cash used in investing activities primarily related to (i) purchases of $168.6 million short-term investments, (ii) a $3.1 million payment of the Holdback Amount related to the acquisition of Cimetrix, (refer to above discussion on Cimetrix Acquisition for further details), and (iii) $4.1 million for equipment purchased and prepayment for the purchase of property and equipment, primarily related to our DFI systems, partially offset by $171.0 million proceeds from maturities of short-term investments.

Net Cash Used in Financing Activities

Net cash used in financing activities was $24.3 million for the year ended December 31, 2022, compared to net cash used in financing activities of $5.5 million for the year ended December 31, 2021.

For the year ended December 31, 2022, net cash used in financing activities primarily consisted of $22.5 million for the repurchase of shares of our common stock and $6.5 million in cash payments for taxes related to net share settlement

of equity awards, partially offset by $4.7 million of proceeds from our employee stock purchase plans and exercise of stock options.

For the year ended December 31, 2021, net cash used in financing activities primarily consisted of $4.5 million for the repurchase of shares of our common stock and $4.0 million in cash payments for taxes related to net share settlement of equity awards, partially offset by $3.0 million of proceeds from purchases under our employee stock purchase plans and the exercise of stock options.

For the year ended December 31, 2020, net cash provided by financing activities primarily consisted of $65.1 million net proceeds from the issuance of common stock in connection with the Securities Purchase Agreement with Advantest, and $4.2 million of proceeds from purchases under our employee stock purchase plan and the exercise of stock options, partially offset by $4.5 million in cash payments for taxes related to net share settlement of equity awards.

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-K

Item 7. Management’s Discussion and Analysis