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Item 2. Management’s Discussion and Analysis

2025-05-08 compared with 2024-11-07 · 133 added, 287 removed, 128 unchanged (77% of the section changed)

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In some cases, you can identify forward-looking statements by terminology such as “may,” “could,” “projected,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “target” or “continue,” the negative effect of terms like these or other similar expressions.

These statements include, but are not limited to, statements concerning:

expectations about the effectiveness of our business and technology strategies;

expectations regarding global economic trends;

the impact of global inflation and changed interest rates, expectations regarding recent and future acquisitions;

current semiconductor industry trends;

expectations of continued adoption of our solutions by new and existing customers;

These statements include, but are not limited to, statements related to:

the Company’s business strategy and objectives;

the Company’s intellectual property and proprietary software, information and technology;

the Company’s sales and marketing strategy, expectations regarding strategic alliances and relationships;

investments in research and development;

industry trends;

macroeconomic factors, inventories, and demand;

changing export controls and sanctions;

administrative initiatives;

investments in semiconductor manufacturing;

geopolitical tensions and conflicts;

fluctuations in the Company’s quarterly results;

and other statements identified by words such as “could,” “expects,” “intends,” “may,” “plans,” “potential,” “should,” “will,” “would,” or similar expressions and the negatives of those terms, that are subject to future events and circumstances, and uncertainties that could cause results to differ materially include risks associated with:

the effectiveness of the Company’s business and technology strategies;

current semiconductor industry trends and competition;

rates of adoption of the Company’s solutions by new and existing customers;

project milestones or delays and performance criteria achieved;

cost and schedule of new product development;

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

the continuing impact of macroeconomic conditions and other trends on the semiconductor industry, our customers, our operations, and supply and demand for our products;

cost and schedule of new product development and investments in research and development;

the continuing impact of macroeconomic conditions, including inflation, changing interest rates and tariffs, the evolving trade regulatory environment and geopolitical tensions, and other trends impacting the semiconductor industry, the Company’s customers, operations, and supply and demand for its products;

supply chain disruptions;

the success of the Company’s strategic growth opportunities and partnerships;

the Company’s ability to successfully integrate acquired businesses and technologies;

recent and future acquisitions, strategic alliances and relationships and the Company’s ability to successfully integrate acquired businesses and technologies;

whether the Company can successfully convert backlog into revenue;

customers’ production volumes under contracts that provide Gainshare;

possible impacts from the evolving trade regulatory environment and geopolitical tensions;

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

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

the sufficiency of the Company’s cash resources and anticipated funds from operations;

the Company’s ability to obtain additional financing if needed;

the Company’s ability to use support and updates for certain open-source software;

and other risks and uncertainties discussed in the Company’s filings with the Securities and Exchange Commission (“SEC”) .

These forward-looking statements are only predictions.

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“Business” and Item 7.

“Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2023, filed with the Securities and Exchange Commission (“SEC”) on February 27, 2024.

“Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2024, filed with the SEC on February 27, 2025 (the “Annual Report”).

All references to “we,” “us,” “our,” “PDF,” “PDF Solutions” or “the Company” refer to PDF Solutions, Inc.

Cimetrix, CV, DFI, Exensio, PDF Solutions, and the PDF Solutions, Exensio, and Cimetrix logos are trademarks or registered trademarks of PDF Solutions, Inc.

Cimetrix, CV, DFI, Exensio, PDF Solutions, secureWISE, and the Cimetrix, Exensio, PDF Solutions, and secureWISE logos, are trademarks or registered trademarks of PDF Solutions, Inc.

or its subsidiaries.

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

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

We derive revenues from two sources:

Analytics and Integrated Yield Ramp.

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

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

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

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

Acquisition of SecureWise LLC

On March 7, 2025, we completed the acquisition of SecureWise LLC (“SecureWise”), a Delaware limited liability company (see Note 14, Business Combinations , in the notes to condensed consolidated financial statements (unaudited) in Part I, Item 1 of this Quarterly Report on Form 10-Q), and added the widely-used, secure, remote secureWISE connectivity solution to our products and services portfolio.

