g
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
FORM 10-Q
☑ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the Quarterly Period ended |
or
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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| For the transition period from _______________ to ______________ |
Commission File Number 000-31311
PDF SOLUTIONS, INC.
(Exact name of Registrant as Specified in its Charter)
Delaware | 25-1701361 |
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) |
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(Address of Principal Executive Offices) | (Zip Code) |
(408) (408) 280-7900
(Registrant’sRegistrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, $0.00015 par value | PDFS | The Nasdaq Stock Market LLC |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”filer,” “smaller reporting company” and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act.
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| Emerging growth company | |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
The number ofThere were 38,126,867 shares outstanding of the Registrant’sRegistrant’s Common Stock outstanding as of October 30, 2017 was 31,947,582.August 3, 2023.
TABLE OF CONTENTS 2
PART I — FINANCIAL INFORMATION CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except par value) September 30, 2017 December 31, 2016 ASSETS Current assets: Cash and cash equivalents Accounts receivable, net of allowance of $324 and $200, respectively Prepaid expenses and other current assets Total current assets Property and equipment, net Goodwill Intangible assets, net Deferred tax assets Other non-current assets Total assets LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable Accrued compensation and related benefits Accrued and other current liabilities Deferred revenues – current portion Billings in excess of recognized revenue Total current liabilities Long-term income taxes payable Other non-current liabilities Total liabilities Commitments and contingencies (Note 9) Stockholders’ equity: Preferred stock, $0.00015 par value, 5,000 shares authorized, no shares issued and outstanding Common stock, $0.00015 par value, 70,000 shares authorized: shares issued 39,506 and 38,514, respectively; shares outstanding 31,882 and 31,864, respectively Additional paid-in-capital Treasury stock at cost, 7,625 and 6,650 shares, respectively ) ) Accumulated deficit ) ) Accumulated other comprehensive loss ) ) Total stockholders’ equity Total liabilities and stockholders’ equity June 30, December 31, 2023 2022 ASSETS Current assets: Cash and cash equivalents $ 100,360 $ 119,624 Short-term investments 23,678 19,557 Accounts receivable, net of allowance for credit losses of $890 as of June 30, 2023 and December 31, 2022 61,451 42,164 Prepaid expenses and other current assets 18,864 12,063 Total current assets 204,353 193,408 Property and equipment, net 42,990 40,174 Operating lease right-of-use assets, net 5,389 6,002 Goodwill 14,123 14,123 Intangible assets, net 16,298 18,055 Deferred tax assets, net 76 64 Other non-current assets 7,043 6,845 Total assets $ 290,272 $ 278,671 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 2,279 $ 6,388 Accrued compensation and related benefits 10,994 16,948 Accrued and other current liabilities 5,497 5,581 Operating lease liabilities – current portion 1,538 1,412 Deferred revenues – current portion 29,915 26,019 Billings in excess of recognized revenues 1,854 1,852 Total current liabilities 52,077 58,200 Long-term income taxes payable 2,430 2,622 Non-current portion of operating lease liabilities 5,260 5,932 Other non-current liabilities 6,335 1,905 Total liabilities 66,102 68,659 Commitments and contingencies (Note 11) Stockholders’ equity: Preferred stock, $0.00015 par value, 5,000 shares authorized, no shares issued and outstanding — — Common stock, $0.00015 par value, 70,000 shares authorized; shares issued 49,205 and 48,613, respectively; shares outstanding 37,879 and 37,431, respectively 6 6 Additional paid-in-capital 459,072 447,415 Treasury stock at cost, 11,326 and 11,182 shares, respectively (138,278) (133,709) Accumulated deficit (93,960) (101,150) Accumulated other comprehensive loss (2,670) (2,550) Total stockholders’ equity 224,170 210,012 Total liabilities and stockholders’ equity $ 290,272 $ 278,671 See accompanying Notes to Condensed Consolidated Financial Statements 3(unaudited)(Unaudited) $ 100,750 $ 116,787 52,954 48,157 6,580 5,335 160,284 170,279 23,604 19,341 1,923 215 6,325 4,223 18,522 15,640 11,312 12,631 $ 221,970 $ 222,329 $ 2,608 $ 2,206 5,450 5,959 2,436 2,080 7,624 8,189 289 88 18,407 18,522 2,914 3,354 2,352 1,650 23,673 23,526 — — 5 5 294,359 281,423 (70,739 (54,882 (24,455 (25,752 (873 (1,991 198,297 198,803 $ 221,970 $ 222,329 (unaudited).(Unaudited)
PDF SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(unaudited)
(in thousands, except per share amounts)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Revenues: | ||||||||||||||||
Design-to-silicon-yield solutions | $ | 19,229 | $ | 18,552 | $ | 55,426 | $ | 57,704 | ||||||||
Gainshare performance incentives | 7,288 | 8,707 | 19,668 | 21,324 | ||||||||||||
Total revenues | 26,517 | 27,259 | 75,094 | 79,028 | ||||||||||||
Costs of Design-to-silicon-yield solutions: | ||||||||||||||||
Direct costs of Design-to-silicon-yield solutions | 12,295 | 11,366 | 34,913 | 32,034 | ||||||||||||
Amortization of acquired technology | 136 | 86 | 327 | 278 | ||||||||||||
Total cost of Design-to-silicon-yield solutions | 12,431 | 11,452 | 35,240 | 32,312 | ||||||||||||
Gross profit | 14,086 | 15,807 | 39,854 | 46,716 | ||||||||||||
Operating expenses: | ||||||||||||||||
Research and development | 7,875 | 7,017 | 22,432 | 20,388 | ||||||||||||
Selling, general and administrative | 5,680 | 5,548 | 17,775 | 15,766 | ||||||||||||
Amortization of other acquired intangible assets | 107 | 106 | 291 | 340 | ||||||||||||
Total operating expenses | 13,662 | 12,671 | 40,498 | 36,494 | ||||||||||||
Income (loss) from operations | 424 | 3,136 | (644 | ) | 10,222 | |||||||||||
Interest and other expense, net | (104 | ) | (101 | ) | (305 | ) | (389 | ) | ||||||||
Income (loss) before income taxes | 320 | 3,035 | (949 | ) | 9,833 | |||||||||||
Income tax provision (benefit) | (270 | ) | 1,051 | (2,246 | ) | 3,655 | ||||||||||
Net income | $ | 590 | $ | 1,984 | $ | 1,297 | $ | 6,178 | ||||||||
Net income per share: | ||||||||||||||||
Basic | $ | 0.02 | $ | 0.06 | $ | 0.04 | $ | 0.20 | ||||||||
Diluted | $ | 0.02 | $ | 0.06 | $ | 0.04 | $ | 0.19 | ||||||||
Weighted average common shares: | ||||||||||||||||
Basic | 32,078 | 31,413 | 32,060 | 31,286 | ||||||||||||
Diluted | 32,969 | 32,578 | 33,317 | 32,144 | ||||||||||||
Net income | $ | 590 | $ | 1,984 | $ | 1,297 | $ | 6,178 | ||||||||
Other comprehensive income: | ||||||||||||||||
Foreign currency translation adjustments, net of tax | 409 | 157 | 1,117 | 331 | ||||||||||||
Comprehensive income | $ | 999 | $ | 2,141 | $ | 2,414 | $ | 6,509 |
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| | Three Months Ended June 30, | | Six Months Ended June 30, | ||||||||
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| 2023 |
| 2022 |
| 2023 |
| 2022 | ||||
Revenues: |
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Analytics | | $ | 37,134 | | $ | 31,117 | | $ | 73,460 | | $ | 61,543 |
Integrated Yield Ramp | |
| 4,467 | |
| 3,551 | |
| 8,900 | |
| 6,623 |
Total revenues | |
| 41,601 | |
| 34,668 | |
| 82,360 | |
| 68,166 |
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Costs and Expenses: | |
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Costs of revenues | |
| 12,369 | |
| 12,042 | |
| 24,273 | |
| 23,571 |
Research and development | |
| 12,264 | |
| 13,374 | |
| 25,315 | |
| 27,463 |
Selling, general, and administrative | |
| 14,766 | |
| 9,770 | |
| 30,411 | |
| 20,609 |
Amortization of acquired intangible assets | |
| 326 | |
| 314 | |
| 651 | |
| 628 |
Interest and other expense (income), net | |
| (1,071) | |
| (991) | |
| (1,982) | |
| (1,301) |
Income (loss) before income tax expense (benefit) | |
| 2,947 | |
| 159 | |
| 3,692 | |
| (2,804) |
Income tax expense (benefit) | |
| (3,888) | |
| 1,306 | |
| (3,498) | |
| 2,493 |
Net income (loss) | | $ | 6,835 | | $ | (1,147) | | $ | 7,190 | | $ | (5,297) |
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Other comprehensive income (loss): | |
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Foreign currency translation adjustments, net of tax | | | (387) | | | (1,037) | | | (127) | | | (1,434) |
Change in unrealized gain (loss) related to available-for-sale debt securities, net of tax | |
| — | |
| — | |
| 7 | |
| (34) |
Total other comprehensive loss | | | (387) | | | (1,037) | | | (120) | | | (1,468) |
Comprehensive income (loss) | | $ | 6,448 | | $ | (2,184) | | $ | 7,070 | | $ | (6,765) |
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Net income (loss) per share: | | | | | | | | | | | | |
Basic | | $ | 0.18 | | $ | (0.03) | | $ | 0.19 | | $ | (0.14) |
Diluted | | $ | 0.17 | | $ | (0.03) | | $ | 0.18 | | $ | (0.14) |
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Weighted average common shares used to calculate net income (loss) per share: | |
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Basic | |
| 37,859 | |
| 37,028 | |
| 37,799 | |
| 37,316 |
Diluted | |
| 39,076 | |
| 37,028 | |
| 38,968 | |
| 37,316 |
See accompanying Notes to Condensed Consolidated Financial Statements (unaudited).(Unaudited)
4
PDF SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSSTOCKHOLDERS’ EQUITY
(Unaudited)
(unaudited)
(in thousands)
Nine Months Ended September 30, | ||||||||
2017 | 2016 | |||||||
Operating activities: | ||||||||
Net income | $ | 1,297 | $ | 6,178 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 3,549 | 2,584 | ||||||
Stock-based compensation expense | 8,737 | 7,935 | ||||||
Amortization of acquired intangible assets | 618 | 617 | ||||||
Deferred taxes | (3,514 | ) | 1,083 | |||||
Loss on disposal of property and equipment | 5 | 107 | ||||||
Provision for (reversal of) allowance for doubtful accounts | 124 | (99 | ) | |||||
Unrealized loss (gain) on foreign currency forward contract | (6 | ) | (54 | ) | ||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable, net of allowance | (4,921 | ) | (10,486 | ) | ||||
Prepaid expenses and other current assets | (1,142 | ) | (1,486 | ) | ||||
Accounts payable | 1,611 | 33 | ||||||
Accrued compensation and related benefits | (721 | ) | 277 | |||||
Accrued and other liabilities | (225 | ) | 139 | |||||
Deferred revenues | (682 | ) | 3,959 | |||||
Billings in excess of recognized revenues | 200 | (1,194 | ) | |||||
Other non-current assets | 1,331 | (7,764 | ) | |||||
Net cash provided by operating activities | 6,261 | 1,829 | ||||||
Investing activities: | ||||||||
Payments for business acquisitions, net of cash acquired | (3,841 | ) | - | |||||
Purchases of property and equipment | (6,942 | ) | (8,860 | ) | ||||
Net cash used in investing activities | (10,783 | ) | (8,860 | ) | ||||
Financing activities: | ||||||||
Proceeds from exercise of stock options | 2,304 | 1,132 | ||||||
Proceeds from employee stock purchase plan | 1,866 | 1,558 | ||||||
Repurchases of common stock | (13,418 | ) | (2,182 | ) | ||||
Payments for taxes related to net share settlement of equity awards | (2,439 | ) | (1,161 | ) | ||||
Net cash used in financing activities | (11,687 | ) | (653 | ) | ||||
Effect of exchange rate changes on cash and cash equivalents | 172 | 60 | ||||||
Net change in cash and cash equivalents | (16,037 | ) | (7,624 | ) | ||||
Cash and cash equivalents, beginning of period | 116,787 | 126,158 | ||||||
Cash and cash equivalents, end of period | $ | 100,750 | $ | 118,534 | ||||
Supplemental disclosure of cash flow information: | ||||||||
Cash paid during the period for: | ||||||||
Taxes | $ | 1,876 | $ | 2,616 | ||||
Property and equipment received and accrued in accounts payable and accrued and other liabilities | $ | 1,533 | $ | 913 |
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| | Three and Six Months Ended June 30, 2023 | ||||||||||||||||||||
| | | | | | | | | | | | | | | | | | Accumulated | | | | |
| | | | | | | Additional | | | | | | | | | | Other | | Total | |||
| | Common Stock | | Paid-In | | Treasury Stock | | Accumulated | | Comprehensive | | Stockholders’ | ||||||||||
|
| Shares |
| Amount |
| Capital |
| Shares |
| Amount |
| Deficit |
| Loss |
| Equity | ||||||
Balances, December 31, 2022 | | 37,431 | | $ | 6 | | $ | 447,415 | | 11,182 | | $ | (133,709) | | $ | (101,150) | | $ | (2,550) | | $ | 210,012 |
Issuance of common stock in connection with employee stock purchase plans |
| 98 | |
| — | |
| 1,663 |
| — | |
| — | |
| — | |
| — | |
| 1,663 |
Issuance of common stock in connection with exercise of options |
| 21 | |
| — | |
| 345 |
| — | |
| — | |
| — | |
| — | |
| 345 |
Vesting of restricted stock units |
| 286 | |
| — | |
| — |
| — | |
| — | |
| — | |
| — | |
| — |
Purchases of treasury stock in connection with tax withholdings on restricted stock awards |
| — | |
| — | |
| — |
| 133 | |
| (4,101) | |
| — | |
| — | |
| (4,101) |
Stock-based compensation expense |
| — | |
| — | |
| 4,884 |
| — | |
| — | |
| — | |
| — | |
| 4,884 |
Comprehensive income |
| — | | | — | |
| — |
| — | | | — | | | 355 | |
| 267 | |
| 622 |
Balances, March 31, 2023 |
| 37,836 | | | 6 | | | 454,307 |
| 11,315 | | | (137,810) | | | (100,795) | | | (2,283) | | | 213,425 |
Issuance of common stock in connection with exercise of options |
| 6 | |
| — | |
| 87 |
| — | |
| — | |
| — | |
| — | |
| 87 |
Vesting of restricted stock units |
| 37 | |
| — | |
| — |
| — | |
| — | |
| — | |
| — | |
| — |
Purchases of treasury stock in connection with tax withholdings on restricted stock awards |
| — | |
| — | |
| — |
| 11 | |
| (468) | |
| — | |
| — | |
| (468) |
Stock-based compensation expense |
| — | |
| — | |
| 4,678 |
| — | |
| — | |
| — | |
| — | |
| 4,678 |
Comprehensive income (loss) |
| — | |
| — | |
| — |
| — | |
| — | |
| 6,835 | |
| (387) | |
| 6,448 |
Balances, June 30, 2023 |
| 37,879 | | $ | 6 | | $ | 459,072 |
| 11,326 | | $ | (138,278) | | $ | (93,960) | | $ | (2,670) | | $ | 224,170 |
| | | | | | | | | | | | | | | | | | | | | | |
| | Three and Six Months Ended June 30, 2022 | ||||||||||||||||||||
| | | | | | | | | | | | | | | | | | Accumulated | | | | |
| | | | | | | Additional | | | | | | | | | | Other | | Total | |||
| | Common Stock | | Paid-In | | Treasury Stock | | Accumulated | | Comprehensive | | Stockholders’ | ||||||||||
|
| Shares |
| Amount |
| Capital |
| Shares |
| Amount |
| Deficit |
| Loss |
| Equity | ||||||
Balances, December 31, 2021 | | 37,411 | | $ | 6 | | $ | 423,069 | | 10,003 | | $ | (104,705) | | $ | (97,721) | | $ | (1,064) | | $ | 219,585 |
Issuance of common stock in connection with employee stock purchase plans |
| 95 | |
| — | |
| 1,502 |
| — | |
| — | |
| — | |
| — | |
| 1,502 |
Issuance of common stock in connection with exercise of options |
| 75 | |
| — | |
| 675 |
| — | |
| — | |
| — | |
| — | |
| 675 |
Vesting of restricted stock units |
| 232 | |
| — | |
| — |
| — | |
| — | |
| — | |
| — | |
| — |
Purchases of treasury stock in connection with tax withholdings on restricted stock awards |
| — | |
| — | |
| — |
| 113 | |
| (3,389) | |
| — | |
| — | |
| (3,389) |
Repurchase of common stock | | (219) | | | — | | | — | | 219 | | | (5,778) | | | — | | | — | | | (5,778) |
Stock-based compensation expense |
| — | |
| — | |
| 5,553 |
| — | |
| — | |
| — | |
| — | |
| 5,553 |
Comprehensive loss |
| — | |
| — | |
| — |
| — | |
| — | |
| (4,150) | |
| (431) | |
| (4,581) |
Balances, March 31, 2022 |
| 37,594 | | | 6 | | | 430,799 |
| 10,335 | | | (113,872) | | | (101,871) | | | (1,495) | | | 213,567 |
Issuance of common stock in connection with exercise of options |
| 12 | |
| — | |
| 113 |
| — | |
| — | |
| — | |
| — | |
| 113 |
Vesting of restricted stock units |
| 84 | |
| — | |
| — |
| — | |
| — | |
| — | |
| — | |
| — |
Purchases of treasury stock in connection with tax withholdings on restricted stock awards |
| — | |
| — | |
| — |
| 33 | |
| (800) | |
| — | |
| — | |
| (800) |
Repurchase of common stock | | (715) | | | — | | | — | | 715 | | | (16,693) | | | — | | | — | | | (16,693) |
Stock-based compensation expense |
| — | |
| — | |
| 3,872 |
| — | |
| — | |
| — | |
| — | |
| 3,872 |
Comprehensive loss |
| — | |
| — | |
| — |
| — | |
| — | |
| (1,147) | |
| (1,037) | |
| (2,184) |
Balances, June 30, 2022 |
| 36,975 | | $ | 6 | | $ | 434,784 | | 11,083 | | $ | (131,365) | | $ | (103,018) | | $ | (2,532) | | $ | 197,875 |
See accompanying Notes to Condensed Consolidated Financial Statements (unaudited).(Unaudited)
5
PDF SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
| | | | | | |
| | Six Months Ended June 30, | ||||
|
| 2023 |
| 2022 | ||
Cash flows from operating activities: | | | | | | |
Net income (loss) | | $ | 7,190 | | $ | (5,297) |
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | |
| | |
|
|
Depreciation and amortization | |
| 2,544 | |
| 2,773 |
Stock-based compensation expense | |
| 9,562 | |
| 9,425 |
Amortization of acquired intangible assets | |
| 1,757 | |
| 1,734 |
Amortization of costs capitalized to obtain revenue contracts | |
| 962 | |
| 755 |
Net (accretion of discounts) and amortization of premiums on short-term investments | | | (438) | | | 20 |
Deferred taxes | |
| (82) | |
| 17 |
Other | |
| 20 | |
| — |
Changes in operating assets and liabilities: | |
| | |
| |
Accounts receivable | |
| (19,320) | |
| 3,910 |
Prepaid expenses and other current assets | |
| (7,466) | |
| (3,208) |
Operating lease right-of-use assets | |
| 603 | |
| 1,238 |
Other non-current assets | |
| 22 | |
| 1,002 |
Accounts payable | |
| (2,791) | |
| (3,633) |
Accrued compensation and related benefits | |
| (5,954) | |
| 1,362 |
Accrued and other liabilities | |
| (61) | |
| 2,147 |
Deferred revenues | |
| 7,371 | |
| (4,789) |
Billings in excess of recognized revenues | |
| 2 | |
| 480 |
Operating lease liabilities | |
| (536) | |
| (1,316) |
Net cash provided by (used in) operating activities | |
| (6,615) | |
| 6,620 |
| | | | | | |
Cash flows from investing activities: | | | | | | |
Proceeds from maturities and sales of short-term investments | |
| 19,800 | |
| 112,500 |
Purchases of short-term investments | | | (23,476) | | | (35,920) |
Purchases of property and equipment | | | (5,694) | | | (4,454) |
Prepayment for the purchase of property and equipment | | | (307) | | | (133) |
Net cash provided by (used in) investing activities | |
| (9,677) | |
| 71,993 |
| | | | | | |
Cash flows from financing activities: | |
| | |
|
|
Proceeds from exercise of stock options | |
| 432 | |
| 788 |
Proceeds from employee stock purchase plans | |
| 1,663 | |
| 1,502 |
Payments for taxes related to net share settlement of equity awards | |
| (4,569) | |
| (4,189) |
Repurchases of common stock | |
| — | |
| (22,471) |
Net cash used in financing activities | |
| (2,474) | |
| (24,370) |
| | | | | | |
Effect of exchange rate changes on cash and cash equivalents | |
| (498) | |
| (584) |
Net change in cash and cash equivalents | |
| (19,264) | |
| 53,659 |
Cash and cash equivalents at beginning of period | |
| 119,624 | |
| 27,684 |
Cash and cash equivalents at end of period | | $ | 100,360 | | $ | 81,343 |
| | | | | | |
Supplemental disclosure of cash flow information: | | | | | | |
Cash paid during the period for taxes | | $ | 3,134 | | $ | 1,690 |
Cash paid for amounts included in the measurement of operating lease liabilities | | $ | 718 | | $ | 795 |
| | | | | | |
Supplemental disclosure of noncash information: | | | | | | |
Property and equipment received and accrued in accounts payable and accrued and other liabilities | | $ | 1,831 | | $ | 2,466 |
Advances for purchase of fixed assets transferred from prepaid assets to property and equipment | | $ | 66 | | $ | 333 |
Operating lease liabilities arising from obtaining right-of-use assets | | $ | — | | $ | 1,137 |
See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited)
6
PDF SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The interim unaudited condensed consolidated financial statements included herein have been prepared by PDF Solutions, Inc. (the “Company”) pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”), including the instructions to the Quarterly Report on Form 10-Q and Article 10 of Regulation S-X. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. The interim unaudited condensed consolidated financial statements reflect, in the opinion of management, all adjustments necessary (consisting only of normal recurring adjustments), to present a fair statement of results for the interim periods presented. The operating results for any interim period are not necessarily indicative of the results that may be expected for other interim periods or the full fiscal year. The accompanying interim unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto in the Company’sCompany’s Annual Report on Form 10-K for the year ended December 31, 2016.
