What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-11-08 compared with 2023-08-08 · 150 added, 163 removed, 207 unchanged (60% of the section changed)

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the provision of technology and services prior to the execution of a final contract;

the continuing impact of COVID-19 on the semiconductor industry and our operations or supply and demand for our products;

the continuing impact of macroeconomic conditions on the semiconductor industry and our operations or supply and demand for our products;

supply chain disruptions;

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We derive revenues from two sources:

Analytics and Integrated Yield Ramp Our offerings combine proprietary software, professional services using proven methodologies and 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.

Analytics and Integrated Yield Ramp.

Our offerings combine proprietary software, professional services using proven methodologies and 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 primarily monetize our offerings through license fees and contract fees for professional services and SaaS.

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

Semiconductor manufacturers have been experiencing lower wafer shipments, which has negatively impacted our Integrated Yield Ramp gainshare revenue.

The logic foundry market at the leading-edge nodes, such as 7nm, 5nm, and smaller, underwent significant change over the past few years.

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

The leading foundry continues to dominate market share.

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

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

● Continuing impact of the COVID-19 pandemic .

A continuing effect of the COVID-19 pandemic is a global shortage in semiconductors due primarily to supply chain disruptions.

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.

● Impacts from inventory cycles .

With the easing of COVID-19 pandemic restrictions, the demand for semiconductors from hardware sales supporting work-from-home has waned.

In addition, the strength of the subsequent economic recovery has varied by region.

A result has been increased semiconductor inventories for several product segments.

The industry has experienced reduced semiconductor fab utilization rates, and semiconductor capital equipment orders.

If these trends persist, the overall reduction in demand may affect our Analytics revenue and our Integrated Yield Ramp gainshare revenue.

● Continuing demand for consumer electronics .

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.

In addition, advances in computing systems and mobile devices continue to fuel demand for higher capacity memory chips.

To meet these demands, IC manufacturers and designers are constantly challenged to improve the overall performance of their ICs by designing and manufacturing ICs with more embedded applications to create greater functionality while lowering power and cost per transistor.

As this trend continues, companies will continually be challenged to improve process capabilities to optimally produce ICs with minimal random and systematic yield loss, which is driven by the lack of compatibility between the design and its respective

manufacturing process.

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.

● Impacts on the global chip supply chain .

The ongoing Russo-Ukrainian war has negatively impacted 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.

These macroeconomic impacts, including inflationary pressures and increasing global interest rates, could also increase our material, labor, and other costs.

● Macroeconomy, inventories, and demand .

The worldwide economy has not recovered as strongly or quickly post-COVID as expected, and recession fears are growing in some locations.

As a result of the slow recovery, inventories of semiconductor devices remain elevated in many instances.

The strength of demand for semiconductor products has varied by region and product segment.

For example, demand for GPU products is strong, while demand for smart phones is weak.

With high inventories and soft demand, semiconductor fab utilization rates are also low and semiconductor capital equipment orders have been impacted.

As a result of these trends, customers are being cautious with their spend and some purchase cycles are lengthening and other purchase decisions are being delayed, particularly with respect to larger deals.

● 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.

government continues to expand and intensify export controls and sanctions, with a major focus on the destinations of People’s Republic of China (“P.R.C.”), Russian Federation, and Belarus.

After an internal evaluation, we determined that a large percentage of our software products are not of U.S.

origin and are, thus, not subject to the EAR.

origin and are, thus, not subject to the U.S.

Export Administration Regulations (“EAR”).

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 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 (an “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.

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.

government has informally indicated that it continues to develop further export control restrictions, a final version of the October 2022 rule, and clarifying guidance, all to be issued in the future.

Other countries and jurisdictions with important roles in our industry have announced they intend to update some of their export control regulations to further align with those of the U.S.

In addition, U.S.

government officials have announced that they are developing outbound investment restrictions, which might affect some aspects of conducting business in some regions in unknown ways.

recently imposed restrictions on import of certain memory ICs offered by a U.S.

company and has been developing its legal authorities to counter foreign sanctions.

government is renewing and amplifying its caution that visitors to the P.R.C.

government could potentially interrupt their ability to make use of our products or services, which has in some cases, and could in the future, negatively impact the demand for our products and services by these customers.

In October 2022 and October 2023, the U.S.

government issued interim final rules with additional export control restrictions.

Other countries and jurisdictions with important roles in our industry are updating some of their export control regulations to further align with those of the U.S.

government and, in some cases, to counter U.S.

For example, the P.R.C.

has imposed restrictions on imports of certain memory ICs offered by U.S.

companies and has been developing its legal authorities to counter foreign sanctions.

government is renewing and amplifying its caution that visitors to

are subject to arbitrary enforcement of local laws and wrongful detention, a risk that could deter or hinder certain business activities.

Based on our current assessments, we expect the near-term impact of these expanded trade restrictions on our business to be limited, but proposals that are still in government development and open questions of interpretation leave much unknown.