We expect this acquisition to also accelerate equipment makers’ ability to derive value from equipment data by enabling them to leverage our Exensio analytics software and to expand the capability of our secure data exchange (“DEX”) outsourced semiconductor assembly and test (“OSAT”) network by allowing equipment makers, fab operators, and fabless companies to collaborate to optimize chip manufacturing and test.

Industry Trends

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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.

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

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

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

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

Foundries that participate at leading edge nodes are expected to continue to invest in new technologies such as memory, 2.5D and 3D packaging, extreme ultraviolet lithography, and 3D architectures such as backside power and gate-all-around transistors , as well as new innovations in process control and variability management.

We expect China’s investment in semiconductors to continue.

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● Macroeconomy, inventories, and demand .

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

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.

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

For example, demand for artificial intelligence (“AI”) processing unit products is strong, while demand for smart phones remains weak.

With high inventories and soft demand, 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 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.

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

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 and/or entities in 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 not subject to the U.S.

Export Administration Regulations.

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.

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.

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, including on some non-U.S.

items, and on some U.S.

person activities in certain cases, 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, which are not yet final and issued, are complicated, would reach into commercial supply chains, and would be challenging to interpret.

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.

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

On April 12, 2024, the U.S.

On November 27, 2024, the U.S.

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

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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.

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.

● Investments in semiconductor manufacturing .

In 2022, the U.S.

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.

It is expected that U.S.

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

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

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

Administrative Initiatives.

Administration has made and is expected to continue to make changes to U.S.

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

For example, the U.S.

recently imposed additional tariffs on imports from China, Canada, and Mexico.

We do not import into the U.S.

a significant volume of goods of those countries.

Trade conflict through exchange of tariffs and other retaliatory actions are expected to impact worldwide supply chains, increase prices and put downward pressure on economic activity, and could negatively affect our future sales in various geographic markets.

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.

● 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 growing 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.

Geopolitical tensions and conflicts in various locations around the world have created volatility in the global financial markets and may have further global economic consequences, including potential disruptions of the global supply chain, heightened volatility of commodity and raw material prices, and 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 we have developed contingency plans to use alternative resources to continue serving customers, if needed.

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Financial Highlights

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

● Total revenues were $46.4 million, an increase of $4.1 million, or 10%, compared to the three months ended September 30, 2023.

Analytics revenue was $44.8 million, an increase of $5.3 million, or 13%, compared to the three months ended September 30, 2023.

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

Integrated Yield Ramp revenue was $1.7 million, a decrease of $1.2 million, or 42%, compared to the three months ended September 30, 2023.

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

● Costs of revenues decreased $1.8 million, compared to the three months ended September 30, 2023, primarily due to decreases in hardware costs and facilities and IT-related costs including depreciation and amortization expense.

Financial highlights for the three months ended March 31, 2025, are as follows:

● Total revenues were $47.8 million, an increase of $6.5 million, or 16%, compared to the three months ended March 31, 2024.

Analytics revenue was $42.5 million, an increase of $4.0 million, or 10%, compared to the three months ended March 31, 2024.

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

Integrated Yield Ramp revenue was $5.3 million, an increase of $2.5 million, or 86%, compared to the three months ended March 31, 2024.

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

● Costs of revenues decreased $0.6 million, compared to the three months ended March 31, 2024, primarily due to decreases in hardware costs and facilities and IT-related costs including depreciation and amortization expense.

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

● Net income was $2.2 million, compared to a net loss of $5.0 million for the three months ended September 30, 2023.

The increase in net income was primarily attributable to (i) an increase in total revenues, (ii) a decrease in costs of revenues, and (iii) a decrease in income tax expense, partially offset by (a) increases in sales and marketing activities, and general and administrative expenses, which were primarily related to increases in personnel-related costs, legal expenses (excluding arbitration-related expenses), facilities and IT-related costs including depreciation expense, subcontractor fees, and trade conference-related expenses, partially offset by a decrease in fees related to the arbitration proceeding over a disputed customer contract, (b) an increase in research and development expenses, and (c) net unfavorable fluctuations in foreign currency exchange rates.

