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Item 7. Management’s Discussion and Analysis

2025-02-27 compared with 2024-02-27 · 130 added, 124 removed, 213 unchanged (54% of the section changed)

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

In parallel, the cost per terabyte of data storage has generally decreases over time.

In parallel, the cost per terabyte of data storage has generally decreased over time.

The combination of these two trends means that more data is collected and stored than ever before.

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

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

The combination of these latter two trends means that cloud-based, analytics programs that effectively manage identity management, physical security, and

data protection are increasingly in demand for insights and efficiencies across the organizations of these companies.

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

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

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

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

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

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

● Macroeconomy, inventories, and demand .

The worldwide economy did not recover as strongly or quickly as expected after the COVID-19 pandemic, and recession fears persist.

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 graphical processing unit 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 for some vendors and market segments.

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.

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

Inventories of semiconductor devices remain elevated in some instances.

With high inventories and soft demand for some product segments, some semiconductor fab utilization rates are also low and semiconductor capital equipment orders have been impacted for some vendors and market segments.

As a result, some purchase cycles, especially for enterprise software and capital equipment and particularly with respect to larger deals, have lengthened in recent years and may continue to do so.

● Changing export controls and sanctions .

government continues to expand and intensify export controls and sanctions, with a major focus on the destinations of the 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.

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

Some customers in the P.R.C., in particular, have 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, 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 announced on November 6, 2023 that it was developing revisions to such rules to make corrections and clarifications.

We believe the government will issue these revisions in 2024, along with additional restrictions.

government policy and regulation remain fluid and uncertain.

Recent additions to regulations include expansion of special Foreign Direct Product Rules, which extend the reach of the EAR to certain foreign-made products produced with certain U.S.

items in certain cases of designated end-users or end-uses, and to renewal licenses for certain lawfully delivered products that would have changed status under new regulations.

Such regulatory additions could negatively affect sales.

Additional proposed and complicated regulations, including for added restrictions on U.S.

person activity, remain pending.

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

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.

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For example, the P.R.C.

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

has imposed restrictions on imports of certain memory integrated circuits (“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 the P.R.C.

On November 27, 2024, the U.S.

government renewed its caution that visitors to the P.R.C.

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 revisions, clarifications, and proposals that are still in government development and open questions of interpretation leave much unknown.

● Presidential Initiatives.

Presidential Administration has recently stated its intention to change U.S.

trade policy, including potentially renegotiating or terminating existing trade agreements and leveraging tariffs.

In February 2025, the U.S.

imposed additional tariffs on imports from China and announced and subsequently paused implementation of tariffs on imports from Canada and Mexico.

We do not import into the U.S.

a significant volume of goods of P.R.C.

Trade conflict through exchange of tariffs and other retaliatory

actions would likely ripple through worldwide supply chains, could increase prices and put downward pressure on economic activity, and could negatively affect our future sales in various geographic markets.

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.

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.

The uncertainty caused by these recent regulations and the potential for additional future restrictions could negatively affect our future sales, including in but not limited to the P.R.C.

● Investments in semiconductor manufacturing .

In 2022, the U.S.

Congress passed into law funding programs from the bipartisan CHIPS Act, 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.

Congress passed into law funding programs from the bipartisan CHIPS and Science Act of 2022 (the “CHIPS Act”), 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.

We expect funds under these programs will continue to support spending by U.S.

semiconductor companies, especially manufacturers.

Changes in governmental spending priorities or approvals could continue to impact payments under some of these programs, which we will monitor for effects on our business.

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 currently commercially operate.

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.

● 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.

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 armed conflicts in the Middle East.

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 global 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.

We have contractors located in the West Bank and in Israel, who are providing software development and customer technical support services, and we 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 conflicts in the Middle East) or China sales (with respect to U.S.-P.R.C.

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

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Analytics revenue was $169.3 million, an increase of $17.2 million, or 11%, compared to the year ended December 31, 2023.

The increase in Analytics revenue was driven by increases in revenue from DFI and CV systems, including sales-type leases of DFI assets, 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.

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

Integrated Yield Ramp revenue decreased $3.5 million, or 26%, compared to the year ended December 31, 2023, primarily due to a decrease in hours worked on fixed fee engagements and a decrease in Gainshare from decreased customer wafer shipments at non-leading-edge nodes.

● Costs of revenues increased $3.8 million for the year ended December 31, 2023, compared to the year ended December 31, 2022, primarily due to increases in hardware costs, travel expenses, subcontractor fees and software licenses and maintenance costs.

