What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-08-08 compared with 2024-05-09 · 149 added, 91 removed, 247 unchanged (49% of the section changed)

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our assessment of the sufficiency of our cash resources and anticipated funds from operations;

and our ability to obtain additional financing if needed.

our ability to obtain additional financing if needed and our ability to use support and updates for certain open-source software.

These forward-looking statements are only predictions.

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

For example, semiconductor manufacturers have recently been experiencing lower wafer shipments, which has negatively impacted our Integrated Yield Ramp gainshare revenue.

For example, semiconductor manufacturers may experience lower wafer shipments due to weakness in the global economy, which would negatively impact the gainshare component of our Integrated Yield Ramp revenue.

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

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● Macroeconomy, inventories, and demand .

The worldwide economy performance is uneven, and the possibility of a recession persists.

The worldwide economic performance is uneven, and the possibility of a recession persists.

Inventories of semiconductor devices remain elevated in some instances.

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

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

origin and not subject to the U.S.

Export Administration Regulations.

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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 adding novel and complex export control restrictions, some exclusions, and requests for public comment.

In light of questions about some restrictions and guidance, the U.S.

government issued an interim final rule in April 2024 making corrections and clarifications, expanding restrictions, and seeking further public questions and comments.

Over the last two years, the U.S.

government has issued a series of rules and guidance, with significant relevance to the P.R.C.

market, adding novel and complex export control restrictions, clarifications and corrections, and requests for further public comment.

government regulatory agendas indicate that several additional rules are now in development to further control certain items, restrict U.S.

person activity, and revise previously issued regulations.

For example, on July 29, 2024, the U.S.

government officially published three sets of proposed regulations that would add restrictions on U.S.

items for certain end-uses and end-users.

The proposals would also separately add restrictions on U.S.

person activity, such as help for or transactional activity with such end-uses or end-users.

This would relate to development, production, or service of military items, law enforcement and internal security, or intelligence services of certain countries.

The proposal gives the example of U.S.

person assistance to develop a high-end integrated circuit sought by the military.

The proposed regulations are complicated, would reach into commercial supply chains, and would be challenging to interpret.

government policy and regulation remain fluid and uncertain, and could in the future impact segments of our business.

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

A change of political parties in the U.S.

Presidential Administration in January 2025, could accelerate international trade restrictions, increase tariffs, and expand trade tensions, which could negatively impact our future sales.

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

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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.

Similarly, the National Defense Authorization Act for Fiscal Year 2024 requires the U.S.

Department of Defense to develop acquisition regulations controlling contracting with certain types of companies that perform consulting services for certain types of P.R.C.

We will monitor the topic to assess whether the future regulations have any relevance to our business.

● 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 and Iran.

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 between Israel and Hamas and Iran.

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.

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Financial Highlights

Financial highlights for the three months ended March 31, 2024, are as follows:

● Total revenues were $41.3 million, an increase of $0.6 million, or 1%, compared to the three months ended March 31, 2023.

Analytics revenue was $38.5 million, an increase of $2.1 million, or 6%, compared to the three months ended March 31, 2023.

Financial highlights for the three months ended June 30, 2024, are as follows:

● Total revenues were $41.7 million, an increase of $0.1 million, which was relatively flat compared to the three months ended June 30, 2023.

Analytics revenue was $38.1 million, an increase of $1.0 million, or 3%, compared to the three months ended June 30, 2023.

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

Integrated Yield Ramp revenue was $2.8 million, a decrease of $1.6 million, or 36%, compared to the three months ended March 31, 2023.

The decrease in Integrated Yield Ramp revenue was primarily due to a decrease in hours worked on fixed-fees engagements and Gainshare from decreased customer wafer shipments at non-leading-edge nodes.

● Costs of revenues increased $1.6 million, compared to the three months ended March 31, 2023, primarily due to an increase in hardware costs, third-party cloud-delivery costs and subcontractor costs.