Financial highlights for the nine months ended September 30, 2024, are as follows:

● Total revenues were $129.4 million, an increase of $4.7 million, or 4%, compared to the nine months ended September 30, 2023.

Analytics revenue was $121.3 million, an increase of $8.4 million, or 7%, compared to the nine months ended September 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 CV and DFI systems.

Integrated Yield Ramp revenue was $8.1 million, a decrease of $3.7 million, or 31%, compared to the nine months ended September 30, 2023.

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

● Costs of revenues decreased $0.3 million, compared to the nine months ended September 30, 2023, primarily due to decreases in facilities and IT-related costs including depreciation and amortization expense, and hardware costs.

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

● Net income was $3.5 million, compared to a net income of $2.2 million for the nine months ended September 30, 2023.

The increase in net income was primarily attributable to (i) increases in total revenues and interest income, and (ii) decreases in income tax expense, costs of revenues, and amortization of acquired intangible assets, partially offset by increases in (a) sales and marketing activities, and general and administrative expenses, which were primarily related to increases in personnel-related costs, legal expenses (excluding arbitration-related expenses), facilities and IT-related costs including depreciation expense, trade conference-related expenses, tax and accounting services, and subcontractor fees, partially offset by decreases in fees related to the arbitration proceeding over a disputed customer contract, business acquisition costs, third-party cloud-services related costs, and (b) research and development expenses.

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 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 nine months ended September 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 most significant accounting policies and methods that we use.

● Net loss was $3.0 million, compared to a net loss of $0.4 million for the three months ended March 31, 2024.

The increase in net loss was primarily attributable to (i) an increase in sales and marketing activities, and general and administrative expenses, which was primarily due to acquisition costs related to the acquisition of SecureWise, and (ii) an increase in research and development expenses, partially offset by an increase in total revenues.

Critical Accounting Policies

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

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

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

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

The most significant estimates

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

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

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

Revenue Recognition

We derive revenue from two sources:

Analytics and Integrated Yield Ramp.

Analytics Revenue

Analytics revenue is derived from the following primary offerings:

licenses and services for standalone Software (which consists primarily of Exensio and Cimetrix products), SaaS (which consists primarily of Exensio products), and DFI and CV systems (including Characterization services) that do not include performance incentives based on customers’ yield achievement.

Revenue from standalone software is recognized depending on whether the license is perpetual or time-based.

Perpetual (one-time charge) license software is recognized at the time of the inception of the arrangement when control transfers to the customers, if the software license is distinct from the services offered by us.

Revenue from post-contract support is recognized over the contract term on a straight-line basis, because we are providing (i) support and (ii) unspecified software updates on a when-and-if available basis over the contract term.

Revenue from time-based-licensed software is allocated to each performance obligation and is recognized either at a point in time or over time as follows.

The license component is recognized at the time when control transfers to customers, with the post-contract support component recognized ratably over the committed term of the contract.

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

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

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, the Company allocates 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 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 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.

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.

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 and continue to be depreciated.

Assets subject to sales-type leases are derecognized from property and equipment, net 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 accompanying condensed consolidated balance sheets.

Integrated Yield Ramp Revenue

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 the 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 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 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.

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

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

federal and state net DTAs, primarily driven by a cumulative loss incurred over the 12-quarter period ended September 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 September 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.

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

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

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

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

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

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

federal, state, and/or foreign tax law.

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

Accordingly, we recognize tax liabilities based upon our estimate of whether, and the extent to which, additional taxes will be due when such estimates are more-likely-than-not to be sustained.

An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained.

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 September 30, 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.

subsidiaries in those operations indefinitely.

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

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

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

The 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.

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

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

The fair value of our restricted stock units is equal to the market value of our common stock on the date of the grant.

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 plan 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 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.

Valuation of Long-lived Assets including Goodwill and Intangible Assets

We record goodwill when the purchase consideration of an acquisition exceeds the fair value of the net tangible and identified intangible assets as of the date of acquisition.