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

● Net income was $3.1 million for the year ended December 31, 2023, compared to a net loss of $3.4 million for the year ended December 31, 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) selling, general, and administrative expenses, which were primarily related to increases in personnel-related costs, travel expenses, legal fees related to the arbitration proceeding over a disputed customer contract, third-party cloud-services related costs, property tax expenses, general legal expenses, trade conference-related expenses, and business acquisition costs, and (c) foreign currency transaction exchange losses.

● Cash, cash equivalents and short-term investments decreased $3.7 million to $135.5 million as of December 31, 2023, from $139.2 million as of December 31, 2022, primarily due to payments to vendors, payments of accrued bonuses and income taxes, purchases of and prepayments for property and equipment, payments of taxes related to net share settlement of equity awards, payments for a business acquisition, and repurchases of common stock, partially offset by cash collection from customers, interest income from cash, cash equivalents and short-term investments, and proceeds from purchases under our employee stock purchase plan and exercise of stock options.

● Costs of revenues increased $2.4 million for the year ended December 31, 2024, compared to the year ended December 31, 2023, primarily due to increases in hardware costs, subcontractor fees and third-party cloud-delivery costs.

These increases were partially offset by decreases in facilities and IT-related costs including depreciation and amortization expense.

● Net income was $4.1 million for the year ended December 31, 2024, compared to a net income of $3.1 million for the year ended December 31, 2023.

The increase in net income was primarily attributable to an increase in total revenues and other income, partially offset by increases in (a) costs of revenues, (b) research and development expenses and (c) selling, general, and administrative expenses, which were primarily related to increases in personnel-related costs, subcontractor fees, third-party cloud-services related costs, general legal

expenses, marketing and trade conference-related expenses, and non-recurring legal, tax and accounting service-related costs, and (d) income tax expenses.

Critical Accounting Estimates

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

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

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

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

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

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

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

For contracts with any combination of SaaS and related services, distinct performance obligations are accounted for separately.

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

Revenue from DFI systems and CV systems (including Characterization services) that do not include performance incentives based on customers’ yield achievement is recognized primarily as services are performed.

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.

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.

The Company also leases some of its DFI system and CV system assets to some customers.

The Company determines the existence of a lease when the customer controls the use of these identified assets for a period of time defined in the lease agreement and classifies such leases as operating leases or sales-type leases.

A lease is classified as a sales-type lease if it meets certain criteria under Topic 842, Leases;

We also lease some of our DFI system and CV system assets to some customers.

We determine the existence of a lease when the customer controls the use of these identified assets for a period of time defined in the lease agreement and classifies such leases as operating leases or sales-type leases.

A lease is classified as a sales-type lease if it meets certain criteria under Accounting Standards Codification (“ASC”) Topic 842, Leases;

otherwise, it is classified as an operating lease.

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 Consolidated Statements of Comprehensive Income (Loss).

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 Consolidated Statements of Comprehensive Income (Loss).

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

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.

Assets subject to operating leases remain in Property and equipment, net and continue to be depreciated.

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

Assets subject to operating leases remain in Property and equipment and continue to be depreciated.

Assets subject to sales-type leases are derecognized from Property and equipment at lease commencement and a net investment in the lease asset is recognized in Prepaid expenses and other current assets and Other non-current assets in the Consolidated Balance Sheets.

We generate revenue from the sale of our DFI system products.

Revenue is recognized at a point in time when our performance obligations have been completed and the customer has accepted the product.

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.

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-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.

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-hour inputs, whichever is the most appropriate measure of the progress towards completion of the contract.

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

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

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 IP 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.

Significant Judgments

Judgments and estimates are required under 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 our 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 us 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.

Our 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.

We rarely license software on a standalone basis, so we are required to estimate the range of SSPs for each performance obligation.

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

We are required to record Gainshare revenue in the same period in which the usage occurs.

Because we generally do 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, we accrue the related revenue based on estimates of customers underlying sales achievement.

Our 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 deferred tax assets (“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 deferred tax assets (“DTAs”), primarily driven by a cumulative loss incurred over the 12-quarter period ended December 31, 2023, and the likelihood that we may not utilize tax attributes before they expire.

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

The valuation allowance was approximately $67.9 million and $64.2 million as of December 31, 2024 and 2023, respectively.

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If we conclude that we are more likely than not to utilize some or all of our U.S.

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

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

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

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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 Consolidated Statements of Comprehensive Income (Loss).

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

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

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

The CHIPS Act was signed into U.S.

law on August 9, 2022.