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

● Net loss was $0.4 million, compared to a net income of $0.4 million for the three months ended March 31, 2023.

The decrease in net income was primarily attributable to increases in (i) costs of revenues, (ii) sales and marketing activities, and general and administrative expenses, which were primarily related to increases in personnel-related costs, general legal expenses, and third-party cloud-services costs, partially offset by a decrease in legal fees related to the arbitration proceeding over a disputed customer contract, partially offset by (a) an increase in total revenues, (b) an increase in interest income, (c) net favorable fluctuations in foreign currency exchange rates, and (d) a decrease in income tax expense.

● Cash, cash equivalents, and short-term investments as of March 31, 2024, were $122.9 million, compared to $135.5 million as of December 31, 2023, a decrease of $12.6 million, primarily due to payments of accrued bonuses, payments to vendors and for income taxes, purchases of property and equipment, 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.

Integrated Yield Ramp revenue was $3.5 million, a decrease of $0.9 million, or 21%, compared to the three months ended June 30, 2023.

The decrease in Integrated Yield Ramp revenue was primarily due to lower Gainshare from decreased customer wafer shipments at non-leading-edge nodes, partially offset by an increase in hours worked on fixed-fees engagements.

● Costs of revenues decreased $0.1 million, compared to the three months ended June 30, 2023, primarily due to decreases in hardware costs and facilities and IT-related costs including depreciation.

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

● Net income was $1.7 million, compared to a net income of $6.8 million for the three months ended June 30, 2023.

The decrease in net income was primarily attributable to increases in (i) income tax expense, (ii) sales and marketing activities, and general and administrative expenses, which were primarily related to increases in general legal expenses, and personnel-related costs, partially offset by decreases in third-party cloud-services costs, business acquisition costs and fees related to the arbitration proceeding over a disputed customer contract, and (iii) research and development expenses, partially offset by an increase in interest income.

Financial highlights for the six months ended June 30, 2024, are as follows:

● Total revenues were $83.0 million, an increase of $0.6 million, or 1%, compared to the six months ended June 30, 2023.

Analytics revenue was $76.6 million, an increase of $3.1 million, or 4%, compared to the six months ended June 30, 2023.

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

Integrated Yield Ramp revenue was $6.4 million, a decrease of $2.5 million, or 28%, compared to the six months ended June 30, 2023.

The decrease in Integrated Yield Ramp revenue was primarily due to lower Gainshare from decreased customer wafer shipments at non-leading-edge nodes and hours worked on fixed-fees engagements.

● Costs of revenues increased $1.5 million, compared to the six months ended June 30, 2023, primarily due to increases in hardware costs, third-party cloud-delivery costs, and subcontractor costs.

These increases were partially offset by a decrease in facilities and IT-related costs, including depreciation expense.

● Net income was $1.3 million, compared to net income of $7.2 million for the six months ended June 30, 2023.

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

● Cash, cash equivalents, and short-term investments as of June 30, 2024, were $117.9 million, compared to $135.5 million as of December 31, 2023, a decrease of $17.6 million, primarily due to payments of accrued bonuses, payments to vendors and for income taxes, purchases of property and equipment, 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, 2023, filed with the SEC on February 27, 2024.

There were no material changes during the three months ended March 31, 2024, 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, 2023.

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 and the Notes to Consolidated Financial Statements in Part II, Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2023, for the description of our significant accounting policies, estimates and methods used in the preparation of our condensed consolidated financial statements.

There were no material changes during the three and six months ended June 30, 2024, 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, 2023, filed with the SEC on February 27, 2024.

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

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Where there are distinct performance obligations, we allocate revenue to all deliverables based on their SSPs.

For these contracts with multiple performance obligations, we allocate the transaction price of the contract to each performance obligation on a relative basis using SSP attributed to each performance obligation.