We have one operating segment and one operating unit.

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

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

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

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

For assets to be held and used, we initiate our review whenever events or changes in circumstances indicate that the carrying amount of a long-lived asset group may not be recoverable.

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 and nine months ended September 30, 2024 and 2023.

For additional information about our critical accounting policies, see Note 1, Basis of Presentation and Summary of Significant Accounting Policies , and Note 2, Revenue from Contracts with Customers to our unaudited condensed consolidated financial statements in this Quarterly Report on Form 10-Q and Part II Item 7 , Management’s Discussion and Analysis of Financial Condition and Results of Operation, under the heading of “Critical Accounting Estimates” in our Annual Report.

There were no material changes during the three months ended March 31, 2025, to the items that we disclosed as our critical accounting policies and estimates in Part II, Item 7 of the Annual Report.

Recent Accounting Pronouncements and Accounting Changes

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Results of Operations

Discussion of Financial Data for the Three and Nine months ended September 30, 2024 and 2023

Discussion of Financial Data for the Three months ended March 31, 2025 and 2024

Revenues, Costs of Revenues, and Gross Margin

Three Months Ended

Nine Months Ended

September 30,

(Dollars in thousands)

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Analytics Revenue

Analytics revenue increased $5.3 million for the three months ended September 30, 2024, compared to the three months ended September 30, 2023.

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

Analytics revenue increased $8.4 million for the nine months ended September 30, 2024, compared to the nine months ended September 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 CV and DFI systems.

Analytics revenue increased $4.0 million for the three months ended March 31, 2025, compared to the three months ended March 31, 2024.

The increase in Analytics revenue was driven by increases in revenues from Exensio and Cimetrix software licenses, the addition of revenues related to SecureWise products and services, and CV systems, partially offset by a decrease in revenues from DFI systems.

Integrated Yield Ramp Revenue

Integrated Yield Ramp revenue decreased $1.2 million for the three months ended September 30, 2024, compared to the three months ended September 30, 2023, primarily due to a decrease in hours worked on fixed-fees engagements, partially offset by higher Gainshare from increased customer wafer shipments at non-leading-edge nodes.

Integrated Yield Ramp revenue decreased $3.7 million for the nine months ended September 30, 2024, compared to the nine months ended September 30, 2023, primarily due to lower hours worked on fixed-fees engagements and Gainshare from decreased customer wafer shipments at non-leading-edge nodes.

Integrated Yield Ramp revenue increased $2.5 million for the three months ended March 31, 2025, compared to the three months ended March 31, 2024, primarily due to higher Gainshare from increased customer wafer shipments at non-leading-edge nodes, partially offset by a decrease in hours worked on fixed-fees engagements.

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

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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.

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 $1.8 million for the three months ended September 30, 2024, compared to the three months ended September 30, 2023, was primarily due to (i) a $2.0 million decrease in hardware costs and (ii) a $0.5 million decrease in facilities and IT-related costs including depreciation and amortization expense.

These decreases were partially offset by (a) a $0.3 million increase in subcontractor costs, (b) a $0.3 million increase in third-party cloud-delivery costs, and (c) a $0.2 million increase in personnel-related costs mostly resulting from higher stock-based compensation expenses.

The decrease in costs of revenues of $0.3 million for the nine months ended September 30, 2024, compared to the nine months ended September 30, 2023, was primarily due to (i) a $0.8 million decrease in facilities and IT-related costs including depreciation and amortization expense, and (ii) a $0.6 million decrease in hardware costs.

These decreases were partially offset by (a) a $0.5 million increase in third-party cloud-delivery costs, (b) a $0.4 million increase in subcontractor costs, and (c) a $0.2 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.

Gross margin increased seven percentage points for the three months ended September 30, 2024, to 73%, compared to 66% for the three months ended September 30, 2023.

The higher gross margin during the three months ended September 30, 2024, was primarily due to higher Analytics revenue and lower cost of revenues for the three months ended September 30, 2024.