Based on our current assessments, we expect the near-term impact of these expanded trade restrictions on our business to be limited, but clarifications and proposals that are still in government development and open questions of interpretation leave much unknown.

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.

We 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 the risk of unintended mishap, mistake, or accident leading to escalation and global supply chain disruption.

The continuing tension between the U.S.

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.

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

● Investments in semiconductor manufacturing .

In 2022, the U.S.

Congress passed into law funding programs from the bipartisan Creating Helpful Incentives to Produce Semiconductors Act (the “CHIPS Act of 2022”), authorizing the Department of Commerce, Department of Defense, and Department of State to develop onshore domestic manufacturing of semiconductors considered critical to U.S.

competitiveness and national security.

It is expected that U.S.

semiconductor companies, especially manufacturers, will increase spending as a result of receiving funds under these programs.

Recipients of funding under such programs may be required to agree to separate restrictions on certain commercial activity in the P.R.C., where we have current business.

If our customers engage us for projects funded by these programs, we will evaluate all restrictions, and their impact on our existing business, before entering into any contracts associated with these programs.

● Geopolitical tensions/conflicts .

Geopolitical tensions and conflicts in various locations around the world continue to increase, including on the issue of Taiwan in Asia, Ukraine and Russia, and most recently between Israel and Hamas.

These current situations have created volatility in the global financial markets and may have further global economic consequences, including potential disruptions of the global supply chain and heightened volatility of commodity and raw material prices.

This has increased fears of a general recession.

We have contractors located in the West Bank and in Israel, who are providing software development and customer technical support services, and have developed contingency plans to use alternative resources to continue serving customers, if needed.

Any escalations could lead to disruptions or reductions in international trade, deter or prevent purchasing activity of customers, and negatively impact our development timelines and customer support (with respect to the Israel-Hamas conflict) or China sales (with respect to U.S.-P.R.C.

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

Financial Highlights

Financial highlights for the three months ended June 30, 2023, are as follows:

● Total revenues were $41.6 million, an increase of $6.9 million, or 20%, compared to the three months ended June 30, 2022.

Analytics revenue was $37.1 million, an increase of $6.0 million, or 19%, compared to the three months ended June 30, 2022.

The increase in Analytics revenue was driven by an increase in revenue from Exensio software licenses and increases in revenue from CV system, partially offset by a decrease in revenues from Cimetrix software licenses due to lower orders for runtime licenses.

Integrated Yield Ramp revenue increased $0.9 million, or 26%, compared to the three months ended June 30, 2022, primarily due to an increase in Gainshare from increased customer wafer shipments at non-leading edge nodes, partially offset by a decrease in hours worked on fixed fees engagements.

● Costs of revenues increased $0.3 million, compared to the three months ended June 30, 2022, primarily due to increases in hardware costs, third-party cloud-delivery costs and travel expenses.

These increases were partially offset by decreases in personnel-related costs.

● Net income was $6.8 million, compared to a net loss of $1.1 million for the three months ended June 30, 2022.

The increase in net income was primarily attributable to an increase in total revenues, interest income, income tax benefits and a decrease in research and development expenses, partially offset by increases in costs of revenues and sales and marketing activities, and general and administrative expenses, which were primarily related to increases in personnel-related costs, third-party cloud-services related costs, legal expenses, travel expenses, and an increase in foreign currency transaction exchange losses.

Financial highlights for the six months ended June 30, 2023, are as follows:

● Total revenues were $82.4 million, an increase of $14.2 million, or 21%, compared to the six months ended June 30, 2022.

Analytics revenue was $73.5 million, an increase of $11.9 million, or 19%, compared to the six months ended June 30, 2022.

The increase in Analytics revenue was driven by increases in revenue from CV and DFI systems and an increase in revenue from Exensio software licenses, partially offset by a decrease in revenues from Cimetrix software licenses due to lower orders for runtime licenses.

Integrated Yield Ramp revenue increased $2.3 million, or 34%, compared to the six months ended June 30, 2022, primarily due to an increase in Gainshare from increased customer wafer shipments at non-leading edge nodes, partially offset by a decrease in hours worked on fixed fees engagements.

● Costs of revenues increased $0.7 million, compared to the six months ended June 30, 2022, primarily due to increases in travel expenses, hardware and third-party cloud-delivery costs.

These increases were partially offset by decreases in facilities and IT-related costs and personnel-related costs.

● Net income was $7.2 million, compared to a net loss of $5.3 million for the six months ended June 30, 2022.

The increase in net income was primarily attributable to an increase in total revenues, interest income, income tax benefits and a decrease in research and development expenses, partially offset by increases in costs of revenues and sales and marketing activities, and general and administrative expenses, which were primarily related to increases in personnel-related costs, legal fees related to the arbitration proceeding over a disputed customer contract, travel expenses, third-party cloud-services related costs, facilities and IT-related costs, and an increase in foreign currency transaction exchange losses.