Where there are not discrete performance obligations, historically, revenue is primarily recognized as services are performed using

a percentage of completion method based on costs or labor-hours inputs, whichever is the most appropriate measure of the progress towards completion of the contract.

For these contracts with multiple performance obligations, we allocate the transaction price of the contract to each performance obligation on a relative basis using the SSP attributed to each performance obligation.

Where there are not discrete performance obligations, historically, revenue is primarily recognized as services are performed using a percentage of completion method based on costs or labor-hours inputs, whichever is the most appropriate measure of the progress towards completion of the contract.

The estimation of percentage of completion method is complex and subject to many variables that require significant judgment.

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Operating lease revenue is recognized on a straight-line basis over the lease term.

Sales-type lease revenue and corresponding lease receivables are recognized at lease commencement based on the present value of the future lease payments, and related interest income on lease receivable is recognized over the lease term and are recorded under Analytics revenue in the accompanying condensed consolidated statements of comprehensive income (loss).

Payments under sales-type leases are discounted using the interest rate implicit in the lease.

Payments under sales-type leases are discounted using the interest rate implicit in the

When the Company’s leases are embedded in contracts with customers that include non-lease performance obligations, the Company allocates consideration in the contract between lease and non-lease components based on their relative SSPs.

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Integrated Yield Ramp Revenue

Integrated Yield Ramp revenue is derived from our yield ramp engagements that include Gainshare or other performance incentives based on customers’ yield achievement.

Integrated Yield Ramp revenue is derived from our fixed-fee engagements that include performance incentives based on customers’ yield achievement (which consists primarily of Gainshare royalties) typically based on customers’ wafer shipments, pertaining to these fixed-fee contracts, which royalties are variable.

Revenue under these project-based contracts, which are delivered over a specific period of time typically for a fixed fee component paid on a set schedule, is recognized as services are performed using a percentage of completion method based on costs or labor-hours inputs, whichever is the most appropriate measure of the progress towards completion of the contract.

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.

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.

The Gainshare contained in Integrated Yield Ramp contracts is a variable fee related to continued usage of our IP after the fixed-fee service period ends, based on a customer’s yield achievement.

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

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

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

Significant Judgments

Judgments and estimates are required under Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers, and its related amendments (collectively known as “ASC 606”).

Due to the complexity of certain contracts, the actual revenue recognition treatment required under ASC 606 for the Company’s arrangements may be dependent on contract-specific terms and may vary in some instances.

For revenue under project-based contracts for fixed-price services, revenue is recognized as services are performed using a percentage-of-completion method based on costs or labor-hours input method, whichever is the most appropriate measure of the progress towards completion of the contract.

Due to the nature of the work performed in these arrangements, the estimation of percentage of completion method is complex, subject to many variables and requires significant judgment.

Key factors reviewed by the Company to estimate costs to complete each contract are future labor and product costs and expected productivity efficiencies.

If circumstances arise that change the original estimates of revenues, costs, or extent of progress toward completion, revisions to the estimates are made.

These revisions may result in increases or decreases in estimated revenues or costs, and such revisions are reflected in revenue on a cumulative catch-up basis in the period in which the circumstances that gave rise to the revision become known.

The Company’s contracts with customers often include promises to transfer products, software licenses and provide services, including professional services, technical support services, and rights to unspecified updates to a customer.

Determining whether licenses and services are distinct performance obligations that should be accounted for separately, or not distinct and thus accounted for together, requires significant judgment.

The Company rarely licenses software on a standalone basis, so the Company is required to estimate the range of SSPs for each performance obligation.

In instances where the SSP is not directly observable because the Company does not license the software or sell the service separately, the Company determines the SSP using information that may include market conditions and other observable inputs.

The Company is required to record Gainshare revenue in the same period in which the usage occurs.

Because the Company generally does not receive the acknowledgment reports from its customers during a given quarter within the time frame necessary to adequately review the reports and include the actual amounts in quarterly results for such quarter, the Company accrues the related revenue based on estimates of customers underlying sales achievement.

The Company’s estimation process can be based on historical data, trends, seasonality, changes in the contract rate, knowledge of the changes in the industry and changes in the customer’s manufacturing environment learned through discussions with customers and sales personnel.

As a result of accruing revenue for the quarter based on such estimates, adjustments will be required in the following quarter to true-up revenue to the actual amounts reported.

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

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

federal and state net DTAs, primarily driven by a cumulative loss incurred over the 12-quarter period ended March 31, 2024, and the likelihood that we may not utilize tax attributes before they expire.

The valuation allowance was approximately $64.2 million as of March 31, 2024, and December 31, 2023.

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.).

federal and state net DTAs, primarily driven by a cumulative loss incurred over the 12-quarter period ended June 30, 2024, and the likelihood that we may not utilize tax attributes before they expire.

The valuation allowance was approximately $64.2 million as of June 30, 2024, and December 31, 2023.

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.).

If we conclude that we are more-likely-than-not to utilize some or all of our 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 March 31, 2024, no deferred taxes have been provided on undistributed earnings from our international subsidiaries.

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

As of June 30, 2024, no deferred taxes have been provided on undistributed earnings from our international subsidiaries.

We intend to reinvest the earnings of

subsidiaries in those operations indefinitely.

As such, we have not provided for any foreign withholding taxes on the earnings of foreign subsidiaries as of March 31, 2024.

As such, we have not provided for any foreign withholding taxes on the earnings of foreign subsidiaries as of June 30, 2024.

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

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The expected volatility is based on the historical volatility of our common stock over the most recent period commensurate with the estimated expected life of our stock options and purchase rights granted under employee stock purchase plan.

The expected life is based on historical

experience and on the terms and conditions of the options granted and purchase rights granted under employee stock purchase plan.

The expected life is based on historical experience and on the terms and conditions of the options granted and purchase rights granted under employee stock purchase plan.

The interest rate assumption is based upon observed Treasury yield curve rates appropriate for the expected life of our stock options and purchase rights granted under employee stock purchase plan.

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

There was no impairment of goodwill for the three months ended March 31, 2024.

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

There was no impairment of goodwill for the three and six months ended June 30, 2024 and 2023.

Our long-lived assets, excluding goodwill, consist of property, equipment, intangible assets and unguaranteed residual assets under net investments in sales-type leases.

We periodically review our long-lived assets for impairment.

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Recoverability of an asset group is measured by comparison of its carrying amount to the expected future undiscounted cash flows that the asset group is expected to generate.

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

There was no impairment of long-lived assets for the three months ended March 31, 2024.

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, 2024 and 2023.

Recent Accounting Pronouncements and Accounting Changes

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Results of Operations

Discussion of Financial Data for the Three Months ended March 31, 2024 and 2023

Discussion of Financial Data for the Three and Six Months ended June 30, 2024 and 2023

Revenues, Costs of Revenues, and Gross Margin

Three Months Ended March 31,

Three Months Ended

Six Months Ended

(Dollars in thousands)

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Analytics Revenue

Analytics revenue increased $2.1 million for the three months ended March 31, 2024, compared to the three months ended March 31, 2023.

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

Analytics revenue increased $1.0 million for the three months ended June 30, 2024, compared to the three months ended June 30, 2023.

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

Analytics revenue increased $3.1 million for the six months ended June 30, 2024, compared to the six months ended June 30, 2023.

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

Integrated Yield Ramp Revenue

Integrated Yield Ramp revenue decreased $1.6 million for the three months ended March 31, 2024, compared to the three months ended March 31, 2023, primarily due to decreases in hours worked on fixed-fees engagements and Gainshare from decreased customer wafer shipments at non-leading-edge nodes.

Integrated Yield Ramp revenue decreased $0.9 million for the three months ended June 30, 2024, compared to the three months ended June 30, 2023, primarily due to a decrease in Gainshare from decreased customer wafer shipments at non-leading-edge nodes, partially offset by an increase in hours worked on fixed-fees engagements.

Integrated Yield Ramp revenue decreased $2.5 million for the six months ended June 30, 2024, compared to the six months ended June 30, 2023, primarily due to decreases in Gainshare from decreased customer wafer shipments at non-leading-edge nodes and 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.

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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.

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 $1.6 million for the three months ended March 31, 2024, compared to the three months ended March 31, 2023, was primarily due to (i) a $1.7 million increase in hardware costs, (ii) a $0.1 million increase in third-party cloud-delivery costs and (ii) a $0.1 million increase in subcontractor costs.

These increases were partially offset by a $0.2 million decrease in personnel-related costs due to lower compensation expenses, partially offset by an increase in stock-based compensation expense.

Gross margin decreased four percentage points for the three months ended March 31, 2024, to 67%, compared to 71% for the three months ended March 31, 2023.

The lower gross margin during the three months ended March 31, 2024, was primarily due to higher cost of revenues and lower Gainshare revenue for the three months ended March 31, 2024.

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 decrease in costs of revenues of $0.1 million for the three months ended June 30, 2024, compared to the three months ended June 30, 2023, was primarily due to (i) a $0.3 million decrease in hardware costs and (ii) a $0.2 million decrease in facilities and IT-related costs including depreciation expense.

These decreases were partially offset by (a) a $0.2 million increase in personnel-related costs due to higher stock-based compensation expenses, increased headcount, and worldwide salary increases, partially offset by lower bonus expense, and (b) a $0.1 million increase in third-party cloud-delivery costs.

The increase in costs of revenues of $1.5 million for the six months ended June 30, 2024, compared to the six months ended June 30, 2023, was primarily due to (i) a $1.4 million increase in hardware costs, (ii) a $0.2 million increase in third-party cloud-delivery costs and (iii) a $0.2 million increase in subcontractor costs.

These increases were partially offset by a $0.3 million decrease in facilities and IT-related costs including depreciation expense.

Gross margin increased one percentage point for the three months ended June 30, 2024, to 71%, compared to 70% for the three months ended June 30, 2023.

The higher gross margin during the three months ended June 30, 2024, was primarily due to lower cost of revenues.

Gross margin decreased two percentage points for the six months ended June 30, 2024, to 69%, compared to 71% for the six months ended June 30, 2023.

The lower gross margin during the six months ended June 30, 2024, was primarily due to lower Integrated Yield Ramp revenue and higher cost of revenues for the six months ended June 30, 2024.

Operating Expenses:

Research and Development

Three Months Ended March 31,

Three Months Ended

Six Months Ended

(Dollars in thousands)

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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 $0.1 million for the three months ended March 31, 2024, compared to the three months ended March 31, 2023, primarily due to (i) a $0.3 million decrease in subcontractor fees primarily related to DFI systems and (ii) a $0.1 million decrease in facilities and IT-related costs including depreciation expense, partially offset by (a) a $0.3 million increase in personnel-related costs mostly resulting from higher stock-based compensation and employee benefits expenses, partially offset by lower bonus expenses, and (b) a $0.1 million increase in third-party cloud-services costs.

Research and development expenses increased $0.4 million for the three months ended June 30, 2024, compared to the three months ended June 30, 2023, primarily due to (i) a $0.3 million increase in personnel-related costs mostly resulting from higher stock-based compensation expenses, higher other compensation expenses (including employee benefit costs), increased headcount, and worldwide salary increases, partially offset by lower bonus expense, and (ii) a $0.1 million increase in travel expenses.

Research and development expenses increased $0.3 million for the six months ended June 30, 2024, compared to the six months ended June 30, 2023, primarily due to (i) a $0.6 million increase in personnel-related costs mostly resulting from higher stock-based compensation expenses, higher other compensation expenses (including employee benefit costs), increased headcount, and worldwide salary increases, partially offset by lower bonus expense, and (ii) a $0.2 million increase in third-party cloud-services costs, partially offset by (a) a $0.3 million decrease in subcontractor fees primarily related to DFI systems and (b) a $0.2 million decrease in facilities and IT-related costs including depreciation 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.

Selling, General, and Administrative

Three Months Ended March 31,

Three Months Ended

Six Months Ended

(Dollars in thousands)

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As a percentage of total revenues

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 $0.9 million for the three months ended March 31, 2024, compared to the three months ended March 31, 2023, primarily due to (i) a $2.4 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 $0.6 million increase in general legal expenses and (iii) a $0.2 million increase in third-party cloud-services costs.

These were partially offset by a $2.1 million decrease in legal fees related to the arbitration proceeding over a disputed customer contract.

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 and trade conference-related expenses, third-party cloud-services related costs, travel, business acquisition costs, IT, and facilities cost allocations.

Selling, general, and administrative expenses increased $1.5 million for the three months ended June 30, 2024, compared to the three months ended June 30, 2023, primarily due to (i) a $0.9 million increase in legal expenses (excluding arbitration-related expenses) and (ii) a $0.9 million increase in personnel-related costs mainly resulting from higher stock-based compensation expenses, higher other compensation expenses (including commissions and

employee benefit costs), increased headcount, and worldwide salary increases, partially offset by lower bonus expense.

These increases were partially offset by (a) a $0.2 million decrease in third-party cloud-services costs, (b) a $0.2 million decrease in business acquisition costs, and (c) a $0.2 million decrease in legal fees related to the arbitration proceeding over a disputed customer contract.

Selling, general, and administrative expenses increased $2.3 million for the six months ended June 30, 2024, compared to the six months ended June 30, 2023, primarily due to (i) a $3.2 million increase in personnel-related costs mainly resulting from higher stock-based compensation expenses, higher other compensation expenses (including commissions and employee benefit costs), increased headcount, and worldwide salary increases, partially offset by lower bonus expense, and (ii) a $1.6 million increase in legal expenses (excluding arbitration-related expenses).

These increases were partially offset by (a) a $2.3 million decrease in legal fees related to the arbitration proceeding over a disputed customer contract and (b) a $0.2 million decrease in business acquisition costs.

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.

Amortization of Acquired Intangible Assets

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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 $0.8 million for the three months ended March 31, 2024, compared to the three months ended March 31, 2023, primarily due to higher interest income resulting from higher interest rates, and net favorable fluctuations in foreign currency exchange rates.

Interest and other expense (income), net increased $0.4 million for the three months ended June 30, 2024, compared to the three months ended June 30, 2023, primarily due to higher interest income resulting from higher interest rates and sales-type leases, and net favorable fluctuations in foreign currency exchange rates.

Interest and other expense (income), net increased $1.2 million for the six months ended June 30, 2024, compared to the six months ended June 30, 2023, primarily due to higher interest income resulting from higher interest rates and sales-type leases, and net favorable fluctuations in foreign currency exchange rates.

Income Tax Expense

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Income tax expense

Income tax expense decreased for the three months ended March 31, 2024, compared to the three months ended March 31, 2023, 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 benefit (expense)

Income tax expense increased for the three and six months ended June 30, 2024, compared to the three and six months ended June 30, 2023, 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.

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 accounting principles generally accepted in the United States of America and the effectiveness of our tax planning strategies.

Liquidity and Capital Resources

As of March 31, 2024, our working capital, defined as total current assets less total current liabilities, was $135.5 million, compared to $147.0 million as of December 31, 2023.

Total cash, cash equivalents, and short-term investments were $122.9 million as of March 31, 2024, compared to cash, cash equivalents, and short-term investments of $135.5 million as of December 31, 2023.