Gross margin increased one percentage point for the nine months ended September 30, 2024, to 70%, compared to 69% for the nine months ended September 30, 2023.

The higher gross margin during the nine months

ended September 30, 2024, was primarily due to higher Analytics revenue for the nine months ended September 30, 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 $0.6 million for the three months ended March 31, 2025, compared to the three months ended March 31, 2024, was primarily due to (i) a $1.5 million decrease in hardware costs and (ii) a $0.3 million decrease in facilities and IT-related costs including depreciation and amortization expense.

These decreases were partially offset by (a) a $0.6 million increase in personnel-related costs due to higher wages, (b) a $0.4 million increase in subcontractor costs, and (c) a $0.1 million increase in third-party cloud-delivery costs.

Gross margin increased 6 percentage points for the three months ended March 31, 2025, to 73%, compared to 67% for the three months ended March 31, 2024.

The higher gross margin during the three months ended March 31, 2025, was primarily due to higher Analytics and Gainshare revenues and lower costs of revenues for the three months ended March 31, 2025.

Operating Expenses:

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Three Months Ended

Nine Months Ended

September 30,

(Dollars in thousands)

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As a percentage of total revenues

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

Research and development expenses increased $0.4 million for the three months ended September 30, 2024, compared to the three months ended September 30, 2023, primarily due to (i) a $0.3 million increase in subcontractor fees primarily related to Cimetrix and Exensio software and (ii) a $0.2 million increase in personnel-related costs mostly resulting from higher stock-based compensation expenses, higher other compensation expenses (including employee benefit costs and bonuses), increased headcount, and worldwide salary increases.

Research and development expenses increased $0.7 million for the nine months ended September 30, 2024, compared to the nine months ended September 30, 2023, primarily due to (i) a $0.7 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, (ii) a $0.2 million increase in third-party cloud-services costs, and (iii) a $0.1 million increase in travel expenses, partially offset by a $0.2 million decrease in laboratory supplies, facilities and IT-related costs including depreciation expense.

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 increased $1.6 million for the three months ended March 31, 2025, compared to the three months ended March 31, 2024, primarily due to (i) a $0.8 million increase in subcontractor fees primarily related to Cimetrix software, (ii) a $0.3 million increase in facilities and IT-related costs, (iii) a $0.3 million increase in personnel-related costs due to increased headcount, worldwide salary increases, and stock-based compensation expense, and (iv) a $0.2 million increase in third-party cloud-delivery 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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Three Months Ended

Nine Months Ended

September 30,

(Dollars in thousands)

2 unchanged sentences

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 $2.5 million for the three months ended September 30, 2024, compared to the three months ended September 30, 2023, primarily due to (i) a $1.6 million increase in personnel-related costs mainly resulting from higher stock-based compensation expenses, higher other compensation expenses (including commissions, employee benefit costs and bonuses), increased headcount, and worldwide salary increases, (ii) a $0.6 million increase in legal expenses (excluding arbitration-related expenses), (iii) a $0.3 million increase in facilities and IT-related costs including depreciation expense, (iv) a $0.1 million increase in subcontractor fees, and (v) a $0.1 million increase in trade conference-related expenses.

These increases were partially offset by a $0.2 million decrease in legal fees related to the arbitration proceeding over a disputed customer contract.

Selling, general, and administrative expenses increased $4.8 million for the nine months ended September 30, 2024, compared to the nine months ended September 30, 2023, primarily due to (i) a $4.8 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, (ii) a $2.1 million increase in legal expenses (excluding arbitration-related expenses), (iii) a $0.3 million increase in facilities and IT-related costs including depreciation expense, (iv) a $0.2 million increase in trade conference-related expenses, and (v) a $0.1 million increase in subcontractor fees.

These increases were partially offset by (a) a $2.5 million decrease in legal fees related to the arbitration proceeding over a disputed customer contract, (b) a $0.2 million decrease in business acquisition costs, and (c) a $0.1 million decrease in third-party cloud-services costs.