2022, filed with the SEC on March 1, 2023.
The interim unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries after the elimination of all intercompany balances and transactions.
The accompanying interim unaudited condensed consolidated balance sheet atas of December 31, 2016,2022 has been derived from the audited consolidated financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America.
Use of Estimates —
The preparation of financial statements in conformity with accounting principles generally accepted accounting principles in the United States (“U.S. GAAP”)of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates in these condensed consolidated financial statements include revenue recognition, the estimated useful lives of property and equipment and intangible assets, assumptions made in analysis of allowance for fixed-price solution implementation service contracts,credit losses, impairment of goodwill and long-lived assets, valuation for deferred tax assets, and accounting for goodwill and intangible assets,lease obligations, stock-based compensation expense, and accounting for income taxes.tax uncertainties and contingencies. Actual results could differ from those estimates.estimates and may result in material effects on the Company’s operating results and financial position.
Recent Accounting Standards
Revenue Recognition — Accounting Standards Adopted
In June 2016, the Financial Accounting Standards Board (“FASB’) issued Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU No. 2016-13”), which requires measurement and recognition of expected credit losses for financial assets held at the reporting date based on internal information, external information, or a combination of both relating to past events, current conditions, and reasonable and supportable forecasts. ASU No. 2016-13 replaces the existing incurred loss impairment model with a forward-looking expected credit loss model, which will result in earlier recognition of credit losses. Subsequent to the issuance of ASU No. 2016-13, the FASB issued ASU No. 2018-19, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instrument, ASU No. 2019-05, Financial Instruments – Credit Losses (Topic 326) Targeted Transition Relief, ASU No. 2016-13, ASU No. 2019-10 Financial Instruments-Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842), and ASU No. 2019-11 Codification Improvements to Topic 326, Financial Instruments-Credit Losses. The subsequent ASUs do not change the core principle of the guidance in
7
ASU No. 2016-13. Instead, these amendments are intended to clarify and improve operability of certain topics included within ASU No. 2016-13.
The Company adopted this standard on January 1, 2023, using a modified retrospective approach, which requires a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption with prior periods not restated. The adoption of ASU No. 2016-13 did not have a material impact on the Company’s condensed consolidated financial statements.
Accounting Standards Not Yet Adopted
Management has reviewed other recently issued accounting pronouncements issued or proposed by the FASB, and does not believe any of these accounting pronouncements has had or will have a material impact on the condensed consolidated financial statements.
2. REVENUE FROM CONTRACTS WITH CUSTOMERS
The Company derives revenue from two sources: Design-to-silicon-yield solutionsAnalytics revenue and Gainshare performance incentives.Integrated Yield Ramp revenue.
Design-to-silicon-yield solutions — Revenues that are derived from Design-to-silicon-yield solutions come from services and software and hardware licenses. The Company recognizes revenue in accordance with FASB Accounting Standards Codification Topic 606, Revenue from Contracts with Customers, and its related amendments (collectively known as “ASC 606”). ASC 606 outlines a single comprehensive model to use in accounting for each elementrevenue arising from contracts with customers. Revenue is recognized when control of Design-to-silicon-yield solutions as follows:
products or services is transferred to customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those promised products or services.
The Company generatesdetermines revenue recognition through the following five steps:
● | Identification of the contract, or contracts, with a customer |
● | Identification of the performance obligations in the contract |
● | Determination of the transaction price |
● | Allocation of the transaction price to the performance obligations in the contract |
● | Recognition of revenue when, or as, performance obligations are satisfied |
The Company accounts for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance, and collectibility of consideration is probable.
Contracts with multiple performance obligations
The Company enters into contracts that can include various combinations of licenses, products and services, some of which are distinct and are accounted for as separate performance obligations. 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 standalone selling price (“SSP”).
Analytics Revenue
Analytics revenue is derived from the following primary offerings: licenses and services for standalone software (which is primarily Exensio® and Cimetrix® products), software-as-a-service (“SaaS”) (which is primarily Exensio® products), and Design-for-Inspection™ (“DFI™”) systems and Characterization Vehicle® (“CV®”) systems 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 considered as a separate performance obligation from the services offered by the Company.
8
Revenue from post-contract support is recognized over the contract term on a straight-line basis, because the Company is 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, 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 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 software, is accounted for as a subscription 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, the Company allocates revenue to all deliverables based on their SSPs. For those 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. 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 portionjudgment. Please refer to the “Significant Judgments” section of its Design-to-silicon-yield solutionsthis Note for further discussion.
Integrated Yield Ramp Revenue
Integrated Yield Ramp revenue is derived from the Company’s fixed-fee engagements that include performance incentives based on customers’ yield achievement (which consists primarily of Gainshare royalties) typically based on customer’s wafer shipments, pertaining to these fixed-price solution implementation service contracts, which royalties are variable.
Revenue under these project-based contracts, which are delivered over a specific period of time. These contracts require reliable estimation of costs to perform obligations and the overall scope of each engagement. Revenue under project–based contractstime, typically for solution implementation servicesa 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, the Company allocates revenue to all deliverables based on their SSPs and allocates the transaction price of the contract accountingto each performance obligation on a relative basis using SSP. Similar to the services provided in connection with DFI systems and CV systems that are contributing to Analytics revenue, due to the nature of the work performed in these arrangements, the estimation of percentage of completion method is complex and subject to many variables that require significant judgment. Please refer to the “Significant Judgments” section of this Note for further discussion.
The Gainshare contained in Integrated Yield Ramp contracts is a variable fee related to continued usage of the Company’s intellectual property after the fixed-fee service period ends, based on a customer’s yield achievement. Revenue derived from Gainshare is contingent upon the Company’s customers reaching certain defined production yield levels. Gainshare periods are generally subsequent to the delivery of all contractual services and performance obligations. The Company records 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.
9
Disaggregation of Revenue
The Company disaggregates revenue from contracts with customers into the timing of the transfer of goods and services and the geographical regions. The Company determined that disaggregating revenue into these categories achieves the disclosure objective to depict how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors.
The Company’s performance obligations are satisfied either over time or at a point-in-time. The following table represents a disaggregation of revenue percentage by timing of revenue:
| | | | | | | | | |
| | Three Months Ended June 30, |
| Six Months Ended June 30, | |||||
|
| 2023 |
| 2022 | | 2023 |
| 2022 | |
Over time | | 73 | % | 74 | % | 77 | % | 72 | % |
Point-in-time |
| 27 | % | 26 | % | 23 | % | 28 | % |
Total |
| 100 | % | 100 | % | 100 | % | 100 | % |
International revenues accounted for approximately 46% and 51% of the Company’s total revenues during the three months ended June 30, 2023 and 2022, respectively. International revenues accounted for approximately 45% and 49% of the Company’s total revenues during the six months ended June 30, 2023 and 2022, respectively. See Note 9, Customer and Geographic Information.
Significant Judgments
Judgments and estimates are required under 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 implementation 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. Losses on fixed-price solution implementation contractsDue 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 recognized infuture labor and product costs and expected productivity efficiencies. If circumstances arise that change the period when they become probable. Revisions in profitoriginal 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 conditionscircumstances that requiregave rise to the revisionsrevision become knownknown.
The Company’s contracts with customers often include promises to transfer products, software licenses and can be estimated (cumulative catch-up method). Revenue under timeprovide services, including professional services, technical support services, and materials contracts for solution implementationrights to unspecified updates to a customer. Determining whether licenses and services are recognized as the services are performed.
On occasion, thedistinct performance obligations that should be accounted for separately, or not distinct and thus accounted for together, requires significant judgment. The Company rarely licenses its software products ason a component of its fixed-price service contracts. In such instances, the software products are licensed to customers over a specified term of the agreement with support and maintenance to be provided, if applicable, over the license term. The amount of product and service revenue recognized in a given period is affected by the Company’s judgment as to whether an arrangement includes multiple deliverables and, ifstandalone basis, so the Company’s determination of the fair value of each deliverable. In general, vendor-specific objective evidence of selling price (“VSOE”) does not exist for the Company’s solution implementation services and software products and because the Company’s services and products include our unique technology, the Company is required to estimate the range of SSPs for each performance obligation. In instances where SSP is not able to determine third-party evidence of selling price (“TPE”). Therefore, in such circumstancesdirectly observable because the Company uses best estimated selling prices (“BESP”) indoes not license the allocation of arrangement consideration. In determining BESP,software or sell the service separately, the Company applies significant judgment asdetermines the Company’s weighs a variety of factors, based on the factsSSP using information that may include market conditions and circumstances of the arrangement. The Company typically arrives at BESP for a product or service that is not sold separately by considering company-specific factors such as geographies, internal costs, gross margin objectives, pricing practices used to establish bundled pricing, and existing portfolio pricing and discounting. After fair value is established for each deliverable, the total transaction amount is allocated to each deliverable based upon its relative selling price. Fees allocated to solution implementation services are recognized using the percentage of completion method of contract accounting. Fees allocated to software and related support and maintenance are recognized under software revenue recognition guidance.
In some instances, the Company also licenses its Design-For-Inspection (“DFI”) system as a separate component of fixed-price service contracts. The Company allocates revenue to all deliverables based on their relative selling prices. The Company currently does not have VSOE for its DFI system, thus the Company uses either TPE or BESP in the allocation of arrangement consideration.
other observable inputs.
The Company defers certain pre-contract costs incurredis 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 specific anticipated contracts. Deferred costs consist primarilysuch quarter, the Company accrues the related revenue based on estimates of direct costscustomers 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 provide solution implementationtrue-up revenue to the actual amounts reported.
10
Contract Balances
The Company performs its obligations under a contract with a customer by licensing software or providing services in relation toexchange for consideration from the specific anticipated contracts.customer. The Company recognizes such costs as a componenttiming of cost of revenues,the Company’s performance often differs from the timing of the customer’s payment, which results in the recognition of a receivable, a contract asset or a contract liability.
The Company classifies the right to consideration in exchange for software or services transferred to a customer as either a receivable or a contract asset. A receivable is a right to consideration that is unconditional, as compared to a contract asset, which is dependenta right to consideration that is conditional upon persuasive evidencefactors other than the passage of time. The majority of the Company’s contract arrangement assuming all otherassets represent unbilled amounts related to fixed-price service contracts when the revenue recognition criteria are met. The Company also defers costs from arrangements that required us to deferrecognized exceeds the revenues, typically due to revenue recognition from multi-element arrangements or from contracts subject to customer acceptance. These costs are recognized in proportionamount billed to the related revenue. At the end of the reporting period, the Company evaluates its deferred costs for their probable recoverability.customer. The Company recognizes impairment of deferred costs when it is determined that the costs no longer have future benefitscontract assets are generally classified as current and are no longer recoverable. Therecorded on a net basis with deferred costs balance was $0.6 million and $0.5 million asrevenue (i.e., contract liabilities) at the contract level. As of SeptemberJune 30, 20172023 and December 31, 2016, respectively. The balance was2022, the total contract assets included in prepaid expenses and other current assets and other non-current assets in the accompanying condensed consolidated balance sheets.
sheets were $4.6 million and $3.3 million, respectively. The Company also licenses its software products separately from solution implementations. For software license arrangements that dodid not require significant modification or customization of the underlying software, software license revenue is recognized under the residual method when (l) persuasive evidence of an arrangement exists, (2) delivery has occurred, (3) the fee is fixed or determinable, (4) collectability is probable, and (5) the arrangement does not require services that are essentialrecord any asset impairment charges related to the functionality of the software. When arrangements include multiple elements such as support and maintenance, consulting (other than for fixed price solution implementations), installation, and training, revenue is allocated to each element of a transaction based upon its fair value as determined by the Company's VSOE and such services are recorded as services revenue. VSOE for maintenance is generally established based upon negotiated renewal rates while VSOE for consulting, installation, and training services is established based upon the Company's customary pricing for such services when sold separately. When software is licensed for a specified term, fees for support and maintenance are generally bundled with the license fee over the entire term of the contract. The Company is unable to establish VSOE of fair value for maintenance services that are generally bundled with term licenses. In these cases, the Company recognizes revenue ratably over the term of the contract. For multiple-element arrangements containing non-software services, the Company: (1) determines whether each element constitutes a separate unit of accounting; (2) determines the fair value of each element using the selling price hierarchy of VSOE, TPE or BESP, as applicable; and (3) allocates the total price to each separate unit of accounting based on the relative selling price method. An element constitutes a separate unit of accounting when the delivered item has standalone value and delivery of the undelivered element is probable and within our control. For multiple-element arrangements that contain both software and non-software elements, the Company allocates revenue to software or software-related elements as a group and any non-software elements separately based on the selling price hierarchy of VSOE, TPE or BESP. Once revenue is allocated to software or software-related elements as a group, we recognize revenue in conformance with software revenue accounting guidance. Revenue is recognized when revenue recognition criteria are met for each element.
Revenue from software-as-a-service (SaaS) that allowcontract assets for the use of a hosted software product or service over a contractually determined period of time without taking possession of software are accounted for as subscriptionsperiods presented.
Deferred revenues and recognized as revenue ratably over the coverage period beginning on the date the service is made available to customers. Revenue for software licenses with extended payment terms is not recognizedbillings in excess of amounts due. For software license arrangements that require significant modification or customization of the underlying software, the software license revenue is recognized as services are performed using the percentage of completion method of contract accounting, and such revenue is recorded as services revenue.
Deferred revenues consist substantially of amounts invoiced in advance of revenue recognition and isare recognized as the revenue recognition criteria are met. Deferred revenues that will be recognized during the succeeding 12 monthtwelve-month period isare recorded as current deferred revenues and the remaining portion is recorded as non- current deferred revenues. Non-current portion of deferred revenue was $1.6 million and $1.5 million, respectively, as of September 30, 2017 and December 31, 2016. This balance was recorded in the other non-current liabilities in the accompanying condensed consolidated balance sheets. As of June 30, 2023, and December 31, 2022, the non-current portion of deferred revenues included in non-current liabilities was $5.4 million and $1.9 million, respectively. Revenue recognized that was included in the deferred revenues and billings in excess of recognized revenues balances at the beginning of each reporting period was $10.8 million and $7.2 million during the three months ended June 30, 2023 and 2022, respectively, and $16.4 million and $11.8 million during the six months ended June 30, 2023 and 2022, respectively.
Gainshare Performance Incentives — WhenAs of June 30, 2023, the Company enters into aaggregate amount of the transaction price allocated to the remaining performance obligations related to customer contracts that were unsatisfied or partially unsatisfied was approximately $244.9 million. Given the applicable contract terms with customers, more than half of this amount is expected to provide yield improvement services,be recognized as revenue over the contract usually includesnext two components: (1) a fixed fee for performance byyears with the Company of services delivered over a specific period of time; and (2) a Gainshare performance incentive component whereremainder to be recognized thereafter. This amount does not include insignificant contracts to which the customer may pay a contingent variable fee, usually after the fixed fee period has ended. Revenue derived from Gainshare performance incentives represents profit sharing and performance incentives earned contingent upon the Company’s customers reaching certain defined operational levels established in related solution implementation service contracts. Gainshare performance incentives periods are usually subsequent to the delivery of all contractual services and therefore have virtually no cost to the Company. Due to the uncertainties surrounding attainment of such operational levels,is not committed, nor significant contracts for which the Company recognizes Gainshare performance incentives revenue (to the extent of completion of the related solution implementation contract) upon receipt of performance reports or other related information from the customer supporting the determination of amounts and probability of collection.
2. RECENT ACCOUNTING PRONOUNCEMENTS
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) as modified by ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, ASU No. 2016-11, Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815), ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, ASU 2016-20, Revenue from Contracts with Customers (Topic 606): Technical Corrections and Improvements, and ASU 2017-13, Revenue Recognition (Topic 605), Leases (Topic 840), and Leases (Topic 842): Amendments to SEC Paragraphs Pursuantequal to the Staff Announcement atamount the July 20, 2017 EITF Meeting and Rescission of Prior SEC Staff Announcement and Observer Comments. The new revenue recognition standard provides a five-step analysis of transactionsCompany has the right to determine when and how revenue is recognized. The core principle is that a company should recognize revenue to reflect the transfer of promised goodsinvoice for services performed, or services to customers in an amount that reflects the consideration to which the entity expects to be entitledfuture sales-based or usage-based royalty payments in exchange for a license of intellectual property. This amount is subject to change due to future revaluations of variable consideration, terminations, other contract modifications, or currency adjustments. The estimated timing of the recognition of remaining unsatisfied performance obligations is subject to change and is affected by changes to the scope, change in timing of delivery of products and services, or contract modifications.
The adjustment to revenue recognized from performance obligations satisfied (or partially satisfied) in previous periods was an increase of $1.3 million and an increase of $0.5 million during the three months ended June 30, 2023 and 2022, respectively, and an increase of $3.2 million and an increase of $0.5 million during the six months ended June 30, 2023 and 2022, respectively. These amounts primarily represent changes in estimated percentage-of-completion based contracts and changes in actual versus estimated Gainshare.
11
Costs to obtain or fulfill a contract
The Company capitalizes the incremental costs to obtain or fulfill a contract with a customer, including direct sales commissions and related fees, when it expects to recover those goods or services. This new standardcosts. Amortization expense related to these capitalized costs is effective for annual periods beginning after December 15, 2017, including interim periods within that reporting period. The new standard also permits two methods of adoption: retrospectively to each prior reportingrecognized over the period presented (full retrospective method), or retrospectivelyassociated with the cumulative effect of initially applyingrevenue from which the guidance recognized at the date of initial application (the modified retrospective method). The Company is finalizing evaluation of the impact of adopting this new accounting standard on its consolidated financial statementscost was incurred. Total capitalized direct sales commission costs included in prepaid expenses and footnote disclosures. The Company currently intends to adopt the standard using the modified retrospective method.