As of March 31, 2024, and December 31, 2023, cash and cash equivalents held by our foreign subsidiaries were $11.1 million and $10.0 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, and thereafter for the foreseeable future, however, we will continue to evaluate if we require additional funding to meet our longer term needs.

As of June 30, 2024, our working capital, defined as total current assets less total current liabilities, was $137.8 million, compared to $147.0 million as of December 31, 2023.

Total cash, cash equivalents, and short-term investments were $117.9 million as of June 30, 2024, compared to cash, cash equivalents, and short-term investments of $135.5 million as of December 31, 2023.

As of June 30, 2024, and December 31, 2023, cash and cash equivalents held by our foreign subsidiaries were $9.8 million and $10.0 million, respectively.

however, we will continue to evaluate if we require additional funding to meet our longer-term needs.

Repurchase of Company’s Common Stock

On April 11, 2022, the Board of Directors adopted a stock repurchased 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, including through Rule 10b5-1 plans, from time to time, over the next two years.

During the three months ended March 31, 2024, 201,561 shares were repurchased by the Company under the 2022 Program at an average price of $34.23 per share for an aggregate total price of $6.9 million.

In total, the Company has repurchased 937,501 shares under the 2022 Program at an average price of $25.96 per share for an aggregate total price of $24.3 million.

On April 11, 2022, the Board of Directors adopted a stock repurchase 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, including through Rule 10b5-1 plans, from time to time, over the next two years.

During the six months ended June 30, 2024, 201,561 shares were repurchased by the Company under the 2022 Program at an average price of $34.23 per share for an aggregate total price of $6.9 million.

In total, the Company repurchased 937,501 shares under the 2022 Program at an average price of $25.96 per share for an aggregate total price of $24.3 million.

The 2022 Program expired on April 11, 2024, and on April 15, 2024, the Board of Directors adopted a new program to repurchase up to $40.0 million of the Company’s common stock both on the open market and in privately negotiated transactions, including through Rule 10b5-1 plans, from time to time, over the next two years.

Cash Flow Data

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

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Net Cash Flows Used in Operating Activities

Cash flows used in operating activities during the three months ended March 31, 2024, consisted of net loss, adjusted for certain non-cash items which primarily consisted of depreciation and amortization, stock-based compensation expense, amortization of acquired intangible expense, amortization of costs capitalized to obtain revenue contracts, net accretion of discounts on short-term investments, and net change in operating assets and liabilities.

Net cash flows used in operating activities was $1.9 million for the three months ended March 31, 2024, compared to net cash flows used in operating activities of $1.0 million for the three months ended March 31, 2023.

The $0.9 million increase in cash flows used in operating activities between the periods was driven primarily by payments under the Company’s bonus plan, changes in net income (loss) between comparable periods, partially

offset by collections from customers.

Net loss was $0.4 million for the three months ended March 31, 2024, compared to a net income of $0.4 million for the three months ended March 31, 2023.

The major contributors to the net change in operating assets and liabilities for the three months ended March 31, 2024, were as follows:

Cash flows used in operating activities during the six months ended June 30, 2024, 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, net accretion of discounts on short-term investments, and net change in operating assets and liabilities.

Net cash flows used in operating activities was $1.2 million for the six months ended June 30, 2024, compared to net cash flows used in operating activities of $6.6 million for the six months ended June 30, 2023.

The decrease in cash used in operating activities between the periods was driven primarily by (i) a decrease in bonus payments under the Company’s bonus plan, (ii) a decrease in payments of vendor invoices, and (iii) an increase in interest income, partially offset by lower collections from customers and net income between comparable periods.

Net income was $1.3 million for the six months ended June 30, 2024, compared to a net income of $7.2 million for the six months ended June 30, 2023.