● Cash, cash equivalents, and short-term investments at June 30, 2023 were $124.0 million, compared to $139.2 million as of December 31, 2022, a decrease of $15.1 million, primarily due to payments of accrued bonuses, legal fees related to the arbitration proceeding over a disputed customer contract, purchases of property and

equipment, and taxes related to net share settlement of equity awards, partially offset by cash collection from customers, proceeds from purchases under our employee stock purchase plan, and proceeds from the exercise of stock options.

Financial highlights for the three months ended September 30, 2023, are as follows:

● Total revenues were $42.4 million, an increase of $2.5 million, or 6%, compared to the three months ended September 30, 2022.

Analytics revenue was $39.5 million, an increase of $6.6 million, or 20%, compared to the three months ended September 30, 2022.

The increase in Analytics revenue was driven by increases in revenue from DFI and CV systems, including a sales-type lease of a DFI asset, and an increase in revenue from Exensio software licenses, partially offset by a decrease in revenues from Cimetrix software licenses due to a decrease in orders for runtime licenses.

Integrated Yield Ramp revenue decreased $4.1 million, or 59%, compared to the three months ended September 30, 2022, primarily due to a decrease in Gainshare from decreased customer wafer shipments at non-leading-edge nodes and a decrease in hours worked on fixed fees engagements.

● Costs of revenues increased $1.7 million, compared to the three months ended September 30, 2022, primarily due to an increase in hardware costs, software licenses and maintenance costs.

These increases were partially offset by decreases in personnel-related costs and third-party cloud-delivery costs.

● Net loss was $5.0 million, compared to a net income of $1.4 million for the three months ended September 30, 2022.

The decrease in net income was primarily attributable to increases in (i) income tax expense, (ii) costs of revenues, (iii) sales and marketing activities, and general and administrative expenses, which were primarily related to increases in personnel-related costs, travel expenses, partially offset by a decrease in legal fees related to the arbitration proceeding over a disputed customer contract, and (iv) foreign currency transaction exchange losses, partially offset by (a) an increase in total revenues, (b) an increase in interest income and (c) a decrease in research and development expenses.

Financial highlights for the nine months ended September 30, 2023, are as follows:

● Total revenues were $124.7 million, an increase of $16.7 million, or 15%, compared to the nine months ended September 30, 2022.

Analytics revenue was $113.0 million, an increase of $18.5 million, or 20%, compared to the nine months ended September 30, 2022.

Integrated Yield Ramp revenue decreased $1.9 million, or 14%, compared to the nine months ended September 30, 2022, primarily due to a decrease in Gainshare from decreased customer wafer shipments at non-leading-edge nodes and a decrease in hours worked on fixed fees engagements.

● Costs of revenues increased $2.4 million, compared to the nine months ended September 30, 2022, primarily due to an increase in hardware costs, increases in travel expenses, third-party cloud-delivery costs, software licenses and maintenance costs and subcontractor fees.

These increases were partially offset by decreases in personnel-related costs and facilities and IT-related costs.

● Net income was $2.2 million, compared to a net loss of $3.9 million for the nine months ended September 30, 2022.

The increase in net income was primarily attributable to (i) an increase in total revenues, (ii) an increase in interest income, (iii) a decrease in research and development expenses and (iv) a decrease in income tax expenses, partially offset by increases in (a) costs of revenues, (b) sales and marketing activities, and general and administrative expenses, which were primarily related to increases in personnel-related costs, legal fees related to the arbitration proceeding over a disputed customer contract, travel expenses, third-party cloud-services related costs, business acquisition costs, software licenses and maintenance costs, facilities and IT-related costs, and (c) foreign currency transaction exchange losses.

● Cash, cash equivalents, and short-term investments at September 30, 2023, were $135.4 million, compared to $139.2 million as of December 31, 2022, a decrease of $3.8 million, primarily due to payments of accrued bonuses, payments to vendors and for income taxes, purchases of and prepayments for property and equipment, payments for business acquisition, repurchases of common stock, and payments of taxes related to net share settlement of equity awards, partially offset by cash collection from customers, proceeds from purchases under our employee stock purchase plan and exercise of stock options, and interest income from cash, cash equivalents and short-term investments.

Critical Accounting Estimates

See Note 1, Basis of Presentation and Summary of Significant Accounting Policies , to our unaudited condensed consolidated financial statements in this Quarterly Report on Form 10-Q, for a description of recent accounting pronouncements and accounting changes, including the expected dates of adoption and estimated effects, if any, on our condensed consolidated financial statements, and to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on March 1, 2023.

There were no material changes during the three and six months ended June 30, 2023, to the items that we disclosed as our critical accounting policies and estimates in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2022.

There were no material changes during the three and nine months ended September 30, 2023, to the items that we disclosed as our critical accounting policies and estimates in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2022.

The following is a brief discussion of the more significant accounting policies and methods that we use.