In February 2016, the Financial Accounting Standards Board (or FASB) issued ASU No. 2016-02, Leases (Topic 842). The update requires that most leases, including operating leases, be recorded on the balance sheet as an asset and a liability, initially measured at the present value of the lease payments. Subsequently, the lease asset will be amortized generally on a straight-line basis over the lease term, and the lease liability will bear interest expense and be reduced for lease payments. The amendments in this update are effective for public companies’ financial statements issued for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is stillother current assets in the processaccompanying condensed consolidated balance sheets as of evaluatingJune 30, 2023, and December 31, 2022, were $1.9 million and $1.7 million, respectively. Total capitalized direct sales commission costs included in other non-current assets in the impactaccompanying condensed consolidated balance sheets as of adopting this new accounting standard on its consolidated financial statementsJune 30, 2023, and footnote disclosures.December 31, 2022, were $2.9 million and $2.1 million, respectively. Amortization of these assets was $0.5 million and $0.6 million during the three months ended June 30, 2023 and 2022, respectively, and $1.0 million and $0.8 million during the six months ended June 30, 2023 and 2022. There was no impairment loss in relation to the costs capitalized for the periods presented.
Practical expedient
In August 2016, the FASB issued ASU No. 2016-15, Classification of Certain Cash Receipts and Cash Payments. The purpose of this standard is to clarify the treatment of several cash flow categories. This update is effective for annual periods beginning after December 15, 2017, and interim periods within those fiscal years, with early adoption permitted, including adoption in an interim period. The adoption of this standard is not expected to have a material impact on our financial statements and footnote disclosures.
In January 2017, the FASB issued ASU No. 2017-01, Business Combinations: Clarifying the Definition of a Business, which narrows the existing definition of a business and provides a framework for evaluating whether a transaction should be accounted for as an acquisition (or disposal) of assets or a business. The guidance is effective for fiscal years beginning after December 15, 2017, with early adoption permitted.The Company does not anticipate thatadjust the adoptiontransaction price for the effects of this standard will have a significant impact on our consolidated financial statementsfinancing component when the period between the transfers of the promised good or the related disclosures.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350) (“ASU No. 2017-04”). ASU No. 2017-04 eliminates step 2 from the annual goodwill impairment test. This update is effective for annual periods beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted, and is to be applied on a prospective basis. The Company does not anticipate that the adoption of this standard will have a significant impact on our consolidated financial statements or the related disclosures.
In May 2017, the FASB issued ASU No. 2017-09, Compensation-Stock Compensation (Topic 718) Scope of Modification Accounting (“ASU No. 2017-09”). ASU No. 2017-09 clarifies which changesservice to the termscustomer and payment for that good or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. The standardservice by the customer is effective for interim and annual reporting periods beginning after December 15, 2017, with early adoption permitted. The adoption of this standard will impact modifications that happen after the adoption date.
3. BUSINESS COMBINATIONS
On July 11, 2017 (the "Acquisition Date"), the Company completed a transaction to acquire certain assets from Realtime Performance Europe B.V. (formerly doing business as Kinesys Software). Pursuant to the terms of an asset purchase agreement, the Company acquired the ALPS and GEMbox software products and certain related liabilities for the purpose of adding device traceability and process data collection through assembly and test to the software products it licenses.
The total purchase price was $4.3 million, of which $0.5 million was classified and recorded as the fair value of the contingent consideration on the balance sheet as of Acquisition Date. The Company may pay the contingent consideration through July 11, 2019, with a maximum potential payment amount of up to $0.6 million, depending on the completion of certain milestones related to the integration of the ALPS software into the Company's Exensio platform and licenses thereof. The fair value of the contingent consideration liability was determined as of the Acquisition Date using unobservable inputs. These inputs include the probability of meeting the milestones related to the integration and license of the ALPS software and a risk-adjusted discount rate to adjust the probability-weighted cash flows to present value.
The Company accounted for this acquisition as a business combination. This method requires that assets acquired and liabilities assumed in a business combination be recognized at their fair values as of the Acquisition Date. The excess of purchase consideration over the fair value of net tangible and identifiable intangible assets acquired was recorded as goodwill. The goodwill recorded from this acquisition represents business benefits the Company anticipates realizing from optimizing resources and new and expanded sales opportunities that extend the Company's footprint throughout the entire systems value chain. The amount of goodwill expected to be deductible for tax purposes is $1.7 million. Pro forma resultsone year or less. The Company assessed each of operations haveits revenue generating arrangements in order to determine whether a significant financing component exists, and determined its contracts did not been presented becauseinclude a significant financing component during the effect of the acquisition was not material to our financial results.
Intangible assets consist of developed technology, customer relationships,three and trademarks. The value assigned to intangibles are based on estimatessix months ended June 30, 2023 and judgments regarding expectations for success and life cycle of intangibles acquired. The following table summarizes the allocation of the purchase consideration transferred to the fair value of the tangible and intangible assets acquired and liabilities assumed as of the acquisition date:2022.
(in thousands) | Amortization period (years) | |||||||
Finite-lived intangible assets: | ||||||||
Developed technology | 1,720 | 9 | ||||||
Customer relationship | 820 | 9 | ||||||
Tradename | 180 | 7 | ||||||
Deferred revenue | (190 | ) | ||||||
Other receivables | 53 |
| ||||||
Net asset acquired | 2,583 | |||||||
Goodwill | 1,708 | |||||||
Purchase consideration | $ | 4,291 |
4.3. BALANCE SHEET COMPONENTS
Accounts receivable
Accounts receivable include amounts that are unbilled at the end of the period that are expected to be billed and collected within a 12-month period. Unbilled accounts receivable are primarily determined on an individual contract basis. Unbilled accounts receivable, included in accounts receivable, totaled $20.7$16.6 million and $20.8$13.5 million as of SeptemberJune 30, 20172023, and December 31, 2016,2022, respectively. Unbilled accounts receivable that are not expected to be billed and collected during the succeeding 12-month period are recorded in other non-current assets and totaled $9.1$0.9 million and $9.8$0.8 million as of SeptemberJune 30, 20172023, and December 31, 2016,2022, respectively. Deferred costs balance was $0.6 million
The Company performs ongoing credit evaluations of its customers’ financial condition. An allowance for credit losses is maintained for probable credit losses based upon the Company’s assessment of the expected collectability of the accounts receivable. The allowance for credit losses is reviewed on a quarterly basis to assess the adequacy of the allowance.
Property and $0.5 million as of September 30, 2017 and December 31, 2016, respectively. The balance was included in prepaid expense and other current assets and other non-current assets in the accompanying balance sheets.
equipment
Property and equipment, net consists consist of the following (in thousands):
| | | | | | |
| | June 30, | | December 31, | ||
|
| 2023 | | 2022 | ||
Computer equipment | | $ | 12,012 | | $ | 11,853 |
Software | |
| 5,588 | |
| 5,395 |
Furniture, fixtures, and equipment | |
| 2,483 | |
| 2,484 |
Leasehold improvements | |
| 6,465 | |
| 6,467 |
Laboratory and other equipment | |
| 4,659 | |
| 4,431 |
Test equipment | |
| 27,866 | |
| 28,403 |
Property and equipment in progress: | |
| | |
| |
DFI™ system assets | | | 25,693 | | | 22,231 |
CV® system and other assets | |
| 6,580 | |
| 5,105 |
| |
| 91,346 | |
| 86,369 |
Less: Accumulated depreciation and amortization | |
| (48,356) | |
| (46,195) |
Total | | $ | 42,990 | | $ | 40,174 |
September 30, 2017 | December 31, 2016 | |||||||
Property and equipment, net: | ||||||||
Computer equipment | $ | 10,756 | $ | 10,642 | ||||
Software | 3,359 | 1,679 | ||||||
Furniture, fixtures and equipment | 1,927 | 1,185 | ||||||
Leasehold improvements | 1,983 | 1,132 | ||||||
DFI test equipment | 5,341 | 3,367 | ||||||
Other test equipment | 8,191 | 8,356 | ||||||
Construction-in-progress | 11,837 | 9,550 | ||||||
43,394 | 35,911 | |||||||
Less: accumulated depreciation | (19,790 | ) | (16,570 | ) | ||||
Total | $ | 23,604 | $ | 19,341 |
12
The construction-in-progress balance asTable of September 30, 2017Contents
Test equipment mainly includes DFI™ system and December 31, 2016 was primarily relatedCV® system assets at customer sites that are contributing to revenue. Property and equipment in progress represent the development or construction of DFI assets. Depreciationproperty and amortization expense was $1.3 million and $1.0 millionequipment that have not yet been placed in service for the three months ended September 30, 2017Company’s intended use and 2016, respectively. are not depreciated.
Depreciation and amortization expense was $3.5$1.2 million and $2.6$1.4 million forduring the ninethree months ended SeptemberJune 30, 20172023 and 2016,2022, respectively, and $2.5 million and $2.8 million during the six months ended June 30, 2023 and 2022, respectively.
Goodwill and Intangible Assets, Net
As of September June 30, 20172023, and December 31, 2016,2022, the carrying amount of goodwill was $1.9 million and $0.2 million, respectively. The following is a rollforward of the Company's goodwill balance (in thousands):
September 30, 2017 | ||||
Balance as of December 31, 2016 | $ | 215 | ||
Add: Goodwill from acquisition | 1,708 | |||
Adjustment | — | |||
Balance as of September 30, 2017 | $ | 1,923 |
$14.1 million.
Intangible assets, balance was $6.4 million and $4.2 million as of September 30, 2017 and December 31, 2016, respectively. Intangible assets as of September 30, 2017 and December 31, 2016 consistnet, consisted of the following (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | | | June 30, 2023 | | December 31, 2022 | ||||||||||||||
| | Amortization | | Gross | | | | | Net | | Gross | | | | | Net | ||||
| | Period | | Carrying | | Accumulated | | Carrying | | Carrying | | Accumulated | | Carrying | ||||||
| | (Years) |
| Amount |
| Amortization |
| Amount |
| Amount |
| Amortization |
| Amount | ||||||
Acquired identifiable intangibles: | | | | | | | | | | | | | | | | | | | | |
Customer relationships |
| 1-10 | | $ | 9,407 | | $ | (7,006) | | $ | 2,401 | | $ | 9,407 | | $ | (6,684) | | $ | 2,723 |
Developed technology |
| 4-9 | |
| 33,635 | |
| (20,843) | |
| 12,792 | |
| 33,635 | |
| (19,647) | |
| 13,988 |
Tradename and trademarks |
| 2-10 | |
| 1,598 | |
| (972) | |
| 626 | |
| 1,598 | |
| (918) | |
| 680 |
Patent |
| 6-10 | |
| 2,100 | |
| (1,739) | |
| 361 | |
| 2,100 | |
| (1,696) | |
| 404 |
Noncompetition agreements |
| 3 | |
| 848 | |
| (730) | |
| 118 | |
| 848 | |
| (588) | |
| 260 |
Total | | | | $ | 47,588 | | $ | (31,290) | | $ | 16,298 | | $ | 47,588 | | $ | (29,533) | | $ | 18,055 |
September 30, 2017 | December 31, 2016 | ||||||||||||||||||||||||||||
Amortization Period (Years) | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | |||||||||||||||||||||||
Acquired identifiable intangibles: | |||||||||||||||||||||||||||||
Customer relationships | 1 | - | 9 | $ | 6,740 | $ | (4,054 | ) | $ | 2,686 | $ | 5,920 | $ | (3,825 | ) | $ | 2,095 | ||||||||||||
Developed technology | 4 | - | 6 | 15,820 | (12,686 | ) | 3,134 | 14,100 | (12,359 | ) | 1,741 | ||||||||||||||||||
Tradename | 2 | - | 4 | 790 | (615 | ) | 175 | 610 | (583 | ) | 27 | ||||||||||||||||||
Backlog | 1 | 100 | (100 | ) | - | 100 | (100 | ) | - | ||||||||||||||||||||
Patent | 7 | - | 10 | 1,800 | (1,470 | ) | 330 | 1,800 | (1,440 | ) | 360 | ||||||||||||||||||
Other acquired intangibles | 4 | 255 | (255 | ) | - | 255 | (255 | ) | - | ||||||||||||||||||||
Total | $ | 25,505 | $ | (19,180 | ) | $ | 6,325 | $ | 22,785 | $ | (18,562 | ) | $ | 4,223 |
The weighted average amortization period for acquired identifiable intangible assets was 6.965.5 years as of SeptemberJune 30, 2017. For both the three months ended September 30, 2017 and 2016,2023. The following table summarizes intangible assetassets amortization expense was $0.2 million. For bothin the nine months ended September 30, 2017 and 2016, intangible asset amortization expense was $0.6 million. accompanying condensed consolidated statements of comprehensive income (loss) (in thousands):
| | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, | ||||||||
|
| 2023 |
| 2022 |
| 2023 |
| 2022 | ||||
Amortization of acquired technology included under Costs of revenues | | $ | 553 | | $ | 553 | | $ | 1,106 | | $ | 1,106 |
Amortization of acquired intangible assets presented separately under Costs and Expenses | |
| 326 | |
| 314 | |
| 651 | |
| 628 |
Total amortization of acquired intangible assets | | $ | 879 | | $ | 867 | | $ | 1,757 | | $ | 1,734 |
The Company expects annual amortization of acquired identifiable intangible assets to be as follows (in thousands):
| | | |
Year Ending December 31, |
| Amount | |
2023 (remaining six months) | | $ | 1,734 |
2024 | |
| 3,093 |
2025 | |
| 2,928 |
2026 | |
| 2,759 |
2027 | |
| 2,606 |
2028 and thereafter | |
| 3,178 |
Total future amortization expense | | $ | 16,298 |
Period Ending September 30, | ||||
2017 (remaining 3 months) | $ | 251 | ||
2018 | 1,009 | |||
2019 | 1,009 | |||
2020 | 1,009 | |||
2021 | 833 | |||
2022 and thereafter | 2,214 | |||
Total future amortization expense | $ | 6,325 |
IntangibleThere were no impairment charges for goodwill and intangible assets are amortized over their useful lives unless these lives are determined to be indefinite. Intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. Duringduring the three and ninesix months ended SeptemberJune 30, 2017, there2023 and 2022.
13
4. LEASES
The Company leases administrative and sales offices and certain equipment under non-cancellable operating leases, which contain various renewal options and, in some cases, require payment of common area costs, taxes and utilities. These operating leases expire at various dates through 2028. The Company had no leases that were no indicatorsclassified as a financing lease as of impairmentJune 30, 2023, and December 31, 2022.
In the first quarter of 2022, the Company early terminated an office lease contract. The termination of this lease reduced the Company’s operating lease right-of-use assets and lease liabilities by approximately $0.5 million and $0.6 million, respectively. The gain from the lease termination of approximately $0.1 million was recorded under selling, general, and administrative expense in the accompanying condensed consolidated statement of comprehensive income (loss) for the six months ended June 30, 2022.
Lease expense was comprised of the following (in thousands):
| | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, | ||||||||
|
| 2023 |
| 2022 |
| 2023 |
| 2022 | ||||
Operating lease expense (1) | | $ | 384 | | $ | 353 | | $ | 771 | | $ | 698 |
Short-term lease and variable lease expense (2) | |
| 206 | |
| 274 | |
| 434 | |
| 557 |
Total lease expense | | $ | 590 | | $ | 627 | | $ | 1,205 | | $ | 1,255 |
(1) | Net of gain recognized upon lease termination of $0.1 million in the six months ended June 30, 2022. |
(2) | Leases with an initial term of 12 months or less are not recorded on the accompanying condensed consolidated balance sheets, and the Company recognizes lease expense for these leases on a straight-line basis over the lease term. Variable lease expense for the periods presented primarily included common area maintenance charges. |
Supplemental condensed consolidated balance sheets information related to the Company’s intangible assets.operating leases was as follows:
| | | | | | | |
| | June 30, | | December 31, |
| ||
|
| 2023 | | 2022 |
| ||
Weighted average remaining lease term under operating leases (in years) | | | 4.9 | | | 5.3 | |
Weighted average discount rate for operating lease liabilities |
| | 4.89 | % | | 4.87 | % |
5. STOCKHOLDERS’ EQUITY
Stock-based compensation is estimated at the grant date based on the award’s fair value and is recognized on a straight-line basis over the vesting periods, generally four years. Stock-based compensation expense before taxes related to the Company’s stock plans and employee stock purchase plan was allocatedMaturities of operating lease liabilities as of June 30, 2023, were as follows (in thousands):
| | | |
Year Ending December 31, |
| Amount (1) | |
2023 (remaining six months) | | $ | 859 |
2024 |
| | 1,627 |
2025 |
| | 1,546 |
2026 |
| | 1,355 |
2027 |
| | 1,294 |
2028 and thereafter | | | 992 |
Total future minimum lease payments | | | 7,673 |
Less: Interest (2) | |
| (875) |
Present value of future minimum lease payments under operating lease liabilities (3) | | $ | 6,798 |
(1) | As of June 30, 2023, the total operating lease liability includes approximately $0.9 million related to an option to extend a lease term that is reasonably certain to be exercised. |
(2) | Calculated using incremental borrowing interest rate for each lease. |
(3) | Includes the current portion of operating lease liabilities of $1.5 million as of June 30, 2023. |
14
5.STOCKHOLDERS’ EQUITY
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Cost of design-to-silicon yield-solutions | $ | 1,184 | $ | 1,191 | $ | 3,445 | $ | 3,232 | ||||||||
Research and development | 877 | 894 | 2,558 | 2,251 | ||||||||||||
Selling, general and administrative | 888 | 892 | 2,734 | 2,452 | ||||||||||||
Stock-based compensation expenses | $ | 2,949 | $ | 2,977 | $ | 8,737 | $ | 7,935 |
Stock Repurchase Program
On SeptemberJune 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 six months ended June 30, 2017,2022, 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. 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, from time to time, over the next two years. In total, the Company has repurchased 714,600 shares under the 2022 Program at an average price of $23.36 per share for an aggregate total price of $16.7 million.
6. EMPLOYEE BENEFIT PLANS
On June 30, 2023, the Company had the following stock-based compensation plans:
Employee Stock Purchase Plan
In July 2001, the Company’s stockholders initially approved the 2001 Employee Stock Plans — AtPurchase Plan, which was subsequently amended and restated in 2010 (as amended, the annual meeting“2010 Purchase Plan”) to extend the term of the plan through May 17, 2020. Under the 2010 Purchase Plan, eligible employees could contribute up to 10% of their compensation, as defined in the 2010 Purchase Plan, towards the purchase of shares of PDF common stock at a price of 85% of the lower of the fair market value at the beginning of the offering period or the end of the purchase period. The 2010 Purchase Plan provided for twenty-four-month offering periods with four six-month purchase periods in each offering period. The 2010 Purchase Plan expired on May 17, 2020. Existing offering periods under the 2010 Plan continued through the applicable expiration date and the final offering period expired on January 31, 2022. On June 15, 2021, the Company’s stockholders approved the 2021 Employee Stock Purchase Plan, which has a ten-year term (the “2021 Purchase Plan” and, together with the 2010 Purchase Plan, the “Employee Purchase Plans”). The terms of the 2021 Purchase Plan are substantially similar to those of the 2010 Purchase Plan. A twenty-four-month offering period under the 2021 Purchase Plan commenced on August 1, 2021.
The Company estimated the fair value of purchase rights granted under the 2021 Purchase Plan during the period using the Black-Scholes-Merton option-pricing model with the following weighted average assumptions, resulting in the following weighted average fair values:
| | | | | | | | |
| | Six Months Ended June 30, | | |||||
| | 2023 |
| | 2022 |
| ||
Expected life (in years) | | | 1.25 |
| | | 1.25 |
|
Volatility | | | 46.70 | % | | | 48.90 | % |
Risk-free interest rate | | | 4.48 | % | | | 0.86 | % |
Expected dividend | | | — |
| | | — |
|
Weighted average fair value of purchase rights granted during the period | | $ | 11.90 | | | $ | 10.76 | |
During the three months ended June 30, 2023 and 2022, no shares were issued under the Employee Purchase Plans. During the six months ended June 30, 2023, a total of 98,216 shares were issued under the 2021 Purchase Plan, at a weighted average purchase price of $16.93 per share. During the six months ended June 30, 2022, a total of 90,040 shares were issued under the 2021 Purchase Plan, at a weighted average purchase price of $15.90 per share. During the six months ended June 30, 2022, a total of 5,203 shares were issued under the 2010 Purchase Plan, at a weighted average purchase price of $13.40 per share. As of June 30, 2023, unrecognized compensation cost related to the 2021 Purchase Plan was $0.7 million. This estimated unrecognized cost is expected to be recognized over a weighted average period of 1.1 years.
15
As of June 30, 2023, 719,701 shares were available for future issuance under the 2021 Purchase Plan.
Stock Incentive Plans
On November 16, 2011, the Company’s stockholders initially approved the 2011 Stock Incentive Plan, which has been amended and restated and approved by the Company’s stockholders a number of times since then (as amended,approved by the stockholders through the date of this report, the “2011 Plan”). and currently expires in 2033. Under the 2011 Plan, the Company may award stock options, stock appreciation rights (“SARs”), stock grants or stock units covering shares of the Company’s common stock to employees, directors, non-employee directors and contractors. The aggregate number of shares reserved for awards under this planthe 2011 Plan is 9,050,00013.8 million shares, plus up to 3,500,0003.5 million shares previously issued under the 2001 Stock Plan adopted by the Company in 2001, which expired in 2011 (the “2001 Plan”) that are either (i) forfeited or (ii) repurchased by the Company or are shares subject to awards previously issued under the 2001 Plan that expire or that terminate without having been exercised or settled in full on or after November 16, 2011. In case of awards other than options or stock appreciation rights,SARs, the aggregate number of shares reserved under the plan2011 Plan will be decreased at a rate of 1.33 shares issued pursuant to such awards. The exercise price for stock options must generally be at prices no less than the fair market value at the date of grant. Stock options generally expire ten years from the date of grant and become vested and exercisable over a four-year period.
In 2001, the Company adopted a 2001 Stock Plan (the “2001 Plan”). In 2003, in connection with its acquisition of IDS Systems Inc., the Company assumed IDS’ 2001 Stock Option / Stock Issuance Plan (the “IDS Plan”). Both of the 2001Plan and the IDS Plans expired in 2011. Stock options granted under the 2001 and IDS Plans generally expire ten years from the date of grant and become vested and exercisable over a four-year period. Although no new awards may be granted under the 2001 or IDS Plans, awards made under the 2001 and IDS Plans that are currently outstanding remain subject to the terms of each such plan, respectively.
The Company estimated the fair value of share-based awards granted under the 2011 Stock Plan during the period using the Black-Scholes-Merton option-pricing model with the following weighted average assumptions, resulting in the following weighted average fair values:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Expected life (in years) | 4.41 | 4.42 | 4.41 | 4.42 | ||||||||||||
Volatility | 41.49 | % | 42.97 | % | 41.53 | % | 43.82 | % | ||||||||
Risk-free interest rate | 1.65 | % | 1.10 | % | 1.69 | % | 1.20 | % | ||||||||
Expected dividend | — | — | — | — | ||||||||||||
Weighted average fair value per share of options granted during the period | $ | 5.78 | $ | 5.52 | $ | 6.14 | $ | 4.82 |
As of SeptemberJune 30, 2017, 9.62023, 14.3 million shares of common stock were reserved to cover stock-based awards under the 2011 Plan, of which 3.93.6 million shares were available for future grant. The number of shares reserved and available under the 2011 Plan includes 0.5 million shares that were subject to awards previously made under the 2001 Plan and were forfeited, expired or repurchased by the Company after the adoption of the 2011 Plan through SeptemberJune 30, 2017.2023. As of SeptemberJune 30, 2017,2023, there were no outstanding awards that had been granted outside of the 2011 Plan,or 2001 Plan or the IDS PlanPlans (collectively, the “ Stock“Stock Plans” ). ).
Stock option activityThe Company estimated the fair value of share-based awards granted under the Company’s2011 Stock Plan during the period using the Black-Scholes-Merton option-pricing model. There were no stock options granted during the three and six months ended June 30, 2023 and 2022.
Stock-Based Compensation
Stock-based compensation is estimated at the grant date based on the award’s fair value and is recognized on a straight-line basis over the vesting periods, generally four years. Stock-based compensation expense before taxes related to the Company’s stock plans and employee stock purchase plans was allocated as follows (in thousands):
| | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, | ||||||||
|
| 2023 |
| 2022 |
| 2023 |
| 2022 | ||||
Costs of revenues | | $ | 938 | | $ | 655 | | $ | 1,902 | | $ | 1,383 |
Research and development | |
| 1,619 | |
| 1,810 | |
| 3,413 | |
| 4,978 |
Selling, general, and administrative | |
| 2,121 | |
| 1,407 | |
| 4,247 | |
| 3,064 |
Stock-based compensation expense | | $ | 4,678 | | $ | 3,872 | | $ | 9,562 | | $ | 9,425 |
16
Additional information with respect to options under the Stock Plans during the ninesix months ended SeptemberJune 30, 2017, was2023, is as follows:
| | | | | | | | | | |
| | Outstanding Options | | | | | | |||
| | | | | | | Weighted | | | |
| | | | Weighted | | Average | | | | |
| | | | Average | | Remaining | | Aggregate | ||
| | Number of | | Exercise | | Contractual | | Intrinsic | ||
| | Options | | Price | | Term | | Value | ||
|
| (in thousands) |
| per Share |
| (Years) |
| (in thousands) | ||
Outstanding, December 31, 2022 |
| 68 | | $ | 16.11 |
|
|
| |
|
Granted |
| — | | | — |
|
|
| |
|
Exercised |
| (27) | | | 16.13 |
|
|
| |
|
Canceled |
| — | | | — |
|
|
| |
|
Expired |
| — | | | — |
|
|
| |
|
Outstanding, June 30, 2023 |
| 41 | | $ | 16.10 |
| 4.56 | | $ | 1,202 |
Vested and expected to vest, June 30, 2023 |
| 41 | | $ | 16.10 |
| 4.56 | | $ | 1,199 |
Exercisable, June 30, 2023 |
| 36 | | $ | 15.97 |
| 4.24 | | $ | 1,042 |
Number of Options (in thousands) | Weighted Average Exercise Price per Share | Weighted Average Remaining Contractual Term (years) | Aggregate Intrinsic Value (in thousands) | |||||||||||||
Outstanding, January 1, 2017 | 1,364 | $ | 8.00 | |||||||||||||
Granted (weighted average fair value of $6.14 per share) | 100 | $ | 16.97 | |||||||||||||
Exercised | (366 | ) | $ | 6.43 | ||||||||||||
Canceled | (16 | ) | $ | 15.63 | ||||||||||||
Expired | (1 | ) | $ | 18.10 | ||||||||||||
Outstanding, September 30, 2017 | 1,081 | $ | 9.23 | 4.73 | $ | 7,133 | ||||||||||
Vested and expected to vest, September 30, 2017 | 1,065 | $ | 9.13 | 4.66 | $ | 7,124 | ||||||||||
Exercisable, September 30, 2017 | 893 | $ | 7.82 | 3.82 | $ | 6,966 |
The aggregate intrinsic value in the table above represents the total intrinsic value based on the Company’sCompany’s closing stock price of $15.49$45.10 per share as of SeptemberJune 30, 2017.2023. The total intrinsic value of options exercised was $0.6 million during the ninesix months ended SeptemberJune 30, 2017, was $4.6 million.2023.
As of September 30, 2017, there was $1.0 million of totalTotal remaining unrecognized compensation cost related to unvested stock options. That costoptions as of June 30, 2023, which is expected to be fully recognized over a weighted average period of 3.3 years. Thein 2023, and total fair value of shares vested during the ninesix months ended SeptemberJune 30, 2017, was $0.2 million.
2023 were immaterial.
Nonvested restricted stock unitsunit activity during the ninesix months ended SeptemberJune 30 2017,2023, was as follows:
| | | | | |
| | | | Weighted | |
| | | | Average Grant | |
| | Shares | | Date Fair Value | |
|
| (in thousands) |
| Per Share | |
Nonvested, December 31, 2022 |
| 2,124 | | $ | 21.29 |
Granted |
| 81 | | $ | 37.53 |
Vested |
| (467) | | $ | 20.98 |
Forfeited |
| (13) | | $ | 24.11 |
Nonvested, June 30, 2023 |
| 1,725 | | $ | 22.12 |
Shares (in thousands) | Weighted Average Grant Date Fair Value Per Share | |||||||
Nonvested, January 1, 2017 | 1,542 | $ | 15.50 | |||||
Granted | 793 | $ | 16.53 | |||||
Vested | (431 | ) | $ | 15.78 | ||||
Forfeited | (99 | ) | $ | 15.93 | ||||
Nonvested, September 30, 2017 | 1,805 | $ | 15.86 |
As of SeptemberJune 30, 2017,2023, there was $23.3$27.7 million of total unrecognized compensation cost related to nonvested restricted stock units. That cost is expected to be recognized over a weighted average period of 2.82.4 years. Restricted stock units do not have rights to dividends prior to vesting.
Employee Stock Purchase Plan — In July 2001, the Company adopted a ten-year Employee Stock Purchase Plan (as amended, the “Purchase Plan”) under which eligible employees can contribute up to 10% of their compensation, as defined in the Purchase Plan, towards the purchase of shares of PDF common stock at a price of 85% of the lower of the fair market value at the beginning of the offering period or the end of the purchase period. The Purchase Plan consists of twenty-four-month offering periods with four six-month purchase periods in each offering period. Under the Purchase Plan, on January 1 of each year, starting with 2002, the number of shares reserved for issuance will automatically increase by the lesser of (1) 675,000 shares, (2) 2% of the Company’s outstanding common stock on the last day of the immediately preceding year, or (3) the number of shares determined by the board of directors. At the annual meeting of stockholders on May 18, 2010, the Company’s stockholders approved an amendment to the Purchase Plan to extend it through May 17, 2020.
The Company estimated the fair value of purchase rights granted under the Purchase Plan during the period using the Black-Scholes-Merton option-pricing model with the following weighted average assumptions, resulting in the following weighted average fair values:
Nine Months Ended September 30, | ||||||||
2017 | 2016 | |||||||
Expected life (in years) | 1.25 | 1.25 | ||||||
Volatility | 40.63 | % | 44.00 | % | ||||
Risk-free interest rate | 1.25 | % | 0.50 | % | ||||
Expected dividend | — | — | ||||||
Weighted average fair value per share of options granted during the period | $ | 5.22 | $ | 3.70 |
During the three months ended September 30, 2017 and 2016, a total of 99,550 and 88,543 shares, respectively, were issued at a weighted-average purchase price of $9.53 and $8.81 per share. During the nine months ended September 30, 2017 and 2016, a total of 199,827 and 173,001 shares, respectively, were issued at a weighted-average purchase price of $9.33 and $9.00 per share, respectively. As of September 30, 2017, there was $0.5 million of unrecognized compensation cost related to the Purchase Plan. That cost is expected to be recognized over a weighted average period of 1.24 years. As of September 30, 2017, 4.3 million shares were available for future issuance under the Purchase Plan.
Stock Repurchase Program —On October 25, 2016, the Board of Directors adopted a program, effective immediately, to repurchase up to $25.0 million of the Company’s common stock both on the open market and in privately negotiated transactions over the next two years. During the three and nine months ended September 30, 2017, the Company repurchased 565,903 shares and 842,182 shares under this program. As of September 30, 2017, 842,182 shares had been repurchased at an average price of $15.93 per share under this program for a total purchase of $13.4 million, and $11.6 million remained available for future repurchases.
6.7. INCOME TAXES
Income tax provisionexpense decreased $5.9by $6.0 million for the ninesix months ended SeptemberJune 30, 2017,2023, to $2.2a $3.5 million income tax benefit as compared to ana $2.5 million income tax provision of $3.7 millionexpense for the ninesix months ended SeptemberJune 30, 2016.2022. The Company’s effective tax rate expense (benefit) was 236.7%(94.7%) and 37.3%88.9% for the ninesix months ended SeptemberJune 30, 20172023 and 2016,2022, respectively. The Company’s effective tax rate increaseddecreased in the ninesix months ended SeptemberJune 30, 2017,2023, as compared to the same period in 2016,2022, primarily due to changes in the foreign and state taxes and year-to-date recognition of excess tax benefits relatedworldwide pre-tax income (loss) in relation to employee stock compensationtheir forecasted amounts for full years.
17
The Company’sCompany’s total amount of unrecognized tax benefits, excluding interest and penalties, as of SeptemberJune 30, 2017,2023, was $12.7$15.4 million, of which $7.6$1.9 million, if recognized, would decreaseaffect the Company’s effective tax rate. The Company’s total amount of unrecognized tax benefits, excluding interest and penalties, as of December 31, 2016,2022, was $11.9$15.1 million, of which $7.2$2.0 million, if recognized, would affect the Company'sCompany’s effective tax rate. As of SeptemberJune 30, 2017,2023, the Company hadhas recorded unrecognized tax benefits of $2.9$2.5 million, including interest and penalties of $0.6 million, as long-term taxes payable in itsthe accompanying condensed consolidated balance sheet. The remaining $9.8$13.5 million has been recorded net of ourwithin the Company’s deferred tax assets of(“DTAs”), which $5.1 million is subject to a full valuation allowance.
The valuation allowance was approximately $7.5 million and $6.8$59.2 million as of SeptemberJune 30, 20172023, and December 31, 2016, respectively,2022, which was related to California R&D tax creditsU.S. net federal and Californiastate DTAs. The worldwide net operating losses related to our acquisitionDTAs balance as of Syntricity that we currently doJune 30, 2023, and December 31, 2022, were not believe are more likely than not to be ultimately realized.
significant.
The Company conducts business globally and, as a result, files numerous consolidated and separate income tax returns in the U.S. federal and various state and foreign jurisdictions. Because the Company used some of the tax attributes carried forward from previous years to tax years that are still open, statutes of limitation remain open for all tax years to the extent of the attributes carried forward into tax year 2002 forFor U.S. federal and California income tax purposes.purposes, the statute of limitations currently remains open for the tax years ended 2019 to present and 2018 to present, respectively. In addition, due to net operating loss carryback claims, the tax years 2013 through 2015 may be subject to federal examination and all of the net operating loss and research and development credit carryforwards that may be utilized in future years may be subject to federal and state examination. The Company is not subject to income tax examinations in any other of its major foreign subsidiaries’ jurisdictions.
7.8. NET INCOME (LOSS) PER SHARE
Basic net income (loss) per share is computed by dividing net income (loss) by weighted average number of common shares outstanding for the period (excluding outstanding stock options and shares subject to repurchase). Diluted net income (loss) per share is computed using the weighted-averageweighted average number of common shares outstanding for the period plus the potential effect of dilutive securities which are convertible into common shares (using the treasury stock method), except in cases in which the effect would be anti-dilutive. The following is a reconciliation of the numerators and denominators used in computing basic and diluted net income (loss) per share (in thousands except per share amount):
| | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, | ||||||||
|
| 2023 |
| 2022 |
| 2023 |
| 2022 | ||||
Numerator: |
| |
|
| |
|
| |
|
| |
|
Net income (loss) | | $ | 6,835 | | $ | (1,147) | | $ | 7,190 | | $ | (5,297) |
Denominator: | |
|
| |
|
| |
|
| |
|
|
Basic weighted average shares outstanding | |
| 37,859 | |
| 37,028 | |
| 37,799 | |
| 37,316 |
Effect of dilutive stock options, unvested restricted stock units, and shares of common stock expected to be issued under Employee Purchase Plan | |
| 1,217 | |
| — | |
| 1,169 | |
| — |
Diluted weighted average shares outstanding | |
| 39,076 | |
| 37,028 | |
| 38,968 | |
| 37,316 |
| | | | | | | | | | | | |
Net income (loss) per share: | | | | | | | | | | | | |
Basic | | $ | 0.18 | | $ | (0.03) | | $ | 0.19 | | $ | (0.14) |
Diluted | | $ | 0.17 | | $ | (0.03) | | $ | 0.18 | | $ | (0.14) |
For the three and six months ended June 30, 2022, because the Company was in a loss position, diluted net loss per share is the same as basic net loss per share as the inclusion of the potential common shares would have been anti-dilutive.
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Numerator: | ||||||||||||||||
Net income | $ | 590 | $ | 1,984 | $ | 1,297 | $ | 6,178 | ||||||||
Denominator: | ||||||||||||||||
Basic weighted average common shares outstanding | 32,078 | 31,413 | 32,060 | 31,286 | ||||||||||||
Dilutive effect of equity incentive plans | 891 | 1,165 | 1,257 | 858 | ||||||||||||
Diluted weighted average common shares outstanding | 32,969 | 32,578 | 33,317 | 32,144 | ||||||||||||
Net income per share: | ||||||||||||||||
Basic | $ | 0.02 | $ | 0.06 | $ | 0.04 | $ | 0.20 | ||||||||
Diluted | $ | 0.02 | $ | 0.06 | $ | 0.04 | $ | 0.19 |
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The following table sets forth potential shares of common stock that arewere not included in the diluted net income (loss) per share calculation above because to do so would be anti-dilutive for the periods indicated (in thousands):
| | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, | ||||
|
| 2023 |
| 2022 |
| 2023 |
| 2022 |
Outstanding options |
| — | | 45 |
| — |
| 73 |
Non-vested restricted stock units |
| 12 | | 684 |
| 10 | | 795 |
Employee Stock Purchase Plan |
| — | | 45 |
| — | | 69 |
Total |
| 12 |
| 774 |
| 10 | | 937 |
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Outstanding options | 211 | 119 | 109 | 188 | ||||||||||||
Nonvested restricted stock units | 15 | 226 | 12 | 389 | ||||||||||||
Employee Stock Purchase Plan | 68 | 25 | 42 | 162 | ||||||||||||
Total | 294 | 370 | 163 | 739 |
8.9. CUSTOMER AND GEOGRAPHIC INFORMATION
Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or group, in deciding how to allocate resources and in assessing performance.
The Company’sCompany’s chief operating decision maker, the chief executive officer, reviews discrete financial information presented on a consolidated basis for purposes of regularly making operating decisions, allocation of resources, and assessing financial performance. Accordingly, the Company considers itself to be in one operating and reporting segment, specifically the licensingprovision of services for differentiated data and implementationanalytics solutions to the semiconductor and electronics industries.
Revenues from an individual customer that are approximately 10% or more of yield improvement solutions for integrated circuits manufacturers. the Company’s consolidated total revenues are as follows:
| | | | | | | | | | |
| | Three Months Ended June 30, |
| Six Months Ended June 30, | ||||||
Customer |
| 2023 |
| 2022 |
| 2023 |
| | 2022 |
|
A | | 33 | % | 29 | % | 36 | % | | 31 | % |
The Company had revenuesGross accounts receivable balances (including amounts that are unbilled) from individual customers in excessthat are approximately 10% or more of 10% of total revenuesthe Company’s gross accounts receivable balance are as follows:
| | | | | | |
| | June 30, | | | December 31, |
|
Customer |
| 2023 | | | 2022 |
|
A |
| 40 | % | | 29 | % |
B |
| * | % | | 12 | % |
C | | * | % | | 12 | % |
D |
| 16 | % | | * | % |
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
Customer | 2017 | 2016 | 2017 | 2016 | ||||||||||||
A | 38 | % | 38 | % | 41 | % | 42 | % | ||||||||
B | * | % | 12 | % | * | % | 12 | % |
| * represents less than 10% |
The Company had gross accounts receivable from individual customers in excess of 10% of gross accounts receivable as follows:
Customer | September 30, 2017 | December 31, 2016 | ||||||
A | 44 | % | 42 | % | ||||
C | 15 | % | 13 | % |
|
|
Revenues from customers by geographic area based on the location of the customers’customers’ work sites are as follows (in(amounts in thousands):
| | | | | | | | | | | | |
| | Three Months Ended June 30, | ||||||||||
| | 2023 | | | 2022 |
| ||||||
| | | | | Percentage | | | | | | Percentage |
|
|
| Revenues |
| of Revenues |
| | Revenues |
| of Revenues |
| ||
United States | | $ | 22,339 |
| 54 | % | | $ | 17,086 | | 49 | % |
China | |
| 7,421 |
| 18 | | |
| 4,539 | | 13 | |
Rest of the world | |
| 11,841 |
| 28 | | |
| 13,043 | | 38 | |
Total revenue | | $ | 41,601 |
| 100 | % | | $ | 34,668 |
| 100 | % |
Three Months Ended September 30, | ||||||||||||||||
2017 | 2016 | |||||||||||||||
Revenues | Percentage of Revenues | Revenues | Percentage of Revenues | |||||||||||||
United States | $ | 9,750 | 37 | % | $ | 8,680 | 32 | % | ||||||||
China | 6,452 | 24 | 2,907 | 11 | ||||||||||||
Germany | 2,729 | 10 | 4,896 | 18 | ||||||||||||
Taiwan | 2,414 | 9 | 4,079 | 15 | ||||||||||||
South Korea | 1,539 | 6 | 3,027 | 11 | ||||||||||||
Rest of the world | 3,633 | 14 | 3,670 | 13 | ||||||||||||
Total revenue | $ | 26,517 | 100 | % | $ | 27,259 | 100 | % |
19
Nine Months Ended September 30, | ||||||||||||||||
2017 | 2016 | |||||||||||||||
Revenues | Percentage of Revenues | Revenues | Percentage of Revenues | |||||||||||||
United States | $ | 30,610 | 41 | % | $ | 30,320 | 38 | % | ||||||||
China | 12,891 | 17 | 5,506 | 7 | ||||||||||||
Taiwan | 9,894 | 13 | 11,988 | 15 | ||||||||||||
Germany | 6,831 | 9 | 11,924 | 15 | ||||||||||||
South Korea | 5,159 | 7 | 8,523 | 11 | ||||||||||||
Rest of the world | 9,709 | 13 | 10,767 | 14 | ||||||||||||
Total revenue | $ | 75,094 | 100 | % | $ | 79,028 | 100 | % |
| | | | | | | | | | | | |
| | Six Months Ended June 30, | ||||||||||
| | 2023 | | | 2022 |
| ||||||
| | | | | Percentage | | | | | | Percentage |
|
|
| Revenues |
| of Revenues |
| | Revenues |
| of Revenues |
| ||
United States | | $ | 45,613 |
| 55 | % | | $ | 34,577 |
| 51 | % |
China | |
| 14,378 |
| 18 | | |
| 8,659 |
| 13 | |
Rest of the world | |
| 22,369 |
| 27 | | |
| 24,930 |
| 36 | |
Total revenue | | $ | 82,360 |
| 100 | % | | $ | 68,166 |
| 100 | % |
Long-lived assets, net by geographic area are as follows (in thousands):
| | | | | | |
| | June 30, | | December 31, | ||
|
| 2023 | | 2022 | ||
United States (1) | | $ | 47,191 | | $ | 44,730 |
Rest of the world | |
| 1,188 | |
| 1,446 |
Total long-lived assets, net | | $ | 48,379 | | $ | 46,176 |
September 30, 2017 | December 31, 2016 | |||||||
United States | $ | 23,117 | $ | 18,818 | ||||
Rest of the world | 487 | 523 | ||||||
Total long-lived assets, net | $ | 23,604 | $ | 19,341 |
(1) Includes assets deployed at customer sites which could be outside the U.S.