Selling, general, and administrative expenses increased $6.9 million for the three months ended March 31, 2025, compared to the three months ended March 31, 2024, primarily due to (i) $4.3 million in non-recurring legal, finance, integration, and other costs related to the acquisition of SecureWise, (ii) a $1.9 million increase in personnel-related costs

mainly resulting from increased headcount, worldwide salary increases, bonus expense, and stock-based compensation expense, (iii) a $0.7 million increase in facilities and IT-related costs including shipping costs and depreciation expense, and (iv) a $0.5 million increase in subcontractor fees, partially offset by a $0.8 million decrease in general legal expenses.

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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Three Months Ended

Nine Months Ended

September 30,

(Dollars in thousands)

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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

Interest Expense

Three Months Ended

Nine Months Ended

September 30,

(Dollars in thousands)

Interest and other expense (income), net

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 decreased $0.5 million for the three months ended September 30, 2024, compared to the three months ended September 30, 2023, primarily due to net unfavorable fluctuations in foreign currency exchange rates.

Interest and other expense (income), net increased $0.7 million for the nine months ended September 30, 2024, compared to the nine months ended September 30, 2023, primarily due to higher interest income resulting from higher interest rates and sales-type leases.

Interest expense

Interest expense is from our long-term debt that was used in financing the acquisition of SecureWise, and amortization of debt discount and financing costs.

Other Income (Expense), Net

Three Months Ended

(Dollars in thousands)

Other income (expense), net

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

Other income (expense), net decreased $0.8 million for the three months ended March 31, 2025, compared to the three months ended March 31, 2024, primarily due to (i) a $0.6 million decrease in interest income from cash, cash equivalents and short-term investments, and (ii) $0.2 million net unfavorable fluctuations in foreign currency exchange rates.

Income Tax Expense

Three Months Ended

Nine Months Ended

September 30,

(Dollars in thousands)

Income tax benefit (expense)

Income tax expense decreased for the three and nine months ended September 30, 2024, compared to the three and nine months ended September 30, 2023, primarily due to changes in the foreign and state taxes and year-to-date recognition of worldwide pre-tax income in relation to their forecasted amounts for full years.

Income tax expense

Income tax expense decreased for the three months ended March 31, 2025, compared to the three months ended March 31, 2024, primarily due to changes in the foreign, federal and state taxes and year-to-date recognition of worldwide pre-tax income 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.

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 September 30, 2024, our working capital, defined as total current assets less total current liabilities, was $133.7 million, compared to $147.0 million as of December 31, 2023.

Total cash, cash equivalents, and short-term investments were $120.2 million as of September 30, 2024, compared to cash, cash equivalents, and short-term investments of $135.5 million as of December 31, 2023.

As of September 30, 2024, and December 31, 2023, cash and cash equivalents held by our foreign subsidiaries were $12.2 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;

As of March 31, 2025, our working capital, defined as total current assets less total current liabilities, was $76.3 million, compared to $145.4 million as of December 31, 2024.

Total cash, cash equivalents, and short-term investments were $54.1 million as of March 31, 2025, compared to cash, cash equivalents, and short-term investments of $114.9 million as of December 31, 2024.

As of March 31, 2025, and December 31, 2024, cash and cash equivalents held by our foreign subsidiaries were $15.0 million and $13.3 million, respectively.

Our material cash requirements include interest payments on our debt, operating lease payments, and purchase obligations to support our operations.

Refer to Part I, Item 1, Financial Statements, Note 13, Debt , Note 4, Leases , Note 14, Business Combination and Note 11, Commitments and Contingencies for details relating to our material cash requirements for debt, leasing arrangements, including future maturities of operating lease liabilities, and purchase obligations, 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 including repayment of long-term debt and corresponding interest 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.

Term Loan and Revolving Credit Facility

On March 7, 2025, we entered into a Credit Agreement (the “Credit Agreement”) with the lenders who are party to the Credit Agreement and the lenders who may become a party to the Credit Agreement pursuant to the terms thereof (the “Lenders”) and Wells Fargo Bank, National Association, as administrative agent to the Lenders (the “Agent”).