Our discussion and analysis of our financial conditions, results of operations and cash flows are based on our condensed consolidated financial statements, which have been prepared in conformity with accounting principles generally accepted in the United States of America.

Our preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods.

liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods.

We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances.

The most significant estimates and assumptions relate to revenue recognition, valuation of long-lived assets including goodwill and intangible assets, and the realization of deferred tax assets.

The most significant estimates and assumptions relate to revenue recognition, valuation of long-lived assets including goodwill and intangible assets, stock-based compensation and the realization of deferred tax assets (“DTAs”).

Actual amounts may differ from such estimates under different assumptions or conditions.

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Where there are distinct performance obligations, we allocate revenue to all deliverables based on their SSPs and allocate the transaction price of the contract to each performance obligation on a relative basis using SSP.

Similar to the services provided in connection with DFI systems and CV systems that are contributing to Analytics revenue, due to the nature of the work performed in these arrangements, the estimation of percentage of completion method is complex and subject to many variables that require significant judgment.

Similar to the services provided in connection with DFI systems and CV systems that are contributing to Analytics revenue, due to the nature of the work

performed in these arrangements, the estimation of percentage of completion method is complex and subject to many variables that require significant judgment.

The Gainshare contained in the 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.

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We record Gainshare as a usage-based royalty derived from customers’ usage of intellectual property and record it in the same period in which the usage occurs.

We are required to assess whether it is “more-likely-than-not” that we will realize our deferred tax assets (“DTAs”).

We are required to assess whether it is “more-likely-than-not” that we will realize our DTAs.

If we believe that they are not likely to be fully realizable before the expiration dates applicable to such assets, then to the extent we believe that recovery is not likely, we must establish a valuation allowance.

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

federal and state net DTAs, primarily driven by a cumulative loss incurred over the 12-quarter period ended June 30, 2023, and the likelihood that we may not utilize tax attributes before they expire.

The valuation allowance was approximately $59.2 million as of June 30, 2023, and December 31, 2022.

federal and state net DTAs, primarily driven by a cumulative loss incurred over the 12-quarter period ended September 30, 2023, and the likelihood that we may not utilize tax attributes before they expire.

The valuation allowance was approximately $59.2 million as of September 30, 2023, and December 31, 2022.

We will continue to evaluate the need for a valuation allowance and may change our conclusion in a future period based on changes in facts (e.g., 12-quarter cumulative profit, significant new revenue, etc.).

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This process involves significant management judgment about assumptions that are subject to change from period to period based on changes in tax laws or variances between future projected operating performance and actual results.

Changes in the net DTAs, less offsetting valuation allowance, in a period are recorded through

the income tax provision and could have a material impact on the condensed consolidated statements of comprehensive income (loss).

Changes in the net DTAs, less offsetting valuation allowance, in a period are recorded through the income tax provision and could have a material impact on the condensed consolidated statements of comprehensive income (loss).

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

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To the extent the final tax liabilities are different than the amounts originally accrued, the increases or decreases are recorded as income tax expense or benefit in the condensed consolidated statements of comprehensive income (loss).

As of June 30, 2023, no deferred taxes have been provided on undistributed earnings from our international subsidiaries.

As of September 30, 2023, no deferred taxes have been provided on undistributed earnings from our international subsidiaries.

We intend to reinvest the earnings of our non-U.S.

subsidiaries in those operations indefinitely.

As such, we have not provided for any foreign withholding taxes on the earnings of foreign subsidiaries as of June 30, 2023.

As such, we have not provided for any foreign withholding taxes on the earnings of foreign subsidiaries as of September 30, 2023.

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

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

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

law on August 16, 2022.

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

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

While the details of the computation of the tax and implementation of 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 consolidated financial statements.

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

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 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.

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We account for stock-based compensation using the fair value method, which requires us to measure stock-based compensation based on the grant-date fair value of the awards and recognize the compensation expense over the requisite service period.

As stock-based compensation expense recognized is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures.

As stock-based compensation expense recognized is based on awards ultimately expected to vest, it has been

reduced for estimated forfeitures.

Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

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We have one operating segment and one operating unit.

We perform an annual impairment assessment of goodwill during the fourth quarter of each calendar year or more frequently, if required to determine if any events or circumstances exist, such as an adverse change in business climate or a decline in the overall industry demand, that would indicate that it would more likely than not reduce the fair value of a reporting unit below its

carrying amount, including goodwill.

If events or circumstances do not indicate that the fair value of a reporting unit is below its carrying amount, then goodwill is not considered to be impaired and no further testing is required.

If the carrying amount exceeds its fair value, an impairment loss would be recognized equal to the amount of excess, limited to the amount of total goodwill.

There was no impairment of goodwill for the three and six months ended June 30, 2023.

There was no impairment of goodwill for the three and nine months ended September 30, 2023.

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

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

There was no impairment of long-lived assets for the three and six months ended June 30, 2023.

There was no impairment of long-lived assets for the three and nine months ended September 30, 2023.

Recent Accounting Pronouncements and Accounting Changes

See Note 1, Basis of Presentation and Summary of Significant Accounting Policies , to our condensed consolidated financial statements in this Quarterly Report on Form 10-Q, for a description of recent accounting pronouncements and accounting changes, including the expected dates of adoption and estimated effects, if any, on our condensed consolidated financial statements.

Results of Operations

Discussion of Financial Data for the Three and Six Months ended June 30, 2023 and 2022

Discussion of Financial Data for the Three and Nine Months ended September 30, 2023 and 2022

Revenues, Costs of Revenues, and Gross Margin

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

(Dollars in thousands)

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Analytics Revenue

Analytics revenue increased $6.0 million for the three months ended June 30, 2023, compared to the three months ended June 30, 2022.

Analytics revenue increased $11.9 million for the six months ended June 30, 2023, compared to the six months ended June 30, 2022.

Analytics revenue increased $6.6 million for the three months ended September 30, 2023, compared to the three months ended September 30, 2022.

Analytics revenue increased $18.5 million for the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022.

Integrated Yield Ramp Revenue

Integrated Yield Ramp revenue increased $0.9 million for the three months ended June 30, 2023, compared to the three months ended June 30, 2022, primarily due to an increase in Gainshare from increased customer wafer shipments at non-leading edge nodes, partially offset by a decrease in hours worked on fixed fees engagements.

Integrated Yield Ramp revenue increased $2.3 million for the six months ended June 30, 2023, compared to the six months ended June 30, 2022, primarily due to an increase in Gainshare from increased customer wafer shipments at non-leading edge nodes, partially offset by a decrease in hours worked on fixed fees engagements.

Integrated Yield Ramp revenue decreased $4.1 million for the three months ended September 30, 2023, compared to the three months ended September 30, 2022, primarily due to a decrease in Gainshare from decreased customer wafer shipments at non-leading-edge nodes and a decrease in hours worked on fixed fees engagements.

Integrated Yield Ramp revenue decreased $1.9 million for the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022, primarily due to a decrease in Gainshare from decreased customer wafer shipments at non-leading-edge nodes and a decrease in hours worked on fixed fees engagements.

Our Integrated Yield Ramp revenue may continue to fluctuate from period to period primarily due to the contribution of Gainshare, 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.

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

penetrate new markets, supply chain challenges and further penetration of our current customer base.

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

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

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

Service costs include material costs, hardware costs (including cost of leased assets under sales-type lease), personnel-related costs (including compensation), employee benefits, bonus and stock-based compensation expense, subcontractor costs, overhead costs, travel expenses, and allocated facilities-related costs.

Software license costs consist of costs associated with third-party cloud-delivery related expenses and licensing third-party software used by us in providing services to our customers in solution engagements or sold in conjunction with our software products.

The increase in costs of revenues of $0.3 million for the three months ended June 30, 2023, compared to the three months ended June 30, 2022, was primarily due to (i) a $0.4 million increase in hardware costs, (ii) a $0.2 million increase in travel expenses, and (iii) a $0.1 million increase in third-party cloud-delivery costs.

These were partially offset by a $0.3 million decrease in personnel-related costs due to lower compensation expense, partially offset by an increase in stock-based compensation expense.

The increase in costs of revenues of $0.7 million for the six months ended June 30, 2023, compared to the six months ended June 30, 2022, was primarily due to (i) a $0.3 million increase in hardware costs, (ii) a $0.3 million increase in travel expenses, (iii) a $0.3 million increase in third-party cloud-delivery costs, and (iv) a $0.1 million increase in subcontractor costs.

These were partially offset by (i) a $0.2 million decrease in facilities and IT-related costs including depreciation expense and (ii) a $0.1 million decrease in personnel-related costs due to lower compensation expense, partially offset by an increase in stock-based compensation expense.

Gross margin increased 5 percentage points for the three months ended June 30, 2023, to 70%, compared to 65% for the three months ended June 30, 2022.

The higher gross margin during the three months ended June 30, 2023, was primarily due to higher total revenue, including Gainshare, when compared to the year-ago period.

Gross margin increased 6 percentage points for the six months ended June 30, 2023, to 71%, compared to 65% for the six months ended June 30, 2022.

The higher gross margin during the six months ended June 30, 2023, was primarily due to higher total revenue, including Gainshare, when compared to the year-ago period.

The increase in costs of revenues of $1.7 million for the three months ended September 30, 2023, compared to the three months ended September 30, 2022, was primarily due to (i) a $2.0 million increase in hardware costs and (ii) a $0.1 million increase in software licenses and maintenance costs.

These increases were partially offset by (i) a $0.2 million decrease in personnel-related costs due to lower compensation expense, partially offset by an increase in stock-based compensation expense, and (ii) a $0.1 million decrease in third-party cloud-delivery costs.