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

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

We have begun to see some benefit from the CHIPS Act to our business, but the extent of future benefit is still unknown.

Stock-Based Compensation

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.

service period.

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

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These awards are subject to time-based vesting which generally occurs over a period of four years.

The fair value of our stock options and purchase rights granted under employee stock purchase plans is estimated using the Black-Scholes-Merton option-pricing model, which incorporates various assumptions including volatility, expected life and interest rates.

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 plans.

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 plans.

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 plans.

The fair value of our stock options and purchase rights granted under employee stock purchase plan is estimated using the Black-Scholes-Merton option-pricing model, which incorporates various assumptions including volatility, expected life and interest rates.

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.

Business Combinations

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

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

with the corresponding offset to goodwill.

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

Upon the conclusion of the measurement period, any subsequent adjustments are recorded to earnings in the Consolidated Statements of Comprehensive Income (Loss).

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There was no impairment of goodwill for the years ended December 31, 2024, 2023 and 2022.

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

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

There was no impairment of intangible assets for the years ended December 31, 2023, 2022 and 2021.

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

There was no impairment of long-lived assets for the years ended December 31, 2024, 2023 and 2022.

We have operating leases for our administrative and sales offices, research and development laboratory and clean room.

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Recent Accounting Pronouncements and Accounting Changes

See our Note 1, “Description of Business and Summary of Significant Accounting Policies” of “Notes to Consolidated Financial Statements” included under Part II, Item 8 of this Form 10-K for a description of recent accounting pronouncements and accounting changes, including the dates of adoption and estimated effects, if any, on our consolidated financial statements.

See our Note 1, “Description of Business and Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements included under Part II, Item 8 of this Annual Report on Form 10-K for a description of recent accounting pronouncements and accounting changes, including the dates of adoption and estimated effects, if any, on our consolidated financial statements.

Results of Operations

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Analytics revenue was $169.3 million for the year ended December 31, 2024, an increase of $17.2 million, or 11%, compared to the year ended December 31, 2023.

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

Integrated Yield Ramp Revenue

Integrated Yield Ramp revenue was $13.8 million for the year ended December 31, 2023, a decrease of $4.3 million, or 24%, compared to the year ended December 31, 2022, primarily due to a decrease in hours worked on fixed fee engagements and a decrease in Gainshare from decreased customer wafer shipments at non-leading-edge nodes.

Our Integrated Yield Ramp revenue may continue to fluctuate from period to period primarily due to the contribution of Gainshare royalty, which is dependent on many factors that are outside our control, including among others, continued production of ICs by our customers at facilities at which we generate Gainshare, sustained yield improvements by our customers, and whether we enter into new contracts containing Gainshare.

Integrated Yield Ramp revenue was $10.2 million for the year ended December 31, 2024, a decrease of $3.5 million, or 26%, compared to the year ended December 31, 2023, primarily due to a decrease in hours worked on fixed fee engagements and a decrease in customer wafer shipments at non-leading-edge nodes.

Our Integrated Yield Ramp revenue may continue to fluctuate from period to period primarily due to fluctuations in customers’ wafer production under 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 revenues may also fluctuate in the future due to other factors, including the semiconductor industry’s continued acceptance of our products, services and solutions, the timing of purchases by existing and new customers, cancellations by existing customers, our ability to attract new customers and penetrate new markets, supply chain challenges and further penetration of our current customer base.

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Costs of revenues 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 costs, hardware costs (including cost of leased assets under sales-type leases), 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 $3.8 million for the year ended December 31, 2023, compared to the year ended December 31, 2022, was primarily due to (i) a $3.5 million increase in hardware costs, (ii) a $0.4 million increase in travel expenses, (iii) a $0.2 million increase in subcontractor fees, and (iv) a $0.2 million increase in software licenses and maintenance costs.

These increases were partially offset by a $0.4 million decrease in personnel-related costs due to lower compensation expenses, partially offset by an increase in stock-based compensation expense.

The increase in costs of revenues of $2.4 million for the year ended December 31, 2024, compared to the year ended December 31, 2023, was primarily due to (i) a $1.6 million increase in hardware-related costs, (ii) a $0.9 million increase in subcontractor fees, (iii) a $0.9 million increase in third-party cloud-delivery costs, and (iv) a $0.2 million increase in personnel-related costs mostly due to higher stock-based compensation expenses.

These increases were partially offset by a $1.2 million decrease in facilities and IT-related costs including depreciation and amortization expense.