The Credit Agreement provides for (a) a revolving credit facility in an aggregate principal amount of $45 million (the “Revolving Credit Facility”) and (b) a term loan facility in an aggregate principal amount of $25 million (the “Term Loan” and together with the Revolving Credit Facility, the “Credit Facilities”).

Borrowings under the Credit Facilities will accrue interest at rates equal, at our election, to (i) the alternate base rate, which is defined as the highest of (a) the federal funds effective rate in effect from time to time plus 0.50%, (b) the prime commercial lending rate in effect from time to time, and (c) the daily simple secured overnight financing rate (“SOFR”) plus 1.00% or (ii) SOFR, plus, in each case, the applicable margin.

The applicable margin for the Revolving Credit Facility borrowings bearing interest at the alternate base rate ranges from 1.00% to 1.75%, and the applicable margin for Revolving Credit Facility borrowings bearing interest based on the SOFR ranges from 2.00% to 2.75%, in each case, based on our consolidated total net leverage ratio as of the most recently ended fiscal quarter.

The applicable margin for Term Loan borrowings bearing interest at the alternate base rate ranges from 1.00% to 1.75%, and the applicable margin for Term Loan borrowings bearing interest based on the SOFR ranges from 2.00% to 2.75%, in each case, based on our consolidated total net leverage ratio as of the most recently ended fiscal quarter.

We will pay an annual commitment fee during the term of the Credit Agreement at a rate per annum equal to 0.50% for any undrawn portion of the Revolving Credit Facility.

The Credit Agreement contains customary representations and warranties, as well as customary affirmative and negative covenants.

Negative covenants include, among others, restrictions on the incurrence of debt, the incurrence of liens, the making of investments and distributions, dividends and stock buy-backs.

In addition, the Credit Agreement requires that we maintain a consolidated total net leverage ratio of not greater than 3.00 to 1.00, and a consolidated fixed charge coverage ratio of not less than 1.25 to 1.00.

As of March 31, 2025, we were in compliance with the covenants contained in the Credit Agreement.

The Credit Agreement contains customary events of default.

Upon the occurrence and during the continuance of an event of default, the Agent may declare the outstanding advances and all other obligations under the Credit Agreement immediately due and payable.

The obligations under the Credit Agreement are guaranteed by all present and future material domestic subsidiaries of the Company (collectively with the Company referred to herein as the “Credit Parties”), subject to customary exceptions, and are secured by the equity interests of the Credit Parties (other than the Company) and substantially all of the personal property owned by the Credit Parties, including 65% of the equity interests of certain foreign subsidiaries owned by the Credit Parties.

The Company used the amounts borrowed under the Credit Facilities to finance, in part, the purchase price paid for the acquisition of SecureWise.

Repurchase of Company’s Common Stock

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 nine months ended September 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.

On April 15, 2024, the Board of Directors adopted a stock 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.

The 2024 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.

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

Nine Months Ended September 30,

Three Months Ended

(In thousands)

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Net change in cash and cash equivalents

Net Cash Flows Provided by Operating Activities

Cash flows provided by operating activities during the nine months ended September 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, accretion of unguaranteed residual assets and net change in operating assets and liabilities.

Net cash flows provided by operating activities was $8.1 million for the nine months ended September 30, 2024, compared to $12.6 million for the nine months ended September 30, 2023.

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

Net income was $3.5 million for the nine months ended September 30, 2024, compared to $2.2 million for the nine months ended September 30, 2023.

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

● Accounts receivable increased by $1.7 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;

● Prepaid expense and other current assets increased by $8.8 million, primarily due to increases in lease receivables, contract assets, prepaid expenses and deferred commission, partially offset by a decrease in income tax receivable;

● Other non-current assets increased by $11.5 million primarily due to increases in non-current unbilled accounts receivables due to the timing of billing and revenue recognition, non-current assets from sales-type leases, non-current prepaid expenses and costs capitalized to obtain revenue contracts, partially offset by a decrease in non-current contract assets;

● Accounts payable increased by $3.0 million primarily due to the timing of payments of vendor invoices;

● Accrued compensation and related benefits decreased by $1.6 million primarily due to the payments of accrued bonuses net of new bonus accruals and exercise of purchase rights under the employee

stock purchase plan, partially offset by increases in accrued commissions and other compensation, and new contributions to the employee stock purchase plan;

● Deferred revenue increased by $2.8 million primarily due to the timing of billing and revenue recognition;

● Billings in excess of recognized revenues decreased by $1.5 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 $0.2 million for the nine months ended September 30, 2024, compared to net cash used in investing activities of $14.2 million for the nine months ended September 30, 2023.