9.10. FAIR VALUE MEASUREMENTS
Fair value is the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. The multiple assumptions used to value financial instruments are referred to as inputs, and a hierarchy for inputs used in measuring fair value is established, that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs reflect assumptions market participants would use in pricing an asset or liability based on market data obtained from independent sources while unobservable inputs reflect a reporting entity’sentity’s pricing based upon its own market assumptions. These inputs are ranked according to a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels.
Level 1 - | Inputs are quoted prices in active markets for identical assets or liabilities. |
|
|
Level 2 - | Inputs are quoted prices for similar assets or liabilities in an active market, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable and market-corroborated inputs which are derived principally from or corroborated by observable market data. |
|
|
Level 3 - | Inputs are derived from valuation techniques in which one or more significant inputs or value drivers are unobservable. |
20
The following table represents the Company’sCompany’s assets measured at fair value on a recurring basis as of SeptemberJune 30, 2017,2023, and December 31, 2022, and the basis for that measurementthose measurements (in thousands):
| | | | | | | | | | | | |
| | Fair Value Measurements Using | ||||||||||
| | | | | Quoted | | | | | | | |
| | | | | Prices in | | | | | | | |
| | | | | Active | | Significant | | | | ||
| | | | | Markets for | | Other | | | | ||
| | | | | Identical | | Observable | | Significant | |||
| | June 30, | | Assets | | Inputs | | Unobservable | ||||
Assets |
| 2023 |
| (Level 1) |
| (Level 2) |
| Inputs (Level 3) | ||||
Cash equivalents |
| |
|
| |
|
| |
|
| |
|
Money market mutual funds | | $ | 75,874 | | $ | 75,874 | | $ | — | | $ | — |
Short-term investments (available-for-sale debt securities) | |
|
| |
|
| |
|
| |
|
|
U.S. Government securities (1) | |
| 23,678 | |
| 23,678 | |
| — | |
| — |
Total | | $ | 99,552 | | $ | 99,552 | | $ | — | | $ | — |
| | | | | | | | | | | | |
| | Fair Value Measurements Using | ||||||||||
| | | | | Quoted | | | | | | | |
| | | | | Prices in | | | | | | | |
| | | | | Active | | Significant | | | | ||
| | | | | Markets for | | Other | | Significant | |||
| | | | | Identical | | Observable | | Unobservable | |||
| | December 31, | | Assets | | Inputs | | Inputs | ||||
Assets |
| 2022 |
| (Level 1) |
| (Level 2) |
| (Level 3) | ||||
Cash equivalents |
| |
|
| |
|
| |
|
| |
|
Money market mutual funds | | $ | 75,738 | | $ | 75,738 | | $ | — | | $ | — |
U.S. Government securities (1) | | | 1,990 | | | 1,990 | | | — | | | — |
Short-term investments (available-for-sale debt securities) | | |
| |
|
| |
|
| |
|
|
U.S. Government securities (1) | | | 19,557 | |
| 19,557 | |
| — | |
| — |
Total | | $ | 97,285 | | $ | 97,285 | | $ | — | | $ | — |
(1) | As of June 30, 2023, and December 31, 2022, the amortized cost of the Company’s investments in U.S Government securities approximated their fair value due to their short-term maturities, and there have been no events or changes in circumstances that would have had a significant effect on the fair value of these securities in the periods presented. For the three and six months ended June 30, 2023, there were no material realized or unrealized gains or losses, either individually or in the aggregate. |
11. COMMITMENTS AND CONTINGENCIES
Assets | Total | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||
Money market mutual funds | $ | 26,577 | $ | 26,577 | $ | — | $ | — |
The following table representsStrategic Partnership with Advantest — See Note 12, Strategic Partnership Agreement with Advantest And Related Party Transactions, for the Company’s assets measured at fair value on a recurring basis as of December 31, 2016, and the basis for that measurement (in thousands):
Assets | Total | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||
Money market mutual funds | $ | 26,456 | $ | 26,456 | $ | — | $ | — |
The Company enters into foreign currency forward contracts to reduce the exposure to foreign currency exchange rate fluctuations on certain foreign currency denominated monetary assets and liabilities, primarily on third-party accounts payables and intercompany balances. The primary objective of the Company’s hedging program is to reduce volatility of earnings related to foreign currency exchange rate fluctuations. The counterparty to these foreign currency forward contracts is a large global financial institution that the Company believes is creditworthy, and therefore, the Company believes the credit risk of counterparty nonperformance is not significant. These foreign currency forward contracts are not designated for hedge accounting treatment. Therefore, the change in fair value of these contracts is recorded into earnings as a component of other income (expense), net, and offsets the change in fair value of the foreign currency denominated assets and liabilities, which is also recorded in other income (expense), net. For the three months ended September 30, 2017 and 2016, the Company recognized a realized gain of $0.2 million and $37,000 on the contracts, respectively, which was recorded in other income (expense), net indiscussion about the Company’s Statements of Operations and Comprehensive Income. Forcommitments under the nine months ended September 30, 2017 and 2016,strategic partnership with Advantest.
Operating Leases — Refer to Note 4, Leases, for the Company recognized a realized gain of $0.7 million and a realized gain of $45,000 on the contracts, respectively, which was recorded in other income (expense), net indiscussion about the Company’s Statement of Operations and Comprehensive Income. lease commitments.
The Company carries these derivatives financial instruments on its Consolidated Balance Sheets at their fair values. The Company’s foreign currency forward contracts are classified as Level 2 because it is not actively traded and the valuation inputs are based on quoted prices and market observable data of similar instruments. As of September 30, 2017, the Company had one outstanding forward contract with a notional amount of $8.0 million and recorded $10,000 other current liabilities associated with this outstanding forward contract. As of December 31, 2016, the Company had one outstanding forward contract with a notional amount of $6.9 million and had recorded $15,000 other current liabilities associated with the outstanding forward contract.
10. COMMITMENTS AND CONTINGENCIES
Leases
The Company leases administrative and sales offices and certain equipment under noncancelable operating leases, which contain various renewal options and, in some cases, require payment of common area costs, taxes and utilities. These operating leases expire at various times through 2024. Rent expense was $0.6 million for the both three months ended September 30, 2017 and 2016, respectively. Rent expense was $1.6 million and $1.7 million for the nine months ended September 30, 2017 and 2016.
Future minimum lease payments under noncancelable operating leases at September 30, 2017, are as follows (in thousands):
Period Ending September 30, | Amount | |||
2017 (remaining three months) | $ | 544 | ||
2018 | 1,757 | |||
2019 | 532 | |||
2020 | 444 | |||
2021 | 360 | |||
2022 and thereafter | 126 | |||
Total future minimum lease payments | $ | 3,763 |
Indemnifications — The Company generally provides a warranty to its customers that its software will perform substantially in accordance with documented specifications typically for a period of 90 days following initial delivery of its products. The Company also indemnifies certain customers from third-party claims of intellectual property infringement relating to the use of its products. Historically, costs related to these guarantees have not been significant. The Company is unable to estimate the maximum potential impact of these guarantees on its future results of operations.
21
Purchase obligationsObligations — The Company has purchase obligations with certain suppliers for the purchase of goods and services entered into in the ordinary course of business. As of SeptemberJune 30, 2017,2023, total outstanding purchase obligations were $8.3$24.5 million, the majority of which are primarilyis due within the next 1224 months.
Indemnification of Officers and Directors — As permitted by the Delaware general corporation law, the Company has included a provision in its certificate of incorporation to eliminate the personal liability of its officers and directors for monetary damages for breach or alleged breach of their fiduciary duties as officers or directors, other than in cases of fraud or other willful misconduct.
In addition, the Bylaws of the Company provide that the Company is required to indemnify its officers and directors even when indemnification would otherwise be discretionary, and the Company is required to advance expenses to its officers and directors as incurred in connection with proceedings against them for which they may be indemnified. The Company has entered into indemnification agreements with its officers and directors containing provisions that are in some respects broader than the specific indemnification provisions contained in the Delaware general corporation law. The indemnification agreements require the Company to indemnify its officers and directors against liabilities that may arise by reason of their status or service as officers and directors other than for liabilities arising from willful misconduct of a culpable nature, to advance their expenses incurred as a result of any proceeding against them as to which they could be indemnified, and to obtain directors’directors’ and officers’ insurance if available on reasonable terms. The Company has obtained directors’ and officers’ liability insurance in amounts comparable to other companies of the Company’s size and in the Company’s industry. Since a maximum obligation of the Company is not explicitly stated in the Company’s Bylaws or in its indemnification agreements and will depend on the facts and circumstances that arise out of any future claims, the overall maximum amount of the obligations cannot be reasonably estimated.
LitigationLegal Proceedings — From time to time, the Company is subject to various claims and legal proceedings that arise in the ordinary course of business. The Company accrues for losses related to litigation when a potential loss is probable, and the loss can be reasonably estimated in accordance with FASB requirements. As of SeptemberJune 30, 2017,2023, the Company was not party to any material legal proceedings thus nofor which a loss was probable and noor an amount was accrued. From time to time, the Company may enter into contingent fee arrangements with external legal firms that may represent the Company in legal proceedings related to disputes. Contingent legal fees are accrued by the Company when they are probable and reasonably estimable.
On May 6, 2020, the Company initiated an arbitration proceeding with the Hong Kong International Arbitration Center against SMIC New Technology Research & Development (Shanghai) Corporation (“SMIC”) due to SMIC’s failure to pay fees due to the Company under a series of contracts. The Company seeks to recover the unpaid fees, a declaration requiring SMIC to pay fees under the contracts in the future (or a lump sum payment to end the contract), and costs associated with bringing the arbitration proceeding. SMIC denies liability and an arbitration hearing was held in February 2023, with final written submissions due from the parties at the end of August. A decision is expected within this calendar year, approximately.
12. STRATEGIC PARTNERSHIP AGREEMENT WITH ADVANTEST AND RELATED PARTY TRANSACTIONS
In July 2020, the Company entered into a long-term strategic partnership with Advantest Corporation through its wholly-owned subsidiary, Advantest America, Inc. (collectively referred to herein as “Advantest”).
Analytics revenue recognized from Advantest was $1.8 million and $2.6 million during the three months ended June 30, 2023 and 2022, respectively, and $3.6 million and $5.3 million during the six months ended June 30, 2023 and 2022, respectively. Accounts receivable from Advantest amounted to $10.3 million and $0.3 million as of June 30, 2023, and December 31, 2022, respectively. Deferred revenue amounted to $14.4 million and $7.1 million as of June 30, 2023, and December 31, 2022, respectively.
22
13.SUBSEQUENT EVENT
On July 5, 2023, the Company acquired 100% of the equity interest in Lantern Machinery Analytics, Inc. headquartered in Canada, a privately-held provider of automated image analysis and feature extraction artificial intelligence/machine learning software for critical inspection and metrology steps at battery cell development and manufacturing processes for the electric vehicle industry. Pursuant to the purchase agreement, the Company paid approximately $1.9 million in cash on the closing date.
23
Item 2. Management’sManagement’s Discussion and Analysis of Financial Condition and Resultsof Operations
Forward-Looking Statements
The following discussion of our financial condition and results of operations contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements other than statements of historical fact may be forward-looking statements. 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. Any statement concerningThese 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 rising global inflation and interest rates, expectations regarding recent and future financialacquisitions; current semiconductor industry trends; expectations of continued adoption of our solutions by new and existing customers; project milestones or delays and performance (including future revenues, earningscriteria 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 COVID-19 on the semiconductor industry and our operations or supply and demand for our products; supply chain disruptions; the success of the Company’s strategic growth rates), ongoing business strategies or prospects,opportunities and partnerships; 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 actions taken by us orimpacts from the evolving trade regulatory environment and geopolitical tensions and our subsidiaries, which may be provided by us are also forward-looking statements.ability to obtain additional financing if needed. These forward-looking statements are only predictions. Forward-looking statements are based on current expectations and projections about future events and are inherently subject to a variety of risks and uncertainties, many of which are beyond our control, which could cause actual results to differ materially from those anticipated or projected. All forward-looking statements included in this document are based on information available to us on the date of filing and we further caution investors that our business and financial performance are subject to substantial risks and uncertainties. We assume no obligation to update publicly any such forward-looking statements. In evaluating these statements, you should specifically consider various factors, including the risk factors set forth in Item 1. “Business” and Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K10 K for the year ended December 31, 2016,2022, filed with the Securities and Exchange Commission (“SEC”) on March 8, 2017.1, 2023. 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. or its subsidiaries.
Overview
We offer products and services designed to empower organizations across the semiconductor and electronics ecosystems to connect, collect, manage, and analyze our customers’ ICdata about design, equipment, manufacturing, and manufacturing processes to identify, quantify, and correct the issues that cause yield losstest to improve our customers’ profitability by improving time-to-market, increasingthe yield and reducing total designquality of their products. We derive revenues from two sources: Analytics and manufacturing costs.Integrated Yield Ramp Our offerings combine proprietary software, professional services using proven methodologies and third-party cloud-hosting platforms for software-as-a-service (“SaaS”), electrical measurement hardware tools, and physical intellectual property (“IP”) for integrated circuit (“IC”) designs. We packageprimarily monetize our solutions in various ways to meetofferings through license fees and contract fees for professional services and SaaS. In some cases, especially on our customers’ specific business and budgetary needs, each of which provides us various revenue streams. Wehistorical IYR engagements, we also receive a mix of fixed fees and variable, performance-based fees for the vast majority of our yield improvement solutions. The fixed fees are typically reflective of the length of time and the resources needed to characterize a customer’s manufacturing process and receive preliminary results of proposed yield improvement suggestions. Thevalue-based variable fee or whatroyalty, which we call Gainshare, usually dependsGainshare. Our products, services, and solutions have been sold to integrated device manufacturers (“IDMs”), fabless semiconductor companies, foundries, out-sourced semiconductor assembly and test (“OSATs”), capital equipment manufacturers and system houses.
We are headquartered in Santa Clara, California and also operate worldwide with offices in Canada, China, France, Germany, Italy, Japan, Korea, and Taiwan.
Industry Trends
Certain trends may affect our Analytics revenue specifically. In particular, the confluence of Industry 4.0 (i.e. the fourth industrial revolution, or the automation and data exchange in manufacturing technologies and processes) and cloud computing (i.e. the on-demand availability of computing resources and data storage without direct active management by the user) is
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driving increased innovation in semiconductor and electronics manufacturing and analytics, as well as in the organization of information technology (“IT”) networks and computing at semiconductor and electronics companies across the ecosystem. First, the ubiquity of wireless connectivity and sensor technology enables any manufacturing company to augment its factories and visualize its entire production line. In parallel, the cost per terabyte of data storage has continually decreased year to year. The combination of these two trends means that more data is collected and stored than ever before. Further, semiconductor companies are striving to analyze these very large data sets in real-time to make rapid decisions that measurably improve manufacturing efficiency and quality. In parallel, the traditional practice of on-site data storage, even for highly sensitive data, is changing. 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 our achieving certain yield targets by a deadline. Variable feesanalytics 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 currently typically tied to wafer volume onincreasingly in demand for insights and efficiencies across the node sizeorganizations of these companies. We believe that all these trends will continue for the manufacturing facility where we performednext few years, and the yield improvement solutions. We receive license feeschallenges involved in adopting Industry 4.0 and service fees for related installation, integration, training, and maintenance and support servicessecure cloud computing will create opportunities for our software that we licensecombination 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. The logic foundry market at the leading-edge nodes, such as 10nm, 7nm, and smaller, underwent significant change over the past few years. The leading foundry continues to dominate market share as other foundries started later than originally forecast in some cases. This trend will likely continue to impact our characterization services business on a stand-alone basis.
Industry Trend
Consistent with the trend since 2010, wethese nodes. We expect that the largestmost logic foundries will continue to invest significantly 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 and capacity throughout 2018. Leading foundriesare 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 3-D transistor architecture. In addition, China’svariability management. We expect China’s investment in semiconductors shouldto continue. Compliance with changing U.S. 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.
There are other global or business trends that may affect our business opportunities generally as follows:
● | Continuing impact of the COVID-19 pandemic. A continuing effect of the COVID-19 pandemic is a global shortage in semiconductors due primarily to supply chain disruptions. Some market segments, including automotive semiconductors, continue to have shortages in production. Although COVID-19 related shortages have not materially affected our business, this trend may affect our future business opportunities, particularly future Gainshare and Cimetrix run-time licenses, if our customers’ production volumes decrease. |
● | Impacts from inventory cycles. With the easing of COVID-19 pandemic restrictions, the demand for semiconductors from hardware sales supporting work-from-home has waned. In addition, the strength of the subsequent economic recovery has varied by region. A result has been increased semiconductor inventories for several product segments. The industry has experienced reduced semiconductor fab utilization rates, and semiconductor capital equipment orders. If these trends persist, the overall reduction in demand may affect our Analytics revenue and our Integrated Yield Ramp gainshare revenue. |
● | Continuing demand for consumer electronics. The demand for consumer electronics, communications devices, and high-performance computing continues to drive technological innovation in the semiconductor industry as the need for products with greater performance, lower power consumption, reduced costs, and smaller size continues to grow with each new product generation. In addition, advances in computing systems and mobile devices continue to fuel demand for higher capacity memory chips. To meet these demands, IC manufacturers and designers are constantly challenged to improve the overall performance of their ICs by designing and manufacturing ICs with more embedded applications to create greater functionality while lowering power and cost per transistor. As this trend continues, companies will continually be challenged to improve process capabilities to optimally produce ICs with minimal random and systematic yield loss, which is driven by the lack of compatibility between the design and its respective |
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manufacturing process. We believe that these difficulties will continue to create a need for our products and services that address yield loss across the IC product life cycle. |
● | Impacts on the global chip supply chain. The ongoing Russo-Ukrainian war has negatively impacted the global supply chain and global energy markets, which has resulted in inflation, supply chain shortages and rising prices. Ukraine and Russia are both top suppliers of neon gas that is used in lasers and chip manufacturing, and Russia is a major producer of palladium, a rare metal used in computer components, sensors, and fuel cells. Limitations on the supply of these two elements can severely affect the global supply chain, which is already scarce. Russia also supplies much of the world’s premium nickel, which is used by electronics manufacturers to make batteries. If these trends continue or worsen, we or our customers may face a shortage of critical components. These macroeconomic impacts, including inflationary pressures and increasing global interest rates, could also increase our material, labor, and other costs. |
● | Changing export controls and sanctions. The U.S. government continues to expand and intensify export controls and sanctions. This includes the addition of many People’s Republic of China (“P.R.C.”) and Russian companies to the U.S. Export Administration Regulations (“EAR”) Entity List or Unverified List. These listings restrict supply to designees of items that are subject to the EAR. 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 could potentially interrupt their ability to make use of our products or services. |
In October 2022, the U.S. government issued an interim final rule (87 Fed. Reg. 62186) with additional export control restrictions. Among several changes, the U.S. government imposed restrictions on supply to any P.R.C. fabrication facility that produces certain advanced logic or memory ICs, when the supply involves a commodity, software or technology (an “Item”) that is “subject to the EAR” or when the supply involves a “U.S. person” even if the Item is not “subject to the EAR.” Another change is a restriction on supply of an Item “subject to the EAR” destined for use in the development or production of certain IC manufacturing equipment and certain parts and components of such equipment in the P.R.C. Industry members, including our Company, continue to increasegenerate questions and evaluate the effects of the new regulations. In addition, the U.S. government expanded the “foreign direct product rules,” and thus EAR jurisdiction and restrictions, to additional foreign-produced Items and in connection with additional restricted parties in the P.R.C. The U.S. government has informally indicated that it continues to develop further export control restrictions, a final version of the October 2022 rule, and clarifying guidance, all to be issued in the future. Other countries and jurisdictions with important roles in our industry production capacity overhave announced they intend to update some of their export control regulations to further align with those of the next few years. These provide opportunities to portentially increase our business.