Gross margin for the year ended December 31, 2024, was 70% compared to 69% for the year ended December 31, 2023, or an increase of 1 percentage point.

The higher gross margin during the year ended December 31, 2023, was primarily due to higher total revenue when compared to the year ended December 31, 2022.

The higher gross margin during the year ended December 31, 2024, was primarily due to higher total revenue compared to the year ended December 31, 2023.

Operating Expenses:

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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 $5.4 million for the year ended December 31, 2023, compared to the year ended December 31, 2022, primarily due to (i) a $5.8 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 $0.5 million decrease in facilities and IT-related costs including depreciation expense.

These were partially offset by (a) a $0.3 million increase in third-party cloud-services related costs, (b) a $0.3 million increase in travel expenses, and (c) a $0.2 million increase in subcontractor expenses primarily related to Cimetrix and Exensio software.

Research and development expenses increased $2.8 million for the year ended December 31, 2024, compared to the year ended December 31, 2023, primarily due to (i) a $1.6 million increase in personnel-related costs mostly due to higher stock-based compensation expenses, higher other compensation expenses (including employee benefit costs) resulting from increased headcount and worldwide salary increases, (ii) a $0.7 million increase in subcontractor expenses primarily related to Cimetrix and Exensio software, and (iii) a $0.4 million increase in third-party cloud-services related costs.

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

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As a percentage of total revenues

administrative personnel), legal, tax and accounting services, marketing communications and trade conference-related expenses, third-party cloud-services related costs, travel, IT, and facilities cost allocations.

Selling, general, and administrative expenses increased $16.9 million for the year ended December 31, 2023, compared to the year ended December 31, 2022, primarily due to (i) a $14.5 million increase in personnel-related costs mainly resulting from increases in stock-based and other compensation expense, commission, employee benefit costs, headcount and worldwide salary increases, (ii) a $0.8 million increase in travel expenses, (iii) a $0.7 million increase in legal fees related to the arbitration proceeding over a disputed customer contract, (iv) a $0.4 million increase in third-party cloud-services related costs, (v) a $0.3 million increase in property tax expense, (vi) a $0.3 million increase in general legal expenses, (vii) a $0.3 million increase in trade conference-related expenses, and (viii) a $0.2 million increase in business acquisition costs.

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

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

Selling, general, and administrative expenses increased $7.7 million for the year ended December 31, 2024, compared to the year ended December 31, 2023, primarily due to (i) a $7.1 million increase in personnel-related costs mainly due to higher stock-based, sales commission, other compensation expense and employee benefits-related costs as a result of increase in headcount, worldwide salary increases and higher health insurance costs, (ii) a $1.5 million increase in general legal expenses, (iii) a $0.7 million increase in non-recurring legal, tax and accounting service-related costs, (iv) a $0.4 million increase in marketing and trade conference-related expenses, and (v) a $0.3 million increase in facilities and IT-related costs including depreciation expense, partially offset by a $2.5 million decrease in legal fees related to the arbitration proceeding over a disputed customer contract.

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

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Amortization of acquired intangible assets

Amortization of acquired intangible assets primarily consists of amortization of intangibles acquired as a result of certain business combinations and was consistent for the year ended December 31, 2023 compared to the year ended December 31, 2022.

Write-down in value of property and equipment

Year Ended December 31,

(Dollars in thousands)

Write-down in value of property and equipment

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

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 $2.5 million for the year ended December 31, 2023, compared to the year ended December 31, 2022, primarily due to an increase in interest income of $4.0 million from cash, cash equivalents and short-term investments resulting from higher interest rates, partially offset by net unfavorable fluctuations in foreign currency exchange rates.

Interest and other expense (income), net increased $0.6 million for the year ended December 31, 2024, compared to the year ended December 31, 2023, primarily due to increase in interest income from cash, cash equivalents and short-term investments resulting from higher interest rates and sales-type leases, and net favorable fluctuations in foreign currency exchange rates, partially offset by loss on damaged equipment in-transit.

Income Tax Expense

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Income tax expense

Income tax expense decreased $2.1 million for the year ended December 31 , 2023, compared to the year ended December 31 , 2022, primarily due to decreases in state tax expense, foreign withholding taxes and changes in the geographic mix of worldwide income, which is subject to taxation at different statutory tax rates.

Income tax expense increased $0.8 million for the year ended December 31 , 2024, compared to the year ended December 31 , 2023, primarily due to state tax return true-ups that resulted in a state tax benefit for the year ended December 31, 2023.