The increase in costs of revenues of $2.4 million for the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022, was primarily due to (i) a $2.3 million increase in hardware costs, (ii) a $0.3 million increase in travel expenses, (iii) a $0.2 million increase in third-party cloud-delivery costs, (iv) a $0.2 million increase in software licenses and maintenance costs, and (v) a $0.1 million increase in subcontractor fees.

These increases were partially offset by (i) a $0.3 million decrease in personnel-related costs due to lower compensation expenses, partially offset by an increase in worldwide salaries and increases in headcount and stock-based compensation expense, and (ii) a $0.2 million decrease in facilities and IT-related costs, including depreciation expense.

Gross margin decreased three percentage points for the three months ended September 30, 2023, to 66%, compared to 69% for the three months ended September 30, 2022.

The lower gross margin during the three months ended September 30, 2023, was primarily due to lower Gainshare revenue for the three months ended September 30, 2023.

Gross margin increased two percentage points for the nine months ended September 30, 2023, to 69%, compared to 67% for the nine months ended September 30, 2022.

The higher gross margin during the nine months ended September 30, 2023, was primarily due to higher total revenues when compared to the year-ago period.

Operating Expenses:

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As a percentage of total revenues

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 decreased $1.1 million for the three months ended June 30, 2023, compared to the three months ended June 30, 2022, primarily due to a $1.5 million decrease in personnel-related costs mostly resulting from a lower stock-based and other compensation expenses, partially offset by worldwide salary increases and increases in headcount.

These were partially offset by (i) a $0.2 million increase in subcontractor expenses primarily related to Exensio and Cimetrix software, and (ii) a $0.1 million increase in third-party cloud-services related costs.

Research and development expenses decreased $2.1 million for the six months ended June 30, 2023, compared to the six months ended June 30, 2022, primarily due to (i) a $3.1 million decrease in personnel-related costs mostly resulting from a lower stock-based and other compensation expenses, partially offset by worldwide salary increases and increases in headcount, and (ii) a $0.2 million decrease in facilities and IT-related costs including depreciation expense.

These were partially offset by (i) a $0.7 million increase in subcontractor expenses primarily related to Exensio and Cimetrix software, (ii) a $0.2 million increase in third-party cloud-services related costs, and (iii) a $0.2 million increase in travel 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 expenses, third-party cloud-services related costs, IT and facilities cost allocations to support product development activities.

Research and development expenses decreased $1.2 million for the three months ended September 30, 2023, compared to the three months ended September 30, 2022, primarily due (i) to a $1.1 million decrease in personnel-related costs mostly resulting from lower compensation expenses, partially offset by worldwide salary increases and increases in headcount, and (ii) a $0.2 million decrease in subcontractor fees primarily related to DFI systems.

These were partially offset by a $0.1 million increase in travel expenses.

Research and development expenses decreased $3.3 million for the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022, primarily due to (i) a $4.2 million decrease in personnel-related costs mostly resulting from a lower stock-based and other compensation expenses, partially offset by worldwide salary increases and increases in headcount, and (ii) a $0.3 million decrease in facilities and IT-related costs including depreciation expense.

These were partially offset by (i) a $0.6 million increase in subcontractor expenses primarily related to Cimetrix and Exensio software, (ii) a $0.3 million increase in third-party cloud-services related costs, and (iii) a $0.3 million increase in travel expenses.

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

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Selling, general, and administrative expenses consist primarily of 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 $5.0 million for the three months ended June 30, 2023, compared to the three months ended June 30, 2022, primarily due to (i) a $4.6 million increase in personnel-related costs mainly resulting from increases in stock-based and other compensation expense, including commission, discretionary bonuses and employee benefit costs, headcount and worldwide salary increases, (ii) a $0.2 million increase in business acquisition costs, (iii) a $0.2 million increase in third-party cloud-services related costs, (iv) a $0.2 million increase in travel expenses, and (v) a $0.1 million increase in legal fees related to the arbitration proceeding over a disputed customer contract.

These were partially offset by a $0.3 million decrease in subcontractor expenses.

Selling, general, and administrative expenses increased $9.8 million for the six months ended June 30, 2023, compared to the six months ended June 30, 2022, primarily due to (i) a $7.5 million increase in personnel-related costs mainly resulting from increases in stock-based and other compensation expense, including commission, discretionary bonuses and employee benefit costs, headcount and worldwide salary increases, (ii) a $1.8 million increase in legal fees related to the arbitration proceeding over a disputed customer contract, (iii) a $0.4 million increase in travel expenses, (iv) a $0.3 million increase in facilities and IT-related costs including depreciation expense, and (v) a $0.2 million increase in business acquisition costs.

Selling, general, and administrative expenses increased $3.6 million for the three months ended September 30, 2023, compared to the three months ended September 30, 2022, primarily due to (i) a $3.7 million increase in personnel-related costs mainly resulting from increases in stock-based and other compensation expense, including commission, employee benefit costs, headcount and worldwide salary increases and (ii) a $0.2 million increase in travel expenses.

These were partially offset by a $0.3 million decrease in legal fees related to the arbitration proceeding over a disputed customer contract.

Selling, general, and administrative expenses increased $13.4 million for the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022, primarily due to (i) a $11.2 million increase in personnel-related costs mainly resulting from increases in stock-based and other compensation expense, including commission, employee benefit costs, headcount and worldwide salary increases, (ii) a $1.5 million increase in legal fees related to the arbitration proceeding over a disputed customer contract, (iii) a $0.6 million increase in travel expenses, (iv) a $0.3 million increase in facilities and IT-related costs including depreciation expense, (v) a $0.2 million increase in business acquisition costs, and (vi) a $0.1 million increase in third-party cloud-services related costs.

These were partially offset by a $0.4 million decrease in subcontractor expenses.

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Amortization of acquired intangible assets

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

Amortization of acquired intangible assets primarily consists of amortization of intangibles acquired as a result of certain business combinations and was consistent for the three and nine months ended September 30, 2023 compared to the three and nine months ended September 30, 2022.

Interest and Other Expense (Income), Net

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

Interest and other expense (income), net increased $0.1 million for the three months ended June 30, 2023, compared to the three months ended June 30, 2022, primarily due to a higher interest income resulting from higher interest rates, partially offset by higher foreign currency exchange loss resulting from a net unfavorable fluctuation in foreign exchange rates.

Interest and other expense (income), net increased $0.7 million for the six months ended June 30, 2023, compared to the six months ended June 30, 2022, primarily due to a higher interest income resulting from higher interest rates, partially offset by higher foreign currency exchange loss resulting from a net unfavorable fluctuation in foreign exchange rates.

Interest and other expense (income), net increased $0.5 million for the three months ended September 30, 2023, compared to the three months ended September 30, 2022, primarily due to a higher interest income resulting from higher interest rates, partially offset by net unfavorable fluctuations in foreign currency exchange rates which resulted in a lower net foreign currency exchange gain.

Interest and other expense (income), net increased $1.2 million for the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022, primarily due to a higher interest income resulting from higher interest rates, partially offset by net unfavorable fluctuations in foreign currency exchange rates.

Income Tax Expense

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Income tax expense (benefit)

Income tax expense decreased for the three and six months ended June 30, 2023, compared to the three and six months ended June 30, 2022, primarily due to changes in the foreign and state taxes and year-to-date recognition of worldwide pre-tax income (loss) in relation to their forecasted amounts for full years.

Income tax expense

Income tax expense increased for the three months and decreased for the nine months ended September 30, 2023, compared to the three and nine months ended September 30, 2022, respectively, primarily due to changes in the foreign and

state taxes and year-to-date recognition of worldwide pre-tax income (loss) in relation to their forecasted amounts for full years.

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

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Liquidity and Capital Resources

As of June 30, 2023, our working capital, defined as total current assets less total current liabilities, was $152.3 million, compared to $135.2 million as of December 31, 2022.

Total cash, cash equivalents, and short-term investments were $124.0 million as of June 30, 2023, compared to cash and cash equivalents of $139.2 million as of December 31, 2022.

As of June 30, 2023, and December 31, 2022, cash and cash equivalents held by our foreign subsidiaries were $11.3 million and $8.8 million, respectively.

As of September 30, 2023, our working capital, defined as total current assets less total current liabilities, was $144.4 million, compared to $135.2 million as of December 31, 2022.

Total cash, cash equivalents, and short-term investments were $135.4 million as of September 30, 2023, compared to cash, cash equivalents, and short-term investments of $139.2 million as of December 31, 2022.

As of September 30, 2023, and December 31, 2022, cash and cash equivalents held by our foreign subsidiaries were $9.1 million and $8.8 million, respectively.

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

There has been no significant impact in respect to Liquidity and Capital Resources from the global COVID-19 pandemic.

For risk discussion about the continuing impact of global COVID-19 pandemic on our operations or demand for our products, refer to Part I, Item 1A, “Risk Factors” of our Annual Report for the year ended December 31, 2022, filed with the SEC on March 1, 2023.

Cash Flow Data

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

Six Months Ended June 30,

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Net change in cash and cash equivalents

Net Cash Flows Provided by (Used in) Operating Activities

Cash flows used in operating activities during the six months ended June 30, 2023, consisted of net income, 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.

Net cash flows used in operating activities was $6.6 million for the six months ended June 30, 2023, compared to net cash flows provided by operating activities of $6.6 million for the six months ended June 30, 2022.

The $13.2 million decrease in cash flows from operating activities between the periods was driven primarily by (i) an increase in accounts receivable from increased invoicing activities during the six months ended June 30, 2023 compared to the same period in 2022, and (ii) payments made under the Company’s bonus plan, partially offset by (a) an increase in deferred revenue due to timing of billing and revenue recognition, and (b) a significant increase in net income compared to the same period in 2022.

was $7.2 million for the six months ended June 30, 2023, compared to a net loss of $5.3 million for the six months ended June 30, 2022.

The major contributors to the net change in operating assets and liabilities for the six months ended June 30, 2023, were as follows:

● Accounts receivable increased by $19.3 million, primarily due to higher contractual invoicing activity and an increase in unbilled accounts receivables due to the timing of billing and revenue recognition, partially offset by collections from customers.

Subsequent to June 30, 2023, we collected more than half of the total $44.9 million billed accounts receivable as of that date;

● Prepaid expense and other current assets increased by $7.5 million, primarily due to an increase in income tax receivable, contract assets and deferred commission;

Net Cash Flows Provided by Operating Activities

Cash flows provided by operating activities during the nine months ended September 30, 2023, consisted of net income, 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.

Net cash flows provided by operating activities was $12.6 million for the nine months ended September 30, 2023, compared to net cash flows provided by operating activities of $8.0 million for the nine months ended September 30, 2022.

The $4.6 million increase in cash flows from operating activities between the periods was driven primarily by (i) collections from customers and (ii) a significant increase in net income compared to the same period in 2022, partially offset by payments

made to vendors and under the Company’s bonus plan.

Net income was $2.2 million for the nine months ended September 30, 2023, compared to a net loss of $3.9 million for the nine months ended September 30, 2022.

The major contributors to the net change in operating assets and liabilities for the nine months ended September 30, 2023, were as follows:

● Accounts receivable decreased by $1.2 million, primarily due to collections from customers, partially offset by contractual invoicing activity and an increase in unbilled accounts receivables due to the timing of billing and revenue recognition;

● Prepaid expense and other current assets increased by $7.0 million, primarily due to increases in contract assets, lease receivables, income tax receivable and deferred commission;

● Accounts payable decreased by $2.7 million primarily due to the timing of payments of vendor invoices;

● Accrued compensation and related benefits decreased by $6.0 million primarily due to the payments of accrued bonuses and a decrease in accrued commissions, partially offset by an increase in accrued contributions to the employee stock purchase plan;

● Accrued compensation and related benefits decreased by $5.3 million primarily due to the payments of accrued bonuses net of new bonus accruals, a decrease in accrued commissions, and exercise of purchase rights under employee stock purchase plans;

● Deferred revenue increased by $3.7 million primarily due to the timing of billing and revenue recognition;

● Billings in excess of recognized revenues decreased by $1.6 million primarily due to the timing of billing and revenue recognition.

Net Cash Flows Provided by (Used in) Investing Activities

Net cash used in investing activities was $9.7 million for the six months ended June 30, 2023, compared to net cash provided by investing activities of $72.0 million for the six months ended June 30, 2022.

For the six months ended June 30, 2023, cash used in investing activities primarily related to purchases of short-term investments of $23.5 million and purchases of and prepayments for property and equipment of $6.0 million primarily related to our DFI and CV systems, partially offset by proceeds from maturities and sales of short-term investments of $19.8 million.

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

Net cash used in investing activities was $14.2 million for the nine months ended September 30, 2023, compared to net cash provided by investing activities of $83.4 million for the nine months ended September 30, 2022.

For the nine months ended September 30, 2023, cash used in investing activities primarily related to purchases of short-term investments of $32.3 million, purchases of and prepayments for property and equipment of $8.9 million primarily related to our DFI and CV systems, payment for business acquisition, net of cash acquired, of $1.8 million, partially offset by proceeds from maturities and sales of short-term investments of $28.8 million.

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

Net Cash Flows Used in Financing Activities

Net cash used in financing activities was $2.5 million for the six months ended June 30, 2023, compared to $24.4 million for the six months ended June 30, 2022.

For the six months ended June 30, 2023, net cash used in financing activities primarily consisted of $4.6 million in cash payments for taxes related to net share settlement of equity awards, partially offset by $2.1 million of proceeds from our employee stock purchase plans and exercise of stock options.

For the six months ended June 30, 2022, net cash used in financing activities primarily consisted of $22.5 million for the repurchase of shares of our common stock and $4.2 million in cash payments for taxes related to net share settlement of equity awards, partially offset by $2.3 million of proceeds from our employee stock purchase plans and exercise of stock options.

Net cash used in financing activities was $5.6 million for the nine months ended September 30, 2023, compared to $24.2 million for the nine months ended September 30, 2022.

For the nine months ended September 30, 2023, net cash used in financing activities primarily consisted of $9.1 million in cash payments for taxes related to net share settlement of equity awards, repurchases of common stock of $0.8 million, partially offset by $4.3 million of proceeds from our employee stock purchase plans and exercise of stock options.

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

Related Party Transactions

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What changed 10-Q

Item 2. Management’s Discussion and Analysis