Capacity utilization for 28nm logic thus farU.S. government. In addition, U.S. government officials have announced that they are developing outbound investment restrictions, which might affect some aspects of conducting business in 2017some regions in unknown ways. The P.R.C. recently imposed restrictions on import of certain memory ICs offered by a U.S. company and has been lower overall,developing its legal authorities to counter foreign sanctions. The U.S. government is renewing and mixed across foundries. We believeamplifying its caution that industry 28nm utilization will increase duringvisitors to the coming quarters. 14nm logic production is also expectedP.R.C. are subject to increase duringarbitrary 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 coming quarters. We expectnear-term impact of these expanded trade restrictions on our Gainshare resultsbusiness to be consistent with those general market trends. Gainshare revenuelimited, but proposals that are still in government development and open questions of interpretation leave much unknown. We will continue to fluctuate quartermonitor for any further trade restrictions, other regulatory or policy changes by the U.S. or foreign governments and any actions in response. We remain committed to quarter despitecomplying with applicable law. The uncertainty caused by these utilization trends asrecent regulations and the potential for additional future restrictions could, nonetheless, negatively affect our Gainshare revenue depends on many factors, including the average selling price of wafers subject to Gainshare and volume.
Generally, the demand for consumer electronics, communications devices, and datacenters, are driving technological innovationfuture sales in the semiconductor industry asP.R.C. market.
Geopolitical tensions. Geopolitical tension between the need for products with greater performance, lower power consumption, reduced costsU.S. and smaller sizeP.R.C. continues to growincrease, with each new product generation. In addition, advancesboth governments taking actions and making statements that lean in computing systemsthe direction of confrontation, including on the issue of Taiwan. Growing tension also increases the risk of unintended mishap, mistake, or accident leading to escalation and mobile devices have fueled demand for higher capacity memory chips. To meet these demands, IC manufacturers and designers are constantly challenged to improve the overall performance of their ICs by designing and manufacturing ICs with more embedded applications to create greater functionality while lowering cost per transistor. As a result, both logic and memory manufacturers have migrated to more and more advanced manufacturing nodes, capable of integrating more devices with higher performance, higher density, and lower power. As this trend continues, companies will continually be challenged to improve process capabilities to optimally produce ICs with minimal random and systematic yield loss, which is driven by the lack of compatibilityglobal supply chain disruption. The continuing tension between the designU.S. and its respective manufacturing process. We believeP.R.C. and/or Russian governments in trade and security matters or the perception of that as volume production of deep submicron ICs continuestension could lead to grow, the difficulties of integrating IC designs with their respective processes and ramping new manufacturing processes will create a greater need for products and services like ours that address the yield loss and escalating cost issues the semiconductor industry is facing today and will facedisruptions or reductions in the future. international trade,
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Customer Contracts
Although a substantial portion of our total revenues are concentrated in a small numberdeter or prevent purchasing activity of customers, the total revenues for each of these customersand negatively impact our China sales (with respect to U.S.-P.R.C. tensions) and financial results in any period is the result of Design-to-silicon-yield solutions and Gainshare performance incentives revenues recognized in the period under multiple, separate contracts, with no interdependent performance obligations. These contracts were all entered into in the ordinary course of our business and contain general terms and conditions that are standard across most of our yield improvement solutions customers, including providing services typically targeted(with respect to one manufacturing process node, for example the 28 or 20 nanometer node. Fluctuations in future results may occur if any of these customers renegotiate pre-existing contractual commitments due to adverse changes in their own business. See the additional discussion in Part I, Item 1, “Customers,” on page 9 of our Annual Report on Form 10-K for the year ended December 31, 2016, and in Item 1A, “Risk Factors,” on pages 13 through 20 of our Annual Report on Form 10-K for the year ended December 31, 2016, for related information on the risks associated with customer concentration and Gainshare performance incentives revenue.global tensions).
Financial Highlights
Financial highlights for the three months ended SeptemberJune 30, 2017, were2023, are as follows:
| Total revenues |
● | Costs of revenues increased $0.3 million, compared to the three months ended June 30, 2022, primarily due to increases in hardware costs, third-party cloud-delivery costs and travel expenses. These increases were partially offset by decreases in personnel-related costs. |
● | Net income was $6.8 million, compared to a net loss of $1.1 million for the three months ended | |
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Financial highlights for the six months ended June 30, 2023, are as follows:
● | Total revenues were $82.4 million, an increase of $14.2 million, or 21%, compared to the six months ended June 30, 2022. Analytics revenue was $73.5 million, an increase of $11.9 million, or 19%, compared to the six months ended June 30, 2022. The increase in Analytics revenue was driven by |
● | Costs of | |
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Financial highlights for the nine months ended September 30, 2017, were as follows:
Total revenues for the nine months ended September 30, 2017, were $75.1 million, a decrease of $3.9 million, or 5%, compared to $79.0 million for the nine months ended September 30, 2016. Design-to-silicon-yield solutions revenue for the nine months ended September 30, 2017, was $55.4 million, a decrease of $2.3 million, or 4%, when compared to Design-to-silicon yield solutions revenue of $57.7 million for the nine months ended September 30, 2016. The decrease in Design-to-silicon-yield solutions was primarily due to the decrease in revenue from our yield ramp engagement not fully offset by the increase in revenue from our DFI solution and our Exensio big data solution. Gainshare performance incentives revenue for the nine months ended September 30, 2017, was $19.7 million, a decrease of $1.7 million, or 8%, compared to $21.3 million for the nine months ended September 30, 2016. The decrease in revenue from Gainshare performance incentives was primarily the result of the Gainshare period ending on an older 28nm node, partially offset by higher Gainshare revenues from a new 28nm customer and from the 14nm nodes.
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● | Net income was $7.2 million, compared to a net loss of $5.3 million for the |
● | Cash, cash equivalents, and short-term investments at June 30, 2023 were $124.0 million, compared to $139.2 million as of December 31, 2022, a decrease of $15.1 million, primarily due to |
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equipment, and taxes related to net share settlement of equity awards, partially offset by |
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Critical Accounting PoliciesEstimates
There were no significantSee Note 1, Basis of Presentation AndSummary of Significant Accounting Policies, to our unaudited condensed consolidated financial statements in this Quarterly Report on Form 10-Q, for a description of recent accounting pronouncements and accounting changes, inincluding the expected dates of adoption and estimated effects, if any, on our critical accounting policies. Please refercondensed consolidated financial statements, and to Management’s“Management’s Discussion and Analysis of Financial Condition and Results of OperationsOperations” contained in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2016. 2022, filed with the SEC on March 1, 2023.
There were no material changes during the three and six months ended June 30, 2023, to the items that we disclosed as our critical accounting policies and estimates in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2022.
The following is a brief discussion of the more significant accounting policies and methods that we use.
General
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. We basedbase 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, stock-based compensationvaluation of long-lived assets including goodwill and intangible assets, and the realization of deferred tax assets. Actual amounts may differ from such estimates under different assumptions or conditions.
Revenue Recognition
We derive revenues primarilyrevenue from two sources: Design-to-silicon-yield SolutionsAnalytics and Gainshare performance incentives.Integrated Yield Ramp.
Analytics Revenue
Design-to-silicon-yield solutions — Revenues that areAnalytics revenue is derived from Design-to-silicon-yield solutions comethe 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 services andstandalone software and hardware licenses. We recognize revenue for each element of Design-to-silicon-yield solutions as follows:
We generate a significant portion of our Design-to-silicon-yield solutions revenue from fixed-price solution implementation service contracts delivered over a specific period of time. These contracts require reliable estimation of costs to perform obligations and the overall scope of each engagement. Revenue under project–based contracts for solution implementation services is recognized as services are performed using percentage of completion method of contract accounting baseddepending on costswhether the license is perpetual or labor-hours input method, whichevertime-based. Perpetual (one-time charge) license software is recognized at the most appropriate measuretime of the progress towards completioninception of the contract. Losses on fixed-price solution implementation contracts are recognized inarrangement when control transfers to the period when they become probable. Revisions in profit estimates are reflected incustomers, if the period in which the conditions that require the revisions become known and can be estimated. Revenue under time and materials contracts for solution implementation services are recognized assoftware 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 performed.
On occasion, we license our software products as a component of our fixed-price service contracts. In such instances, the software products are licensed to customers over a specified term of the agreement withproviding (i) support and maintenance to be provided, if applicable,(ii) unspecified software updates on a when-and-if available basis over the licensecontract term. The amount of product and service revenue recognized in a given period is affected by the Company’s judgment as to whether an arrangement includes multiple deliverables and, if so, our determination of the fair value of each deliverable. In general, vendor-specific objective evidence of selling price (“VSOE”) does not exist for our solution implementation services andRevenue from time-based-licensed software products and because our services and products include our unique technology, we are not able to determine third-party evidence of selling price (“TPE”). Therefore, in such circumstances we use best estimated selling prices (“BESP”) in the allocation of arrangement consideration. In determining BESP, we apply significant judgment as we weigh a variety of factors, based on the facts and circumstances of the arrangement. We typically arrive at BESP for a product or service that is not sold separately by considering company-specific factors such as geographies, internal costs, gross margin objectives, pricing practices used to establish bundled pricing, and existing portfolio pricing and discounting. After fair value is established for each deliverable, the total transaction amount is allocated to each deliverable based upon its relative selling price. Fees allocated to solution implementation services are recognized using the percentage of completion method of contract accounting. Fees allocated to softwareperformance obligation and related support and maintenance are recognized under software revenue recognition guidance.
In some instances, we also license our DFI system as a separate component of fixed-price service contracts. We allocate revenue to all deliverables based on their relative selling prices. We currently do not have VSOE for our DFI system, thus we use either TPE or BESP in the allocation of arrangement consideration.
We defer certain pre-contract costs incurred for specific anticipated contracts. Deferred costs consist primarily of direct costs to provide solution implementation services in relation to the specific anticipated contracts. We recognize such costs as a component of cost of revenues, the timing of which is dependent upon persuasive evidence of contract arrangement assuming all other revenue recognition criteria are met. We also defer costs from arrangements that required us to defer the revenues, typically due to revenue recognition from multi-element arrangements or from contracts subject to customer acceptance. These costs are recognized in proportion to the related revenue. At the end of reporting period, we evaluate its deferred costs for their probable recoverability. We recognize impairment of deferred costs when it is determined that the costs no longer have future benefits and are no longer recoverable.
We also license our software products separately from solution implementations. For software license arrangements that do not require significant modification or customization of the underlying software, software license revenue is recognized undereither at a point in time or over time as follows. The license component is recognized at the residual methodtime when (l) persuasive evidence of an arrangement exists, (2) delivery has occurred, (3) the fee is fixed or determinable, (4) collectability is probable, and (5) the arrangement does not require services that are essentialcontrol transfers to the functionality of the software. When arrangements include multiple elements such as support and maintenance, consulting (other than for our fixed price solution implementations), installation, and training, revenue is allocated to each element of a transaction based upon its fair value as determined by our VSOE and such services are recorded as services revenue. VSOE for maintenance is generally established based upon negotiated renewal rates while VSOE for consulting, installation, and training services is established based upon the our customary pricing for such services when sold separately. When software is licensed for a specified term, fees for support and maintenance are generally bundledcustomers, with the license feepost-contract support component recognized ratably over the entire term of the contract. We are unable to establish VSOE of fair value for maintenance services that are generally bundled with term licenses. In these cases, we recognize revenue ratably over thecommitted term of the contract. For multiple-element arrangements containing non-softwarecontracts 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 Company: (1) determines whethertransaction price of the contract to each element constitutesperformance obligation on a separate unit of accounting; (2) determines the fair value of each elementrelative basis using the standalone selling price hierarchy of VSOE, TPE or BESP, as applicable; and (3) allocates the total price(“SSP”) attributed to each separate unitperformance obligation.
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Revenue from software-as-a-service (or SaaS) thatSaaS arrangements, which allow for the use of a hostedcloud-based software product or service over a contractually determined period of time without taking possession of software, areis accounted for as subscriptions and is recognized as revenue ratably, on a straight-line basis, over the coveragesubscription period beginning on the date the service is first made available to customers.
Revenue for software licensesfrom 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 extended payment termsmultiple performance obligations, we allocate the transaction price of the contract to each performance obligation on a relative basis using SSP attributed to each performance obligation. Where there are not discrete performance obligations, historically, revenue is notprimarily recognized in excessas services are performed using a percentage of amounts due. For software license arrangementscompletion 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 modificationjudgment.
Integrated Yield Ramp Revenue
Integrated Yield Ramp revenue is derived from our yield ramp engagements that include Gainshare or customizationother performance incentives based on customers’ yield achievement.
Revenue under these project–based contracts, which are delivered over a specific period of the underlying software, the software license revenuetime typically for a fixed fee component paid on a set schedule, is recognized as services are performed using thea percentage of completion method based on costs or labor-hours inputs, whichever is the most appropriate measure of contract accounting,the progress towards completion of the contract. Where there are distinct performance obligations, we allocate revenue to all deliverables based on their SSPs and such revenue is recorded as services revenue.
Deferred revenues consist substantiallyallocate the transaction price of amounts invoiced in advance of revenue recognition and is recognized as the revenue recognition criteria are met. Deferred revenues that will be recognized during the succeeding 12 month period is recorded as current deferred revenues and the remaining portion is recorded as non- current deferred revenues.
Gainshare Performance Incentives — When we enter into a contract to provideeach performance obligation on a relative basis using SSP. Similar to the services provided in connection with DFI systems and CV systems that are contributing to Analytics revenue, due to the nature of the work performed in these arrangements, the estimation of percentage of completion method is complex and subject to many variables that require significant judgment.
The Gainshare contained in the yield improvement services, the contract usually includes two components: (1)ramp contracts is a fixed fee for performance by us of services delivered over a specific period of time; and (2) a Gainshare performance incentive component where the customer may pay a contingent variable fee usuallyrelated to continued usage of our IP after the fixed feefixed-fee service period has ended.ends, based on the customers’ yield achievement. Revenue derived from Gainshare performance incentives represents profit sharing and performance incentives earnedis contingent upon our customers reaching certain defined operational levels established in related solution implementation service contracts.production yield levels. Gainshare performance incentives periods are usuallygenerally subsequent to the delivery of all contractual services and therefore have virtually no cost to us. Due toperformance obligations. We record Gainshare as a usage-based royalty derived from customers’ usage of intellectual property and record it in the uncertainties surrounding attainment of such operational levels, we recognize Gainshare performance incentives revenue (tosame period in which the extent of completion of the related solution implementation contract) upon receipt of performance reports or other related information from the customer supporting the determination of amounts and probability of collection. usage occurs.
Stock-Based Compensation
Stock-based compensation is estimated at the grant date based on the award’s fair value and is recognized on a straight-line basis over the vesting periods, generally four years. 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.
We have elected to use 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 stock options. The expected life of an award is based on historical experience and on the terms and conditions of the stock awards granted to employees. The interest rate assumption is based upon observed Treasury yield curve rates appropriate for the expected life of stock options.
Income Taxes
We are required to assess the likelihoodwhether it is “more-likely-than-not” that we will realize our deferred tax assets will be recovered from future taxable income and if(“DTAs”). If we believe that they are not likely to be fully realizable before the expiration dates applicable to such assets, then to the extent we believe that recovery is not likely, we must establish a valuation allowance. Based on all available evidence, both positive and negative, we determined a full valuation allowance was still appropriate for our U.S. federal and state net DTAs, primarily driven by a cumulative loss incurred over the 12-quarter period ended June 30, 2023, and the likelihood that we may not utilize tax attributes before they expire. The valuation allowance was approximately $59.2 million as of June 30, 2023, and December 31, 2022. 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 deferred tax assets,DTAs, less offsetting valuation allowance, in a period are recorded through
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the income tax provision (benefit) inand could have a material impact on the condensed consolidated statements of operations. The valuation allowance was approximately $7.5 million and $6.8 million as of September 30, 2017 and December 31, 2016, respectively, which was related to California R&D tax credits and California net operating losses related to an acquisition that we currently do not believe to be more likely than not to be ultimately realized. If we conclude at a future financial reporting period that there has been a change in our ability to realize our California R&D credit and net operating loss carry forward deferred tax assets, and it is at such time no longer “more–likely-than-not” that we will realize the tax credits before applicable expiration dates, our tax provision will increase in the period in which we make such determination.
comprehensive income (loss).
Our income tax calculations are based on the application of the respectiveapplicable 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 operations. At Septembercomprehensive income (loss). As of June 30, 2017,2023, no deferred taxes have been provided on undistributed earnings from our international subsidiaries. We intend to reinvest the earnings of approximately $6.7 million fromour non-U.S. subsidiaries in those operations indefinitely. As such, we have not provided for any foreign withholding taxes on the Company’s internationalearnings of foreign subsidiaries since theseas of June 30, 2023. The earnings have been,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 under current plans will continueJobs Act.
The Inflation Reduction Act of 2022 (the “Act”) was signed into U.S. law on August 16, 2022. The Act includes various tax provisions, including an excise tax on stock repurchases, expanded tax credits for clean energy incentives, and a corporate alternative minimum tax that generally applies to be, permanently reinvested outsideU.S. corporations with average adjusted financial statement income over a three-year period in excess of $1 billion. While the United States. It is not practicable to determine the amountdetails of the unrecognizedcomputation of the tax liability at this time.
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Software Development Costs
Internally developed software includes software developedand implementation of some of the incentives will be subject to meet our internal needs to provide solution implementation services to our end-customers. These capitalized costs consist of internal compensation related costs and external direct costs incurred during the application development stage and are amortized over their useful lives, generally six years. The costs to develop softwareregulations that is marketed externally have not yet been capitalized as we believe our current software development processreleased by the U.S. Department of the Treasury, the Company does not expect the Act to materially impact its consolidated financial statements.
The Creating Helpful Incentives to Produce Semiconductors Act (the “CHIPS Act”) was signed into U.S. law on August 9, 2022. CHIPS Act is essentially completed concurrent with the establishment of technological feasibility. As such, all related software development costs are expensed as incurred and includedintended to increase domestic competitiveness in semiconductor manufacturing capacity, increase research and development in computing, artificial intelligence, clean energy, and nanotechnology through federal government programs and incentives over the next ten years. The CHIPS Act includes an advanced manufacturing tax credit equal to 25% of qualified investments in property purchased for an advanced manufacturing facility. We are evaluating the potential benefits of CHIPS Act to our business.
Stock-Based Compensation
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 consolidated statementsrestricted stock units is equal to the market value of operations.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 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. The expected life is based on historical experience and on the terms and conditions of the stock options granted. The interest rate assumption is based upon observed Treasury yield curve rates appropriate for the expected life of our stock options.
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
30
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 further testing is required, we perform a two-step process. The first step involves comparing the fair value of its reporting unit to its carrying value, including goodwill. If the carrying value of the reporting unitamount exceeds its fair value, an impairment loss would be recognized equal to the second stepamount of excess, limited to the test is performed by comparing the carrying valueamount of the goodwill in the reporting unit to its implied fair value. An impairment charge is recognized for the excess of the carrying value of goodwill over its implied fair value. For the purpose of impairment testing, we have determined that we have one reporting unit.total goodwill. There was no impairment of goodwill for the periodthree and six months ended SeptemberJune 30, 2017.
2023.
Our long-lived assets, excluding goodwill, consist of property, and equipment, and intangible assets. We periodically review our long-lived assets for impairment.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. During the three months ended September 30, 2017, thereThere was no impairment related to ourof long-lived assets.
assets for the three and six months ended June 30, 2023.
Recent Accounting Pronouncements and Accounting Changes
See Note 21, Basis of “NotesPresentation andSummary of Significant Accounting Policies, to Condensed Consolidated Financial Statements (Unaudited)” ofour condensed consolidated financial statements in this Quarterly Report on Form 10-Q, for a description of recent accounting pronouncements and accounting changes, including the expected dates of adoption and estimated effects, if any, on our condensed consolidated financial statements.
Results of Operations
The following table sets forth,Discussion of Financial Data for the periods indicated, the percentageThree and Six Months ended June 30, 2023 and 2022
Revenues, Costs of total revenues represented by the line items reflected in our condensed consolidated statements of operations: Revenues, and Gross Margin
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | | | | | | | Six Months Ended | | | | | | | ||||||||
| June 30, | | Change | | | June 30, | | Change | | ||||||||||||||
(Dollars in thousands) | 2023 |
| 2022 |
| $ |
| % |
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| 2023 |
| 2022 |
| $ |
| % |
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Revenues: | |
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Analytics | $ | 37,134 | | $ | 31,117 | | $ | 6,017 |
| 19 | % | | $ | 73,460 | | $ | 61,543 | | $ | 11,917 |
| 19 | % |
Integrated Yield Ramp |
| 4,467 | |
| 3,551 | |
| 916 |
| 26 | % | |
| 8,900 | |
| 6,623 | |
| 2,277 |
| 34 | % |
Total revenues | | 41,601 | | | 34,668 | | | 6,933 |
| 20 | % | | | 82,360 | | | 68,166 | | | 14,194 |
| 21 | % |
Costs of revenues |
| 12,369 | |
| 12,042 | |
| 327 |
| 3 | % | |
| 24,273 | |
| 23,571 | |
| 702 |
| 3 | % |
Gross profit | $ | 29,232 | | $ | 22,626 | | $ | 6,606 |
| 29 | % | | $ | 58,087 | | $ | 44,595 | | $ | 13,492 |
| 30 | % |
Gross margin |
| 70 | % |
| 65 | % |
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| | | |
| 71 | % |
| 65 | % |
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Analytics revenue as a percentage of total revenues |
| 89 | % |
| 90 | % |
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| | |
| 89 | % |
| 90 | % |
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Integrated Yield Ramp revenue as a percentage of total revenues |
| 11 | % |
| 10 | % |
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| | |
| 11 | % |
| 10 | % |
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Analytics Revenue
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Revenues: | ||||||||||||||||
Design-to-silicon-yield solutions | 72 | % | 68 | % | 74 | % | 73 | % | ||||||||
Gainshare performance incentives | 28 | 32 | 26 | 27 | ||||||||||||
Total revenues | 100 | % | 100 | % | 100 | % | 100 | % | ||||||||
Costs of design-to-silicon-yield solutions | 47 | 42 | 47 | 41 | ||||||||||||
Amortization of acquired technology | — | — | — | — | ||||||||||||
Total cost of design-to-silicon-yield solutions | 47 | 42 | 47 | 41 | ||||||||||||
Gross profit | 53 | 58 | 53 | 59 | ||||||||||||
Operating expenses: | ||||||||||||||||
Research and development | 30 | 26 | 30 | 26 | ||||||||||||
Selling, general and administrative | 22 | 21 | 24 | 20 | ||||||||||||
Amoritization of other acquired intangible assets | — | — | — | — | ||||||||||||
Total operating expenses | 52 | 47 | 54 | 46 | ||||||||||||
Income (loss) from operations | 1 | 11 | (1 | ) | 13 | |||||||||||
Interest and other income (expense), net | — | — | — | — | ||||||||||||
Income (loss) before taxes | 1 | 11 | (1 | ) | 13 | |||||||||||
Income tax provision (benefit) | (1 | ) | 4 | (3 | ) | 5 | ||||||||||
Net income | 2 | % | 7 | % | 2 | % | 8 | % |
Comparison of the Three Months Ended September 30, 2017 and 2016
Three Months Ended September 30, | % | |||||||||||||||
Revenues | 2017 | 2016 | Change | Change | ||||||||||||
(in thousands, except for percentages) | ||||||||||||||||
Design-to-silicon-yield solutions | $ | 19,229 | $ | 18,552 | $ | 677 | 4 | % | ||||||||
Gainshare performance incentives | 7,288 | 8,707 | (1,419 | ) | (16 | )% | ||||||||||
Total revenues | $ | 26,517 | $ | 27,259 | $ | (742 | ) | (3 | )% |
Design-to-silicon-yield solutions. Design-to-silicon-yield solutions revenue is derived from services (including services from yield solutions, design for inspection solutions, software support and maintenance, consulting, and training) and software and or system licenses, provided during our customer engagements as well as during solution product sales. Design-to-silicon-yield solutionsAnalytics revenue increased $0.7$6.0 million for the three months ended SeptemberJune 30, 2017,2023, compared to the three months ended SeptemberJune 30, 2016.2022. The increase in Design-to-silicon-yield solutionsAnalytics revenue was driven by an increase in revenue from Exensio software licenses and increases in revenue from CV system, partially offset by a decrease in revenues from Cimetrix software licenses due to lower orders for runtime licenses.
Analytics revenue increased $11.9 million for the six months ended June 30, 2023, compared to the six months ended June 30, 2022. The increase in Analytics revenue was driven by increases in revenue from CV and DFI systems and an increase in revenue from Exensio software licenses, partially offset by a decrease in revenues from Cimetrix software licenses due to lower orders for runtime licenses.
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Integrated Yield Ramp Revenue
Integrated Yield Ramp revenue increased $0.9 million for the three months ended June 30, 2023, compared to the three months ended June 30, 2022, primarily due to an increase in the revenueGainshare from our Design-For-Inspection solution and from our Exensio big data solution,increased customer wafer shipments at non-leading edge nodes, partially offset by thea decrease in thehours worked on fixed fees engagements.
Integrated Yield Ramp revenue from our yield ramp solution. Our Design-to-silicon-yield solutions revenue may fluctuate in the future and is dependent on a number of factors, including the semiconductor industry’s continued acceptance of our solutions, the timing of purchases by existing and new customers, and our ability to attract new customers and penetrate new markets, and further penetration of our current customer base. Fluctuations in future results may also occur if any of our significant customers renegotiate pre-existing contractual commitments due to adverse changes in their own business or, in the case of a time and materials contract, may take advantage of contractual provisions that permit the suspension of contracted work for a period if their business experiences a financial hardship.
Gainshare Performance Incentives. Gainshare performance incentives revenues represent profit sharing and performance incentives earned contingent upon our customers reaching certain defined operational levels. Revenue derived from Gainshare performance incentives decreased $1.4increased $2.3 million for the threesix months ended SeptemberJune 30, 2017,2023, compared to the threesix months ended SeptemberJune 30, 2016. The2022, primarily due to an increase in Gainshare from increased customer wafer shipments at non-leading edge nodes, partially offset by a decrease was primarily the result of the Gainshare period endingin hours worked on an older 28nm node. fixed fees engagements.
Our Gainshare performance incentivesIntegrated Yield Ramp revenue may continue to fluctuate from period to period.period primarily due to the contribution of Gainshare, performance incentives revenuewhich is dependent on many factors that are outside our control, including among others, continued production of ICs by our customers at facilities at which we generate Gainshare, sustained yield improvements by our customers, and whether we enter into new contracts containing Gainshare.
Our Analytics and Integrated Yield Ramp revenues may also fluctuate in the future and are dependent on a number of factors, including the semiconductor industry’s continued acceptance of our products, services and solutions, the timing of purchases by existing and new customers, cancellations by existing customers, and our ability to enter intoattract new Design-to-silicon-yield solutions contracts containing Gainshare performance incentives. customers and penetrate new markets, supply chain challenges and further penetration of our current customer base. Fluctuations in future results may also occur if any of our significant customers renegotiate pre-existing contractual commitments, including due to adverse changes in their own business.
Three Months Ended September 30, | % | |||||||||||||||
Costs of Design-to-silicon-yield solutions | 2017 | 2016 | Change | Change | ||||||||||||
(in thousands, except for percentages) | ||||||||||||||||
Direct costs of Design-to-silicon-yield solutions | $ | 12,295 | $ | 11,366 | $ | 929 | 8 | % | ||||||||
Amortization of acquired technology | 136 | 86 | 50 | 58 | % | |||||||||||
Total costs of Design-to-silicon-yield solutions | $ | 12,431 | $ | 11,452 | $ | 979 | 9 | % |
Costs of Design-to-silicon-yield solutions. Revenues
Costs of Design-to-silicon-yield solutionsrevenues 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. Direct costs of Design-to-silicon-yield solutions consist of service and software licenses costs. Service costs consist ofinclude material, hardware, personnel-related costs including compensation, employee benefits, bonus and stock-based compensation and related benefits,expense, subcontractor costs, overhead costs, travel, 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 the Companyus in providing services to our customers in solution engagements or sold in conjunction with our software products. Direct
The increase in costs of Design-to-silicon-yield solutions increased $0.9revenues of $0.3 million for the three months ended SeptemberJune 30, 2017,2023, compared to the three months ended SeptemberJune 30, 2016,2022, was primarily due to (i) a $0.5$0.4 million net changeincrease in hardware costs, (ii) a $0.2 million increase in travel expenses, and (iii) a $0.1 million increase in third-party cloud-delivery costs. These were partially offset by a $0.3 million decrease in personnel-related costs due to lower compensation expense, partially offset by an increase in stock-based compensation expense.
The increase in costs of revenues of $0.7 million for the deferred cost relatedsix months ended June 30, 2023, compared to timing of completion of the contract signature process,six months ended June 30, 2022, was primarily due to (i) a $0.3 million increase in personnel-related cost driven by world-wide merit increases, andhardware costs, (ii) a $0.3 million increase in depreciation expense of test equipment,travel expenses, (iii) a $0.3 million increase in third-party cloud-delivery costs, and (iv) a $0.1 million increase in subcontractor costs. These were partially offset by (i) a $0.2 million decrease in subcontractorfacilities and IT-related costs including depreciation expense and (ii) a $0.1 million decrease in personnel-related costs due to lower compensation expense, partially offset by an increase in stock-based compensation expense. Amortization of acquired technology
Gross Margin
Gross margin increased 5 percentage points for the three months ended SeptemberJune 30, 2017 and 2016 slightly increased2023, to 70%, compared to 65% for the three months ended June 30, 2022. The higher gross margin during the three months ended June 30, 2023, was primarily due to higher total revenue, including Gainshare, when compared to the amortizationyear-ago period.
Gross margin increased 6 percentage points for the six months ended June 30, 2023, to 71%, compared to 65% for the six months ended June 30, 2022. The higher gross margin during the six months ended June 30, 2023, was primarily due to higher total revenue, including Gainshare, when compared to the year-ago period.
32
Operating Expenses:
Three Months Ended | ||||||||||||||||
September 30 | % | |||||||||||||||
Research and Development | 2017 | 2016 | Change | Change | ||||||||||||
(in thousands, except for percentages) | ||||||||||||||||
Research and development | $ | 7,875 | $ | 7,017 | $ | 858 | 12 | % |
Research and Development. Development
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | | | | | | | Six Months Ended | | | | | | | ||||||||
| | June 30, | | Change | | | June 30, | | Change | | ||||||||||||||
(Dollars in thousands) |
| 2023 |
| 2022 |
| $ | | % |
|
| 2023 |
| 2022 |
| $ | | % |
| ||||||
Research and development | | $ | 12,264 | | $ | 13,374 | | $ | (1,110) |
| (8) | % | | $ | 25,315 | | $ | 27,463 | | $ | (2,148) |
| (8) | % |
As a percentage of total revenues | |
| 29 | % |
| 39 | % |
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| | |
| 31 | % |
| 40 | % |
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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, third-party cloud-services related costs, IT and facilities cost allocations to support product development activities, including compensation and benefits, outside development services, travel, facilities cost allocations, and stock-based compensation charges. activities.
Research and development expenses increased $0.9decreased $1.1 million for the three months ended SeptemberJune 30, 2017,2023, compared to the three months ended SeptemberJune 30, 2016,2022, primarily due to a $1.5 million decrease in personnel-related costs mostly resulting from a lower stock-based and other compensation expenses, partially offset by worldwide salary increases and increases in headcount. These were partially offset by (i) a $0.2 million increase in subcontractor expenses primarily related to Exensio and Cimetrix software, and (ii) a $0.1 million increase in personnel-related expensethird-party cloud-services related costs.
Research and development expenses decreased $2.1 million for the six months ended June 30, 2023, compared to the six months ended June 30, 2022, primarily due to world-wide merit(i) a $3.1 million decrease in personnel-related costs mostly resulting from a lower stock-based and other compensation expenses, partially offset by worldwide salary increases and increases in headcount, and (ii) a $0.1$0.2 million increasedecrease in facilities expense, and IT-related costs including depreciation expense. These were partially offset by (i) a $0.6$0.7 million increase in subcontractor expense. The increased investment in research and development isexpenses primarily driven by continued development activity related to our DFI solution. Exensio and Cimetrix software, (ii) a $0.2 million increase in third-party cloud-services related costs, and (iii) a $0.2 million increase in travel expenses.
We anticipate our expenses in research and development will fluctuate in absolute dollars from period to period as a result of cost control initiativesthe size and the timing of product development projects and revenue generating activity requirements. projects.
Three Months Ended | ||||||||||||||||
September 30, | $ | % | ||||||||||||||
Selling, General and Administrative | 2017 | 2016 | Change | Change | ||||||||||||
(in thousands, except for percentages) | ||||||||||||||||
Selling, general and administrative | $ | 5,680 | $ | 5,548 | $ | 132 | 2 | % |
Selling, General, and Administrative.
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | | | | | | | Six Months Ended | | | | | | | ||||||||
| | June 30, | | Change | | | June 30, | | Change | | ||||||||||||||
(Dollars in thousands) |
| 2023 |
| 2022 |
| $ | | % |
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| 2023 |
| 2022 |
| $ | | % |
| ||||||
Selling, general, and administrative | | $ | 14,766 | | $ | 9,770 | | $ | 4,996 |
| 51 | % | | $ | 30,411 | | $ | 20,609 | | $ | 9,802 |
| 48 | % |
As a percentage of total revenues | |
| 35 | % |
| 28 | % |
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| | |
| 37 | % |
| 30 | % |
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Selling, general, and administrative expenses consist primarily of personnel-related costs including compensation, employee benefits, bonus, commission and benefitsstock-based compensation expense for sales, marketing, and general and administrative personnel, legal, tax and accounting services, marketing communications expenses, third-party cloud-services related costs, travel, IT, and facilities cost allocations, and stock-based compensation charges. allocations.
Selling, general, and administrative expenses increased $0.1$5.0 million for the three months ended SeptemberJune 30, 2017,2023, compared to the three months ended SeptemberJune 30, 2016,2022, primarily due to (i) a $4.6 million increase in personnel-related costs mainly resulting from increases in stock-based and other compensation expense, including commission, discretionary bonuses and employee benefit costs, headcount and worldwide salary increases, (ii) a $0.2 million increase in business acquisition costs, (iii) a $0.2 million increase in third-party cloud-services related costs, (iv) a $0.2 million increase in travel expenses, and (v) a $0.1 million increase in personnel-related expense duelegal fees related to world-wide merit increases and hiring of an executive,the arbitration proceeding over a $0.1 million increase in accounting and legal expense,disputed customer contract. These were partially offset by a $0.1$0.3 million decrease in subcontractor expense. expenses.
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Selling, general, and administrative expenses increased $9.8 million for the six months ended June 30, 2023, compared to the six months ended June 30, 2022, primarily due to (i) a $7.5 million increase in personnel-related costs mainly resulting from increases in stock-based and other compensation expense, including commission, discretionary bonuses and employee benefit costs, headcount and worldwide salary increases, (ii) a $1.8 million increase in legal fees related to the arbitration proceeding over a disputed customer contract, (iii) a $0.4 million increase in travel expenses, (iv) a $0.3 million increase in facilities and IT-related costs including depreciation expense, and (v) a $0.2 million increase in business acquisition costs. These were partially offset by a $0.4 million decrease in subcontractor 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.
Amortization of Other Acquired Intangible Assets.
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | | | | | | | Six Months Ended | | | | | | | ||||||||
| | June 30, | | Change | | | June 30, | | Change | | ||||||||||||||
(Dollars in thousands) |
| 2023 |
| 2022 |
| $ | | % |
|
| 2023 |
| 2022 |
| $ | | % |
| ||||||
Amortization of acquired intangible assets | | $ | 326 | | $ | 314 | | $ | 12 |
| 4 | % | | $ | 651 | | $ | 628 | | $ | 23 |
| 4 | % |
Amortization of other acquired intangible assets primarily consists of amortization of intangibles acquired as a result of certain business combinations. The amortization
Interest and Other Expense (Income), Net
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | |
| | Six Months Ended | | | | |
| ||||||||||||
| | June 30, | | Change | | | June 30, | | Change | | ||||||||||||||
(Dollars in thousands) |
| 2023 |
| 2022 |
| $ | | % |
|
| 2023 |
| 2022 |
| $ | | % |
| ||||||
Interest and other expense (income), net | | $ | (1,071) | | $ | (991) | | $ | (80) |
| 8 | % | | $ | (1,982) | | $ | (1,301) | | $ | (681) |
| 52 | % |
Interest and other expense (income), net, primarily consists of interest income and foreign currency transaction exchange gains and losses.
Interest and other acquired intangible assetsexpense (income), net increased $0.1 million for the three months ended SeptemberJune 30, 2017 remained flat at $0.1 million2023, compared to the three months ended SeptemberJune 30, 2016.2022, primarily due to a higher interest income resulting from higher interest rates, partially offset by higher foreign currency exchange loss resulting from a net unfavorable fluctuation in foreign exchange rates.
Interest and Other Income (expense)other expense (income), net. The increased $0.7 million for the six months ended June 30, 2023, compared to the six months ended June 30, 2022, primarily due to a higher interest and other income (expense)resulting from higher interest rates, partially offset by higher foreign currency exchange loss resulting from a net unfavorable fluctuation in foreign exchange rates.
Income Tax Expense
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| | Three Months Ended | | | | | |
| | Six Months Ended | | | | | |
| ||||||||
| | June 30, | | Change | | | June 30, | | Change | | ||||||||||||||
(Dollars in thousands) |
| 2023 |
| 2022 |
| $ | | % |
|
| 2023 |
| 2022 |
| $ | | % |
| ||||||
Income tax expense (benefit) | | $ | (3,888) | | $ | 1,306 | | $ | (5,194) |
| (398) | % | | $ | (3,498) | | $ | 2,493 | | $ | (5,991) |
| (240) | % |
Income tax expense decreased for the three and six months ended SeptemberJune 30, 2017 remained flat at $0.1 million expense2023, compared to the three and six months ended SeptemberJune 30, 2016.
Three Months Ended | ||||||||||||||||
September 30, | $ | % | ||||||||||||||
Income Tax Provision (benefit) | 2017 | 2016 | Change | Change | ||||||||||||
(in thousands, except for percentages) | ||||||||||||||||
Income tax provision (benefit) | $ | (270 | ) | $ | 1,051 | $ | (1,321 | ) | (126 | )% |
Income Tax Provision (benefit). The decrease in income tax provision (benefit) from $1.1 million expense for the three months ended September 30, 2016 to $0.3 million benefit for the three months ended September 30, 2017 was2022, primarily due to changes in the foreign and state taxes and year-to-date recognition of worldwide pre-tax income (loss) in relation to their forecasted amounts for full years.
34
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 excessexpenses not deductible for tax benefits related to employee stock compensation as well as the decrease in income.
Comparison of the Nine Months Ended September 30, 2017 and 2016
Nine Months Ended | ||||||||||||||||
September 30, | $ | % | ||||||||||||||
Revenues | 2017 | 2016 | Change | Change | ||||||||||||
(In thousands, except for percentages) | ||||||||||||||||
Design-to-silicon-yield solutions | $ | 55,426 | $ | 57,704 | $ | (2,278 | ) | (4 | )% | |||||||
Gainshare performance incentives | 19,668 | 21,324 | (1,656 | ) | (8 | )% | ||||||||||
Total | $ | 75,094 | $ | 79,028 | $ | (3,934 | ) | (5 | )% |
Design-to-Silicon-Yield Solutions. Design-to-silicon-yield solutions revenue decreased $2.3 million for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016, due to the decrease in revenue from our yield ramp solution not fully offset by the increase in revenue from our DFI solution and our Exensio big data solution.
Gainshare Performance Incentives. Revenue derived from Gainshare performance incentives decreased $1.7 million for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016, was primarily the result of the Gainshare period ending on an older 28nm node, partially offset by higher Gainshare revenues from apurposes, new 28nm customer and from the 14nm nodes.
Nine Months Ended September 30, | $ | % | ||||||||||||||
Costs of Design-to-silicon-yield solutions | 2017 | 2016 | Change | Change | ||||||||||||
(in thousands, except for percentages) | ||||||||||||||||
Direct costs of Design-to-silicon-yield solutions | $ | 34,913 | $ | 32,034 | $ | 2,879 | 9 | % | ||||||||
Amortization of acquired technology | 327 | 278 | 49 | 18 | % | |||||||||||
Total costs of Design-to-silicon-yield solutions | $ | 35,240 | $ | 32,312 | $ | 2,928 | 9 | % |
Costs of Design-to-Silicon-Yield Solutions. Costs of Design-to-silicon-yield solutions increased $2.9 million for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016. The increase was primarily due to a $1.5 million increase in personnel-related costs, primarily due to the increase in headcount in Asia, a $0.3 million increase in equipment cost, a $0.2 million net changeor changing tax legislation in the deferred cost relatedUnited States and in foreign countries where we are subject to timingtax jurisdictions, the geographic composition of completionour pre-tax income, the amount of the contract signature process, a $0.8 million increase in depreciation expense which was primarily dueour pre-tax income as business activities fluctuate, our ability to increased depreciation expense related to our DFI test equipment, and a $0.1 million increase in subcontractor expense. Amortization of acquired technology for the nine months ended September 30, 2017 and 2016 slightly increased due to the amortization of acquired technology from the Kinesys acquisition.
Nine Months Ended | ||||||||||||||||
September 30, | $ | % | ||||||||||||||
Research and Development | 2017 | 2016 | Change | Change | ||||||||||||
(In thousands, except for percentages) | ||||||||||||||||
Research and development | $ | 22,432 | $ | 20,388 | $ | 2,044 | 10 | % |
Research and Development. Research and development expenses increased $2.0 million for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016, primarily due to a $0.7 million increase in personnel-related expense, a $1.0 million increase in subcontractor expenses, and a $0.3 million increase in depreciation expense. The increased investment inuse tax attributes such as research and development is primarily driven by continued developmenttax credits and net operation losses, the tax effects of employee stock activity, related to our DFI solution.
Nine Months Ended | ||||||||||||||||
September 30, | $ | % | ||||||||||||||
Selling, General and Administrative | 2017 | 2016 | Change | Change | ||||||||||||
(In thousands, except for percentages) | ||||||||||||||||
Selling, general and administrative | $ | 17,775 | $ | 15,766 | $ | 2,009 | 13 | % |
Selling, General and Administrative. Selling, general and administrative expenses increased $2.0 million for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016, primarily due to a $0.6 million increase in personnel-related expense as a result of world-wide merit increases and hiring of an executive, a $0.8 million increaseaudit examinations with adverse outcomes, changes in accounting principles generally accepted in the United States of America and legal expense primarily as a resultthe effectiveness of the new accounting system implementation and increased legal activities related to the Kinesys transaction, a $0.2 million increase in subcontractor expense, a $0.1 million increase in facility expense, a $0.2 million increase in allowance for doubtful account due to an increase in accounts receivable balance, and a $0.2 million increase in travel expense, partially offset by a $0.1 million decrease in depreciation expense.
Amortization of other acquired intangible for the nine months ended September 30, 2017 decreased slightly compared to amortization for the nine months ended September 30, 2016.
Interest and Other Income (Expense), Net. The decrease in interest and other income (expense), net from a $0.4 million expense for the nine months ended September 30, 2016 to a $0.3 million expense for the nine months ended September 30, 2017 was primarily due to foreign exchange rate movements.
Nine Months Ended | ||||||||||||||||
September 30, | $ | % | ||||||||||||||
Income Tax Provision | 2017 | 2016 | Change | Change | ||||||||||||
(In thousands, except for percentages) | ||||||||||||||||
Income tax provision | $ | (2,246 | ) | $ | 3,655 | $ | (5,901 | ) | (161 | )% |
Income Tax Provision (benefit). The decrease in incomeour tax provision (benefit) from a $3.7 million expense for the nine months ended September 30, 2016 to a $2.2 million benefit for the nine months ended September 30, 2017 was primarily due to the increase in excess tax benefits related to employee stock compensation as well as the decrease in income.
planning strategies.
Liquidity and Capital Resources
As of SeptemberJune 30, 2017,2023, our working capital, defined as total current assets less total current liabilities, was $141.7$152.3 million, compared to $151.8$135.2 million as of December 31, 2016. Cash2022. Total cash, cash equivalents, and short-term investments were $124.0 million as of June 30, 2023, compared to cash and cash equivalents were $100.8 million as of September 30, 2017, compared to $116.8$139.2 million as of December 31, 2016.2022. As of SeptemberJune 30, 20172023, and December 31, 2016,2022, cash and cash equivalents held by our foreign subsidiaries were $2.5$11.3 million and $3.4$8.8 million, respectively. We believe that our existing cash resources and anticipated funds from operations will satisfy our cash requirements to fund our operating activities, capital expenditures, and other obligations for at least the next twelve months.
There has been no significant impact in respect to Liquidity and Capital Resources from the global COVID-19 pandemic. For risk discussion about the continuing impact of global COVID-19 pandemic on our operations or demand for our products, refer to Part I, Item 1A, “Risk Factors” of our Annual Report for the year ended December 31, 2022, filed with the SEC on March 1, 2023.
During nineCash Flow Data
The following table summarizes our cash flows for the periods presented:
| | | | | | | | | |
| | Six Months Ended June 30, | | | | ||||
(In thousands) |
| 2023 |
| 2022 |
| $ Change | |||
Net cash flows provided by (used in): |
| |
|
| |
|
| |
|
Operating activities | | $ | (6,615) | | $ | 6,620 | | $ | (13,235) |
Investing activities | |
| (9,677) | |
| 71,993 | |
| (81,670) |
Financing activities | |
| (2,474) | |
| (24,370) | |
| 21,896 |
Effect of exchange rate changes on cash and cash equivalents | |
| (498) | |
| (584) | |
| 86 |
Net change in cash and cash equivalents | | $ | (19,264) | | $ | 53,659 | | $ | (72,923) |
Net Cash Flows Provided by (Used in) Operating Activities
Cash flows used in operating activities during the six months ended SeptemberJune 30, 2017,2023, consisted of net income, adjusted for certain non-cash items which primarily consisted of depreciation and amortization, stock-based compensation expense, amortization of acquired intangible expense, amortization of costs capitalized to obtain revenue contracts and net change in operating assets and liabilities.
Net cash flows used in operating activities was $6.6 million for the six months ended June 30, 2023, compared to net cash flows provided by operating activities of $6.3$6.6 million for the six months ended June 30, 2022. The $13.2 million decrease in cash flows from operating activities between the periods was driven primarily by (i) an increase in accounts receivable from increased invoicing activities during the six months ended June 30, 2023 compared to the same period in 2022, and (ii) payments made under the Company’s bonus plan, partially offset by (a) an increase in deferred revenue due to timing of billing and revenue recognition, and (b) a result of $1.3 million ofsignificant increase in net income non-cash adjustmentscompared to the same period in 2022. Net income
35
was $7.2 million for the six months ended June 30, 2023, compared to a net incomeloss of $9.5$5.3 million and a cash decrease infor the six months ended June 30, 2022.
The major contributors to the net change in operating assets and liabilities for the six months ended June 30, 2023, were as follows:
● | Accounts receivable increased by $19.3 million, primarily due to higher contractual invoicing activity and an increase in unbilled accounts receivables due to the timing of billing and revenue recognition, partially offset by collections from customers. Subsequent to June 30, 2023, we collected more than half of the total $44.9 million billed accounts receivable as of that date; |
● | Prepaid expense and other current assets increased by $7.5 million, primarily due to an increase in income tax receivable, contract assets and deferred commission; |
● | Accounts payable decreased by $2.8 million primarily due to the timing of payments of vendor invoices; |
● | Accrued compensation and related benefits decreased by $6.0 million primarily due to the payments of accrued bonuses and a decrease in accrued commissions, partially offset by an increase in accrued contributions to the employee stock purchase plan; and |
● | Deferred revenue increased by $7.4 million primarily due to the timing of billing and revenue recognition. |
Net Cash Flows Provided by (Used in) Investing Activities
Net cash used in investing activities was $9.7 million for the six months ended June 30, 2023, compared to net cash provided by investing activities of $4.5 million. Non-cash charges consisted$72.0 million for the six months ended June 30, 2022.
For the six months ended June 30, 2023, cash used in investing activities primarily related to purchases of stock-based compensationshort-term investments of $8.7 million, depreciation and amortization of $3.5 million, amortization of acquired intangible assets of $0.6$23.5 million and a provisionpurchases of and prepayments for doubtful accountsproperty and equipment of $0.1$6.0 million primarily related to our DFI and CV systems, partially offset by proceeds from maturities and sales of short-term investments of $19.8 million.
For the six months ended June 30, 2022, cash provided by investing activities primarily related to proceeds from maturities and sales of short-term investments of $112.5 million, partially offset by deferred taxespurchases of $3.5 million.short-term investments of $35.9 million, and purchases of and prepayments for property and equipment of $4.6 million primarily related to our DFI and CV systems.
Net Cash flow decreases resulting from the net changeFlows Used in operating assets and liabilities primarily consisted of a $4.9 million increase in accounts receivable, mainly due to the slow payments from Asia customers, a $1.1 million increase in prepaid expense and other current assets, a $0.7 million decrease in accrued compensation and related benefits, a $0.2 million of decrease in accrued and other liabilities, and a $0.7 million decrease in deferred revenue, partially offset by a $1.6 million increase in accounts payable, a $1.3 million decrease in other non-current assets, and a $0.2 million increase in billing in excess of recognized revenue. Cash flows used in investing activities of $10.8 million for the nine months ended September 30, 2017, consisted of $6.9 million payments for capital expenditures, primarily DFI test equipment and $3.8 million payments for business acquisitions, net ofFinancing Activities
Net cash acquired. Cash flows used in financing activities of $11.7was $2.5 million for the ninesix months ended SeptemberJune 30, 2017,2023, compared to $24.4 million for the six months ended June 30, 2022.
For the six months ended June 30, 2023, net cash used in financing activities primarily consisted of $13.4$4.6 million in cash payments for taxes related to net share settlement of equity awards, partially offset by $2.1 million of proceeds from our employee stock purchase plans and exercise of stock options.
For the six months ended June 30, 2022, net cash used to purchasein financing activities primarily consisted of $22.5 million for the repurchase of shares of our common stock $2.4and $4.2 million in cash payments for taxes related to net share settlement of equity awards, partially offset by $2.3 million of proceeds from theour employee stock purchase plans and exercise of stock options and $1.9 million of proceeds from our Employee Stock Purchase Plan.options.
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Related Party Transactions
Refer to Note 12, Strategic Partnership Agreement with Advantest and a cash decrease of $16.5 million reflectedRelated Party Transactions, to our unaudited condensed consolidated financial statements in the net change of operating assets and liabilities. Non-cash charges consisted primarily of stock-based compensation of $7.9 million, depreciation and amortization of $2.6 million, amortization of acquired intangible assets of $0.6 million, a lossthis Quarterly Report on disposal of property and equipment of $0.1 million and deferred taxes of $1.1 million, partially offset by a $0.1 million reversal of allowance for doubtful accounts and $0.1 million unrealized gain from foreign currency forward contract. Cash flow decreases resulting from the net change in operating assets and liabilities primarily consisted of a $10.5 million increase in accounts receivable, mainly due to the slow payments from Asia customers, a $1.5 million increase in prepaid expense and other assets, a $1.2 million decrease in billing in excess of recognized revenues, and a $7.8 million increase in other non-current assets, partially offset by a $3.9 million increase in deferred revenue, a $0.3 million increase in accrued compensation and related benefits and a $0.1 million increase in accrued and other liabilities. Cash flows used in investing activities ofForm 10-Q, for the nine months ended September 30, 2016 consisted of $8.9 million payment for capital expenditures, primarilydiscussion about related to our DFI test equipment. Cash flows used in financing activities of $0.7 million forparty transactions between the nine months ended September 30, 2016, consisted of $2.2 million of cash used to purchase shares of our common stock, $1.2 million cash payments for taxes related to net share settlement of equity awards, partially offset by $1.1 million of proceeds from the exercise of stock optionsCompany and $1.6 million of proceeds from our Employee Stock Purchase Plan.
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.
Contractual Obligations
The following table summarizes our known contractual obligations (in thousands) as of September 30, 2017:
Payments Due by Period | ||||||||||||||||||||||||||||
Contractual Obligations | 2017 (remaining three months) | 2018 | 2019 | 2020 | 2021 | 2022 and thereafter | Total | |||||||||||||||||||||
Operating lease obligations | $ | 544 | $ | 1,757 | $ | 532 | $ | 444 | $ | 360 | $ | 126 | $ | 3,763 | ||||||||||||||
Purchase obligations(1) | 6,491 | 974 | 368 | 222 | 222 | — | 8,277 | |||||||||||||||||||||
Total(2) | $ | 7,035 | $ | 2,731 | $ | 900 | $ | 666 | $ | 582 | $ | 126 | $ | 12,040 |
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Item 3. Quantitative and Qualitative Disclosures about Market Risk
The following discusses our exposure to market risk related to changes in interest rates and foreign currency exchange rates. We do not currently own any equity investments, nor do we expect to own any in the foreseeable future. This discussion contains forward-looking statements that are subject to risks and uncertainties. Actual results could vary materially as a result of a number of factors.
Interest Rate Risk. As of SeptemberJune 30, 2017,2023, we had cash, and cash equivalents and short-term investments of $100.8$124.0 million. Cash and cash equivalents consisted of cash and highly liquid money market instruments.instruments and short-term investments consisted of U.S. Government securities. We would not expect our operating results or cash flows to be affected to any significant degree by the effect of a sudden change in market interest on our portfolio. A hypothetical increase in market interest rates of 100 basis points from the market rates in effect at Septemberas of June 30, 2017,2023, would cause the fair value of these investments to decrease by an immaterial amount which would not have significantly impacted our financial position or results of operations. Declines
As of June 30, 2023, and periodically throughout the year, we have maintained cash balances in interest rates over time will resultvarious operating accounts in lower interest incomeexcess of federally insured limits. We limit the amount of credit exposure to any financial institution by evaluating the creditworthiness of the financial institutions with which we invest and interest expense.
investing through more than one financial institution.
Foreign Currency and Exchange Risk. Certain of our receivables and payables for our international offices are denominated in the local currency, including the Euro, Yen and RMB. Therefore, a portion of our revenues and operating expenditures isare subject to foreign currency risks. WeFrom time to time, we enter into foreign currency forward contracts to reduce the exposure to foreign currency exchange rate fluctuations on certain foreign currency denominated monetary assets and liabilities. We do not use foreign currency forward contracts for speculative or trading purposes. We record these forward contracts at fair value. The counterparty to these foreign currency forward contracts is a large global financial institution that we believe is creditworthy, and therefore, we believe the credit risk of counterparty non-performance is not significant. The change in fair value of these contracts is recorded intoin earnings as a component of other income (expense), net and offsets the change in fair value of foreign currency denominated monetary assets and liabilities, which is also recorded in other income (expense), net. As of SeptemberJune 30, 2017,2023, we had oneno outstanding forward contract with a notional amount of $8.0 million. The foreign currency exchange rate movement of plus-or-minus 10% will result in the change in fair value of this contract of plus-or-minus $0.8 million. contracts.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our principal executive officer and principal financial and accounting officer, evaluated the effectiveness of our “disclosure controls and procedures” as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) as of SeptemberJune 30, 2017,2023, in connection with the filing of this Quarterly Report on Form 10-Q. Based on that evaluation as of SeptemberJune 30, 2017,2023, our principal executive officer and principal financial and accounting officer concluded that our disclosure controls and procedures were effective to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and is accumulated and communicated to our management as appropriate to allow timely decisions regarding required disclosure.
37
Changes in Internal Control over Financial Reporting
There were no changes in the Company'sCompany’s internal control over financial reporting during the three months ended SeptemberJune 30, 2017,2023, that have materially affected, or are reasonably likely to materially affect, the Company'sCompany’s internal control over financial reporting.
PART II — OTHER INFORMATION
From timeRefer to time, we are subjectNote 11, Commitments and Contingencies to various claims andour condensed consolidated financial statements in this Quarterly Report on Form 10-Q, for information regarding our legal proceedings that arise in the ordinary course of business. We accrue for losses related to litigation when a potential loss is probable and the loss can be reasonably estimated in accordance with FASB requirements. During the reported period, we were not a party to any material legal proceedings, thus no loss was probable and no amount was accrued at September 30, 2017.proceedings.
Item 1A, “Risk Factors,” on pages 13 through 20As of the Company’sdate of this Quarterly Report on Form 10-Q, there have been no material changes from the risk factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2016, provides information2022, filed with the SEC on theMarch 1, 2023. Any of such factors could result in a significant risks associated withor material adverse effect on our business. There have been no subsequent materialresult of operations or financial conditions. Additional risk factors not presently known to us or that we currently deem immaterial may also impair our business or results of operations. We may disclose changes to these risks. such factors or disclose additional factors from time to time in our future filings with the SEC.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The table below sets forth the information with respect to purchases made by or on behalf of the Company or any “affiliated purchaser” (as the term is defined in Rule 10b-18(a)(3) under the Exchange Act) of our commonThere were no stock repurchases during the three months ended September 30, 2017 (in thousands except per share amounts):second quarter of 2023.
ISSUER PURCHASES OF EQUITY SECURITIES
Period | Total Number of Shares Purchased (1) | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Programs (1) | Approximate Dollar Value of Shares that May Yet Be Purchased Under Programs(1) | ||||||||||||
Month #7 (July 1, 2017 through July 31, 2017) | — | $ | — | — | $ | 20,230 | ||||||||||
Month #8 (August 1, 2017 through August 31, 2017) | 566 | $ | 15.28 | 566 | $ | 11,582 | ||||||||||
Month #9 (September 1, 2017 through September 30, 2017) | — | $ | — | — | $ | 11,582 | ||||||||||
Total | 566 | $ | 15.28 | 566 |
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Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
None.
Insider Adoption or Termination of Trading Arrangements
None.During the quarter ended June 30, 2023, none of our directors or officers informed us of the adoption or termination of a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as those terms are defined in Regulation S-K, Item 408.
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Exhibit
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| Description |
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10.1 | | |
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10.2+ | | |
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31.01 | ||
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31.02 | ||
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32.01 | ||
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32.02 | ||
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| Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).† |
* | Management contract or compensatory plan or arrangement. |
** |
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† | Filed herewith. |
+ | ||
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Certain portions of this document that constitute confidential information have been redacted in accordance with Regulation S-K, Item 601(b)(10). |
39
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PDF SOLUTIONS, INC. Date: By: /s/ JOHN K. KIBARIAN John K. Kibarian President and Chief Executive Officer (principal executive officer) Date: By: /s/ ADNAN RAZA Adnan Raza Executive Vice President, Finance and Chief Financial Officer (principal financial and accounting officer) November 6, 2017 August 8, 2023November 6, 2017August 8, 2023 GREGORY C. WALKERGregory C. Walker Financial OfficerExhibitNumberDescription31.0131.0232.0132.02101.INS XBRL Instance Document.101.SCH XBRL Taxonomy Extension Schema Document.101.CALXBRL Taxonomy Extension Calculation Linkbase Document.101.DEFXBRL Taxonomy Extension Definition Linkbase Document.101.LAB XBRL Taxonomy Extension Label Linkbase Document.101.PRE XBRL Taxonomy Extension Presentation Linkbase Document. 32