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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Discussion of Financial Data for the years ended December 31, 2023 and 2022

For a discussion of our results of operations for the years ended December 31, 2022 and 2021, please see our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on March 1, 2023.

For a discussion of our results of operations for the years ended December 31, 2023 and 2022, please see our Annual Report on Form 10-K for the year ended December 31, 2023, filed with the SEC on February 27, 2024.

Liquidity and Capital Resources

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As of December 31, 2024 and 2023, cash and cash equivalents held by our foreign subsidiaries were $13.3 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, and other obligations, for at least the next twelve months.

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

Repurchase of Company’s Common Stock

On June 4, 2020, the Company’s Board of Directors adopted a stock repurchase program (the “2020 Program”) to repurchase up to $25.0 million of the Company’s common stock both on the open market and in privately negotiated transactions, including through Rule 10b5-1 plans, over the next two years.

During the year ended December 31, 2022, 218,858 shares were repurchased by the Company under the 2020 Program at an average price of $26.40 per share for an aggregate total price of $5.8 million.

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

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

On April 11, 2022, the Board of Directors terminated the 2020 Program, and adopted a new program (the “2022 Program”) to repurchase up to $35.0 million of the Company’s common stock both on the open market and in privately negotiated transactions, including through Rule 10b5-1 plans, from time to time, over the next two years.

During the year ended December 31, 2023, 21,340 shares were repurchased by the Company under the 2022 Program at an average price of $34.81 per share for an aggregate total price of $0.7 million.

On April 11, 2022, our 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 from the adoption date.

During the year ended December 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 735,940 shares under the 2022 Program at an average price of $23.69 per share for an aggregate total price of $17.4 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 repurchase program (the “2024 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 from the adoption date.

The actual timing and amount of repurchases are subject to business and market conditions, corporate and regulatory requirements, stock price, acquisition opportunities and other factors.

Program does not obligate the Company to acquire a minimum amount of shares and may be modified, suspended or terminated without prior notice.

The Company has not repurchased any shares under the 2024 Program.

Consolidated Statements of Cash Flows Data

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Net Cash Provided by Operating Activities

Cash flows provided by operating activities during the year ended December 31, 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, net accretion of discounts on short-term investments and net change in operating assets and liabilities.

Net cash flows provided by operating activities was $14.6 million for the year ended December 31, 2023, compared to net cash flows provided by operating activities of $32.3 million for the year ended December 31, 2022.

The $17.7 million decrease in cash flows provided by operating activities between the years was driven primarily by payments made to vendors and employees, including under the Company’s bonus plan, partially offset by an increase in net income compared to the year ended December 31, 2022.

Net income was $3.1 million for the year ended December 31, 2023, compared to a net loss of $3.4 million for the year ended December 31, 2022.

The major contributors to the net change in operating assets and liabilities for the year ended December 31, 2023, were as follows:

● Accounts receivable increased by $2.7 million, primarily due to an increase in sales, an increase in unbilled accounts receivables due to timing of billing, and revenue recognition and higher contractual invoicing activity, partially offset by collections from customers;

● Prepaid expense and other current assets increased by $7.3 million, primarily due to the timing of billing of contract assets related to fixed-price service contracts, an increase in lease receivable from sales-type leases, and an increase in income tax receivable, partially offset by a decrease in prepaid expenses related to third party software licenses and cloud-subscription costs;

● Other non-current assets increased by $4.2 million primarily due to non-current assets from sales-type leases, increases in non-current contract assets and costs capitalized to obtain revenue contracts, partially offset by the amortization of non-current prepaid expenses;

● Accounts payable decreased by $2.1 million primarily due to the timing of payments of vendor invoices;

● Accrued compensation and related benefits decreased by $2.2 million primarily due to the payments of accrued bonuses net of new bonus accruals, a decrease in accrued commissions, partially offset by additional contributions to the employee stock purchase plan.

Cash flows provided by operating activities during the years ended December 31, 2024 and 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, net accretion of discounts on short-term investments and net change in operating assets and liabilities.

We expect cash from our operating activities to fluctuate due to the level of our business activities, the timing of billings and payments terms as set forth in our agreements with our customers, the timing of cash disbursements to our vendors and settlement of other liabilities.

The decrease in cash flows provided by operating activities during the year ended December 31, 2024, as compared to the year ended December 31, 2023, was driven primarily by (i) an increase in accounts receivable primarily due to an increase in total revenues and the impact of the timing of contractual invoicing activities resulting to lower collections from customers, and (ii) increases in payments of personnel-related costs and vendor invoices, partially offset by an increase in net income between comparable periods.