The major contributors to the net change in operating assets and liabilities for the six months ended June 30, 2024, were as follows:

● Accounts receivable increased by $11.6 million, primarily due to 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;

● Other non-current assets increased by $5.9 million primarily due to an increase non-current assets from sales-type leases, increases in costs capitalized to obtain revenue contracts and non-current unbilled accounts receivables due to the timing of billing and revenue recognition, partially offset by the amortization of non-current prepaid expenses and a decrease in non-current contract assets;

● Prepaid expense and other current assets increased by $3.0 million, primarily due to increases in lease receivables and deferred commission, partially offset by a decrease in contract assets;

● Other non-current assets increased by $7.1 million primarily due to increases in non-current assets from sales-type leases, costs capitalized to obtain revenue contracts, non-current unbilled accounts receivables due to the timing of billing and revenue recognition, and non-current prepaid expenses, partially offset by a decrease in non-current contract assets;

● Accounts payable increased by $0.5 million primarily due to the timing of payments of vendor invoices;

● Accrued compensation and related benefits decreased by $5.2 million primarily due to the payments of accrued bonuses net of new bonus accruals, and exercise of purchase rights under employee stock purchase plan, partially offset by an increase in accrued commissions;

● Accrued compensation and related benefits decreased by $3.2 million primarily due to the payments of accrued bonuses net of new bonus accruals, partially offset by increases in accrued commissions and contributions to the employee stock purchase plan;

● Deferred revenue increased by $7.0 million primarily due to the timing of billing and revenue recognition;

● Billings in excess of recognized revenues increased by $0.8 million primarily due to the timing of billing and revenue recognition.

Net Cash Flows Used in Investing Activities

Net cash used in investing activities was $2.6 million for the three months ended March 31, 2024, compared to $2.3 million for the three months ended March 31, 2023.

For the three months ended March 31, 2024, cash used in investing activities primarily related to purchases of short-term investments of $19.6 million, purchases of property and equipment of $2.0 million primarily related to our DFI systems, partially offset by proceeds from maturities and sales of short-term investments of $19.0 million.

For the three months ended March 31, 2023, cash used in investing activities primarily related to purchases of short-term investments of $6.4 million and purchases of property and equipment of $2.9 million primarily related to our DFI systems and CV systems, partially offset by proceeds from maturities and sales of short-term investments of $7.0 million.

● Billings in excess of recognized revenues decreased by $1.1 million primarily due to the timing of billing and revenue recognition.

Net Cash Flows Provided by (Used in) Investing Activities

Net cash provided by investing activities was $4.2 million for the six months ended June 30, 2024, compared to net cash used in investing activities of $9.7 million for the six months ended June 30, 2023.

For the six months ended June 30, 2024, cash provided by investing activities primarily related to proceeds from maturities and sales of short-term investments of $37.0 million, partially offset by purchases of short-term investments of $25.5 million and purchases of property and equipment of $7.3 million primarily related to our DFI systems.

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.

Net Cash Flows Used in Financing Activities

Net cash used in financing activities was $8.8 million for the three months ended March 31, 2024, compared to $2.1 million for the three months ended March 31, 2023.

For the three months ended March 31, 2024, net cash used in financing activities primarily consisted of repurchases of common stock of $6.9 million, $3.8 million in cash payments for taxes related to net share settlement of equity awards, partially offset by $1.9 million of proceeds from our employee stock purchase plan and exercise of stock options.

For the three months ended March 31, 2023, net cash used in financing activities primarily consisted of $4.1 million in cash payments for taxes related to net share settlement of equity awards, partially offset by $2.0 million of proceeds from our employee stock purchase plan and exercise of stock options.

Net cash used in financing activities was $9.2 million for the six months ended June 30, 2024, compared to $2.5 million for the six months ended June 30, 2023.

For the six months ended June 30, 2024, net cash used in financing activities primarily consisted of repurchases of common stock of $6.9 million, and $4.3 million in cash payments for taxes related to net share settlement of equity awards, partially offset by $2.0 million of proceeds from our employee stock purchase plan and exercise of stock options.

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 plan and exercise of stock options.

Related Party Transactions

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Item 2. Management’s Discussion and Analysis