For the nine months ended September 30, 2024, cash provided by investing activities primarily related to proceeds from maturities and sales of short-term investments of $57.1 million, partially offset by purchases of short-term investments of $43.1 million, purchases of and prepayments for property and equipment of $11.9 million primarily related to our DFI systems, and purchase of a convertible promissory note of $2.0 million.

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

Net Cash Flows Used in Financing Activities

Net cash used in financing activities was $10.9 million for the nine months ended September 30, 2024, compared to $5.6 million for the nine months ended September 30, 2023.

For the nine months ended September 30, 2024, net cash used in financing activities primarily consisted of $8.2 million in cash payments for taxes related to net share settlement of equity awards, repurchases of common stock of $6.9 million, partially offset by $4.2 million of proceeds from our employee stock purchase plans and exercise of stock options.

For the nine months ended September 30, 2023, net cash used in financing activities primarily consisted of $9.1 million in cash payments for taxes related to net share settlement of equity awards, repurchases of common stock of $0.7 million, partially offset by $4.3 million of proceeds from our employee stock purchase plans and exercise of stock options.

Net Cash Flows Provided by (Used in) Operating Activities

Cash flows provided by operating activities during the three months ended March 31, 2025, 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, accretion of unguaranteed residual assets and net change in operating assets and liabilities.

Net cash flows provided by operating activities was $8.6 million for the three months ended March 31, 2025, compared to net cash used in operating activities of $1.9 million for the three months ended March 31, 2024.

The increase in cash provided by operating activities between the periods was driven primarily by higher collections from customers, partially offset by (i) an increase in bonus payments under the Company’s bonus plan, and (ii) an increase in payments of vendor invoices.

Net Cash Flows Used in Investing Activities

Net cash used in investing activities was $123.9 million for the three months ended March 31, 2025, compared to $2.6 million for the three months ended March 31, 2024.

For the three months ended March 31, 2025, cash used in investing activities primarily related to $129.7 million payments for the acquisition of SecureWise, net of cash acquired, $2.9 million purchases of short-term investments, and $8.2 million purchases and prepayments of property and equipment primarily related to our DFI systems, partially offset by $17.0 million proceeds from maturities and sales of short-term investments.

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

Net Cash Flows Provided by (Used in) Financing Activities

Net cash provided by financing activities was $68.0 million for the three months ended March 31, 2025, compared to cash used in financing activities of $8.8 million for the three months ended March 31, 2024.

For the three months ended March 31, 2025, net cash provided by financing activities primarily consisted of $69.2 million proceeds from long-term debt, net of debt financing costs, that was used in financing the acquisition of SecureWise, and $2.1 million proceeds from our employee stock purchase plan, offset by $3.3 million in cash payments for taxes related to net share settlement of equity awards.

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

Related Party Transactions

Refer to Note 12, Strategic Partnership Agreement with Advantest and Related Party Transactions , to our unaudited condensed consolidated financial statements in this Quarterly Report on Form 10-Q, for the discussion about related party transactions between the Company and Advantest (as defined therein).

Refer to Note 12, Strategic Partnership Agreement with Advantest and Related Party Transactions , to our condensed consolidated financial statements in this Quarterly Report on Form 10-Q, for the discussion about related party transactions between the Company and Advantest (as defined therein).

Off-Balance Sheet Agreements

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

As of March 31, 2025, we do not have any off-balance sheet arrangements, investments in special purpose entities or undisclosed borrowings or debt.

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What changed 10-Q

Item 2. Management’s Discussion and Analysis