Net income was $4.1 million for the year ended December 31, 2024, compared to net income of $3.1 million for the year ended December 31, 2023.

Subsequent to December 31, 2024, we collected more than half of the $51.6 million billed accounts receivable as of that date.

Net Cash Provided by (Used in) Investing Activities

Net cash used in investing activities was $29.0 million for the year ended December 31, 2023, compared to net cash provided by investing activities of $84.6 million for the year ended December 31, 2022.

For the year ended December 31, 2023, cash used in investing activities primarily related to purchases of short-term investments of $59.6 million, purchases of and prepayments for property and equipment of $11.3 million primarily related to our DFI and CV systems, payment for a business acquisition, net of cash acquired, of $1.8 million, partially offset by proceeds from maturities and sales of short-term investments of $43.8 million.

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

Net cash used in investing activities was $5.9 million for the year ended December 31, 2024, compared to net cash used in investing activities of $29.0 million for the year ended December 31, 2023.

For the year ended December 31, 2024, cash used in investing activities primarily related to purchases of short-term investments of $54.3 million, purchases of and prepayments for property and equipment of $17.8 million primarily related to our DFI system, and the purchase of a convertible promissory note of $2.0 million, partially offset by proceeds from maturities and sales of short-term investments of $68.1 million.

For the year ended December 31, 2023, cash used in investing activities primarily related to purchases of short-term investments of $59.6 million, purchases of and prepayments for property and equipment of $11.3 million primarily related to our DFI and CV systems, and the payment for a business acquisition, net of cash acquired, of $1.8 million, partially offset by proceeds from maturities and sales of short-term investments of $43.8 million.

Net Cash Used in Financing Activities

Net cash used in financing activities was $11.2 million for the year ended December 31, 2024, compared to net cash used in financing activities of $5.9 million for the year ended December 31, 2023.

For the year ended December 31, 2023, net cash used in financing activities primarily consisted of $9.5 million in cash payments for taxes related to net share settlement of equity awards and $0.7 million for the repurchase of shares of our common stock and, partially offset by $4.3 million of proceeds from our employee stock purchase plan and exercise of stock options.

For the year ended December 31, 2022, net cash used in financing activities primarily consisted of $22.5 million for the repurchase of shares of our common stock and $6.5 million in cash payments for taxes related to net share settlement of equity awards, partially offset by $4.7 million of proceeds from our employee stock purchase plans and exercise of stock options.

For the year ended December 31, 2024, net cash used in financing activities primarily consisted of $8.5 million in cash payments for taxes related to net share settlement of equity awards and $6.9 million for the repurchase of shares of

our common stock, partially offset by $4.2 million of proceeds from our employee stock purchase plan and exercise of stock options.

For the year ended December 31, 2023, net cash used in financing activities primarily consisted of $9.5 million in cash payments for taxes related to net share settlement of equity awards and $0.7 million for the repurchase of shares of our common stock, partially offset by $4.3 million of proceeds from our employee stock purchase plan and exercise of stock options.

Related Party Transactions

Refer to Note 13, “Strategic Partnership Agreement with Advantest and Related Party Transactions” of the Notes to Consolidated Financial Statements (Item 8 of Part II of this Annual Report) for a discussion on related party transactions between the Company and Advantest.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements, investments in special purpose entities or undisclosed borrowings or debt.

See Note 14, “Strategic Partnership Agreement with Advantest and Related Party Transactions” of the Notes to Consolidated Financial Statements (Item 8 of Part II of this Annual Report on Form 10-K) for a discussion on related party transactions between the Company and Advantest.

Contractual Obligations

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Purchase obligations (2)

(1) Refer to Note 5 of “Notes to Consolidated Financial Statements” (Item 8 of Part II of this Annual Report) for further discussion.

(1) See Note 6, “Leases” of the Notes to Consolidated Financial Statements” (Item 8 of Part II of this Annual Report on Form 10-K) for further discussion.

(2) Purchase obligations consist of agreements to purchase goods and services entered in the ordinary course of business.

(3) The contractual obligation table above excludes liabilities for uncertain tax positions of $2.8 million, which are not practicable to assign to any particular years due to the inherent uncertainty of the tax positions.

See Note 9 of “Notes to Consolidated Financial Statements” (Item 8 of Part II of this Annual Report) for further discussion.

See Note 10, “Income Taxes” of the Notes to Consolidated Financial Statements (Item 8 of Part II of this Annual Report on Form 10-K) for further discussion.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis