10-Q 1 pdfs-20220930x10q.htm 10-Q
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 

 

 

For the Quarterly Period ended September 30, 2022

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 

 

 

 

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.)

  

  

2858 De La Cruz Blvd.

  

Santa Clara, California 

95050 

(Address of Principal Executive Offices)

(Zip Code)

(408) 280-7900

(Registrant’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 every Interactive Data File required to be submitted 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 such files). Yes  No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐

Accelerated filer ☐

Non-accelerated  filer

Smaller reporting company 

 

Emerging growth company 

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

There were 37,382,927 shares of the Registrant’s Common Stock outstanding as of November 4, 2022.

TABLE OF CONTENTS

 

    

Page

PART I   FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

Condensed Consolidated Balance Sheets

3

Condensed Consolidated Statements of Comprehensive Income (Loss)

4

Condensed Consolidated Statements of Stockholders’ Equity

5

Condensed Consolidated Statements of Cash Flows

7

Notes to Condensed Consolidated Financial Statements

9

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

26

Item 3. Quantitative and Qualitative Disclosures About Market Risk

39

Item 4. Controls and Procedures

40

PART II  OTHER INFORMATION

Item 1. Legal Proceedings

40

Item 1A. Risk Factors

40

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

42

Item 3. Defaults Upon Senior Securities

42

Item 4. Mine Safety Disclosures

42

Item 5. Other Information

42

Item 6. Exhibits

43

INDEX TO EXHIBITS

43

SIGNATURES

44

2

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

PDF SOLUTIONS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)

(in thousands, except par value)

September 30, 

December 31, 

    

2022

    

2021

    

ASSETS

 

  

 

  

 

Current assets:

 

  

 

  

 

Cash and cash equivalents

$

93,728

$

27,684

Short-term investments

 

22,357

 

112,542

Accounts receivable, net of allowance for doubtful accounts of $890 as of September 30, 2022 and December 31, 2021

 

54,981

 

40,087

Prepaid expenses and other current assets

 

9,463

 

8,194

Total current assets

 

180,529

 

188,507

Property and equipment, net

 

38,740

 

35,295

Operating lease right-of-use assets, net

 

6,022

 

5,408

Goodwill

 

14,123

 

14,123

Intangible assets, net

 

18,934

 

21,239

Deferred tax assets, net

 

16

 

75

Other non-current assets

 

7,611

 

9,121

Total assets

$

265,975

$

273,768

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

  

 

  

Current liabilities:

 

  

 

  

Accounts payable

$

5,186

$

5,554

Accrued compensation and related benefits

 

12,652

 

9,495

Accrued and other current liabilities

 

6,472

 

3,328

Operating lease liabilities – current portion

 

1,448

 

1,758

Deferred revenues – current portion

 

26,461

 

23,691

Billings in excess of recognized revenues

 

183

 

Total current liabilities

 

52,402

 

43,826

Long-term income taxes payable

 

2,348

 

2,656

Non-current portion of operating lease liabilities

 

6,074

 

5,258

Non-current portion of deferred revenues

 

1,948

 

2,443

Total liabilities

 

62,772

 

54,183

Commitments and contingencies (Note 12)

 

  

 

  

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 48,448 and 47,414, respectively; shares outstanding 37,295 and 37,411, respectively

 

6

 

6

Additional paid-in-capital

 

441,705

 

423,069

Treasury stock at cost, 11,153 and 10,003 shares, respectively

 

(132,966)

 

(104,705)

Accumulated deficit

 

(101,633)

 

(97,721)

Accumulated other comprehensive loss

 

(3,909)

 

(1,064)

Total stockholders’ equity

 

203,203

 

219,585

Total liabilities and stockholders’ equity

$

265,975

$

273,768

See accompanying Notes to Condensed Consolidated Financial Statements (unaudited)

3

PDF SOLUTIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(unaudited)

(in thousands, except per share amounts)

Three Months Ended September 30, 

Nine Months Ended September 30, 

    

2022

   

2021

    

2022

  

2021

Revenues:

 

  

 

  

 

  

 

  

Analytics

$

32,879

$

27,194

$

94,422

$

66,165

Integrated Yield Ramp

 

6,981

 

2,361

 

13,604

 

15,009

Total revenues

 

39,860

 

29,555

 

108,026

 

81,174

Costs and Expenses:

 

  

 

  

 

  

 

  

Costs of revenues

 

12,545

 

11,070

 

36,116

 

32,518

Research and development

 

14,303

 

10,657

 

41,766

 

32,562

Selling, general and administrative

 

12,005

 

9,609

 

32,614

 

28,482

Amortization of acquired intangible assets

 

318

 

314

 

946

 

942

Interest and other expense (income), net

 

(1,511)

 

(194)

 

(2,812)

 

(391)

Income (loss) before income taxes

 

2,200

 

(1,901)

 

(604)

 

(12,939)

Income tax expense

 

815

 

506

 

3,308

 

1,549

Net income (loss)

$

1,385

$

(2,407)

$

(3,912)

$

(14,488)

Other comprehensive income (loss):

 

  

 

 

Foreign currency translation adjustments, net of tax

(1,394)

(226)

(2,828)

(540)

Change in unrealized gain (loss) related to available-for-sale debt securities, net of tax

 

17

 

1

 

(17)

 

(3)

Total other comprehensive loss

(1,377)

(225)

(2,845)

(543)

Comprehensive income (loss)

$

8

$

(2,632)

$

(6,757)

$

(15,031)

Net income (loss) per share:

 

  

 

  

 

  

 

  

Basic

$

0.04

$

(0.06)

$

(0.10)

$

(0.39)

Diluted

$

0.04

$

(0.06)

$

(0.10)

$

(0.39)

Weighted average common shares used to calculate net income (loss) per share:

 

  

 

  

 

  

 

  

Basic

 

37,226

 

37,221

 

37,285

 

37,067

Diluted

 

38,054

 

37,221

 

37,285

 

37,067

See accompanying Notes to Condensed Consolidated Financial Statements (unaudited)

4

PDF SOLUTIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(unaudited)

(in thousands)

Three and Nine Months Ended September 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 grants

 

 

 

 

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 grants

 

 

 

 

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

Issuance of common stock in connection with employee stock purchase plan

 

92

 

 

1,509

 

 

 

 

 

1,509

Issuance of common stock in connection with exercise of options

 

22

 

 

276

 

 

 

 

 

276

Vesting of restricted stock units

 

206

 

 

 

 

 

 

 

Purchases of treasury stock in connection with tax withholdings on restricted stock grants

 

 

 

 

70

 

(1,601)

 

 

 

(1,601)

Stock-based compensation expense

 

 

 

5,136

 

 

 

 

 

5,136

Comprehensive income (loss)

 

 

 

 

 

 

1,385

 

(1,377)

 

8

Balances, September 30, 2022

 

37,295

$

6

$

441,705

 

11,153

$

(132,966)

$

(101,633)

$

(3,909)

$

203,203

See accompanying Notes to Condensed Consolidated Financial Statements (unaudited)

5

PDF SOLUTIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY – CONTINUED

(unaudited)

(in thousands)

Three and Nine Months Ended September 30, 2021

Accumulated

Additional

Other

Total

Common Stock

Paid-In

Treasury Stock

Accumulated

Comprehensive

Stockholders’

    

Shares

    

Amount

    

Capital

    

Shares

    

Amount

    

Deficit

    

Loss

    

Equity

Balances, December 31, 2020

36,850

$

6

$

407,173

9,550

$

(96,215)

$

(76,233)

$

(225)

$

234,506

Issuance of common stock in connection with employee stock purchase plan

 

100

 

 

921

 

 

 

 

 

921

Issuance of common stock in connection with exercise of options

 

81

 

 

568

 

 

 

 

 

568

Vesting of restricted stock units

 

149

 

 

 

 

 

 

 

Purchases of treasury stock in connection with tax withholdings on restricted stock grants

 

 

 

 

73

 

(1,463)

 

 

 

(1,463)

Repurchase of common stock

(251)

251

(4,523)

(4,523)

Stock-based compensation expense

 

 

 

3,369

 

 

 

 

 

3,369

Comprehensive loss

 

 

 

 

 

 

(7,597)

 

(528)

 

(8,125)

Balances, March 31, 2021

 

36,929

$

6

$

412,031

 

9,874

$

(102,201)

$

(83,830)

$

(753)

$

225,253

Issuance of common stock in connection with exercise of options

 

39

 

 

290

 

 

 

 

 

290

Vesting of restricted stock units

 

118

 

 

 

 

 

 

 

Purchases of treasury stock in connection with tax withholdings on restricted stock grants

 

 

 

 

51

 

(887)

 

 

 

(887)

Stock-based compensation expense

 

 

 

2,742

 

 

 

 

 

2,742

Comprehensive income (loss)

 

 

 

 

 

 

(4,484)

 

210

 

(4,274)

Balances, June 30, 2021

 

37,086

$

6

$

415,063

9,925

$

(103,088)

$

(88,314)

$

(543)

$

223,124

Issuance of common stock in connection with employee stock purchase plan

 

9

 

 

114

 

 

 

 

 

114

Issuance of common stock in connection with exercise of options

40

 

393

 

 

 

 

 

393

Vesting of restricted stock units

 

139

 

 

 

 

 

 

 

Purchases of treasury stock in connection with tax withholdings on restricted stock grants

 

 

 

 

49

 

(907)

 

 

 

(907)

Stock-based compensation expense

 

 

 

3,363

 

 

 

 

 

3,363

Comprehensive loss

 

 

 

 

 

 

(2,407)

 

(225)

 

(2,632)

Balances, September 30, 2021

 

37,274

$

6

$

418,933

 

9,974

$

(103,995)

$

(90,721)

$

(768)

$

223,455

See accompanying Notes to Condensed Consolidated Financial Statements (unaudited)

6

PDF SOLUTIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands)

Nine Months Ended September 30, 

    

2022

    

2021

Cash flows from operating activities:

Net loss

$

(3,912)

$

(14,488)

Adjustments to reconcile net loss to net cash provided by operating activities:

 

 

  

Depreciation and amortization

 

4,173

 

4,806

Stock-based compensation expense

 

14,561

 

9,474

Amortization of acquired intangible assets

 

2,605

 

2,467

Amortization of costs capitalized to obtain revenue contracts

 

1,127

 

499

Deferred taxes

 

46

 

87

Other

 

(41)

 

125

Changes in operating assets and liabilities:

 

 

Accounts receivable

 

(14,999)

 

440

Prepaid expenses and other current assets

 

(2,750)

 

1,848

Operating lease right-of-use assets

 

1,510

 

1,043

Other non-current assets

 

1,479

 

(1,211)

Accounts payable

 

(2,852)

 

(1,969)

Accrued compensation and related benefits

 

3,624

 

(142)

Accrued and other liabilities

 

2,560

 

(167)

Deferred revenues

 

2,322

 

3,542

Billings in excess of recognized revenues

 

183

 

(1,334)

Operating lease liabilities

 

(1,613)

 

(1,193)

Net cash provided by operating activities

 

8,023

 

3,827

Cash flows from investing activities:

Proceeds from maturities and sales of short-term investments

 

136,000

 

136,000

Purchases of short-term investments

(45,791)

(90,985)

Purchases of property and equipment

(6,651)

(2,713)

Prepayment for the purchase of property and equipment

(54)

Purchases of intangible assets

(150)

Net cash provided by investing activities

 

83,354

 

42,302

Cash flows from financing activities:

 

 

  

Proceeds from exercise of stock options

 

1,064

 

1,251

Proceeds from employee stock purchase plan

 

3,011

 

1,035

Payments for taxes related to net share settlement of equity awards

 

(5,790)

 

(3,257)

Repurchases of common stock

 

(22,471)

 

(4,523)

Net cash used in financing activities

 

(24,186)

 

(5,494)

Effect of exchange rate changes on cash and cash equivalents

 

(1,147)

 

(193)

Net change in cash, cash equivalents, and restricted cash

 

66,044

 

40,442

Cash, cash equivalents, and restricted cash at beginning of period

 

27,684

 

33,815

Cash, cash equivalents, and restricted cash at end of period

$

93,728

$

74,257

Reconciliation of cash, cash equivalents, and restricted cash to the condensed consolidated balance sheet:

Cash and cash equivalents

$

93,728

$

71,238

Restricted cash

3,019

Total cash, cash equivalents, and restricted cash

$

93,728

$

74,257

Continued on next page.

7

PDF SOLUTIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS – CONTINUED

(unaudited)

(in thousands)

Nine Months Ended September 30, 

    

2022

    

2021

Supplemental disclosure of cash flow information:

 

  

 

  

Cash paid during the period for taxes

$

2,001

$

1,543

Cash paid for amounts included in the measurement of operating lease liabilities

$

1,219

$

1,538

Supplemental disclosure of noncash information:

 

 

  

Property and equipment, and intangible assets received and accrued in accounts payable and accrued and other liabilities

$

2,200

$

247

Advances for purchase of fixed assets transferred from prepaid assets to property and equipment

$

336

$

963

Operating lease liabilities arising from obtaining right-of-use assets

$

2,268

$

Release of restricted cash reducing goodwill due to the acquisition purchase price adjustment

$

$

469

See accompanying Notes to Condensed Consolidated Financial Statements (unaudited)

8

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’s Annual Report on Form 10-K for the year ended December 31, 2021, filed with the Securities and Exchange Commission on March 1, 2022.

The 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 Condensed Consolidated Balance Sheet at December 31, 2021, 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 generally accepted accounting principles in the United States 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 financial statements include revenue recognition, the estimated useful lives of property and equipment and intangible assets, assumptions made in analysis of allowance for doubtful accounts, impairment of goodwill and long-lived assets, valuation for deferred tax assets, and accounting for lease obligations, stock-based compensation expense, and income tax uncertainties and contingencies. Actual results could differ from those estimates and may result in material effects on the Company’s operating results and financial position.

The global COVID-19 pandemic (“COVID-19”) has impacted the operations and purchasing decisions of companies worldwide. As of the date of issuance of the condensed consolidated financial statements, the Company is not aware of any specific event or circumstance relating to COVID-19 that would require updates to the Company’s estimates and judgments or revisions to the carrying value of its assets or liabilities. These estimates may change, as new events occur and additional information is obtained, and are recognized in the condensed consolidated financial statements as soon as they become known. Actual results could differ from those estimates and any such differences may be material to the financial statements.

Recent Accounting Standards

Accounting Standards Not Yet Adopted

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASU 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

9

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 ASU No. 2016-13. Instead, these amendments are intended to clarify and improve operability of certain topics included within ASU No. 2016-13.

Additionally, ASU No. 2019-10 defers the effective date for the adoption of the new standard on credit losses for public filers that are considered small reporting companies (“SRC”) as defined by the SEC to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, which will be fiscal 2023 for the Company. In February 2020, the FASB issued ASU 2020-02, which provides guidance regarding methodologies, documentation, and internal controls related to expected credit losses. The subsequent amendments will have the same effective date and transition requirements as ASU No. 2016-13. Topic 326 requires a modified retrospective approach by recording a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. While the Company is currently evaluating the impact of Topic 326, the Company does not expect the adoption of this ASU to have a material impact on its condensed consolidated financial statements or the related disclosure.

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: Analytics revenue and Integrated Yield Ramp revenue.

The Company recognizes revenue in accordance with FASB ASC 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 revenue arising from contracts with customers. Revenue is recognized when control of 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 determines 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 collectability 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”).

10

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 DFI™ systems and 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. Revenue from post-contract support is recognized over the contract term on a straight-line basis, because we are providing (i) support and (ii) unspecified software updates on a when-and-if available basis over the contract term. Revenue from time-based-licensed software is allocated to each performance obligation and is recognized either at a point in time or over time as follows. The license component is recognized at the time when control transfers to customers, with the post-contract support component recognized ratably over the committed term of the contract. For contracts with any combination of licenses, support, and other services, distinct performance obligations are accounted for separately. For contracts with multiple performance obligations, we allocate the transaction price of the contract to each performance obligation on a relative basis using the 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, we allocate the transaction price of the contract to each performance obligation on a relative basis using the SSP attributed to each performance obligation.

Revenue from DFI systems and CV systems 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 judgment. Please refer to the “Significant Judgments” section of this 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 contracts, which royalties are variable.

Revenue under these project-based contracts, which are delivered over a specific period of time, typically for a fixed fee component paid on a set schedule, is recognized as services are performed using a percentage of completion method based on costs or labor-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 to each performance obligation on a relative basis using SSP. Similar to the services provided in connection with DFI systems and CV systems that are contributing to Analytics revenue, due to the nature of the work performed in these arrangements, the estimation of percentage of completion method is complex and subject to many variables that require significant judgment. Please refer to the “Significant Judgments” section of this Note for further discussion.

11

The Gainshare royalty 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 royalty 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.

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 September 30, 

 

Nine Months Ended September 30, 

 

    

2022

    

2021

2022

    

2021

Over time

68

72

%

70

%  

60

%

Point-in-time

 

32

28

%

30

%  

40

%

Total

 

100

%  

100

%

100

%  

100

%

International revenues accounted for approximately 54% and 51% of our total revenues during the three and nine months ended September 30, 2022, respectively, compared to 53% and 57% of our total revenues during the three and nine months ended September 30, 2021, respectively. See Note 10, 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. Due to the nature of the work performed in these arrangements, the estimation of percentage of completion method is complex, subject to many variables and requires significant judgment. Key factors reviewed by the Company to estimate costs to complete each contract are future labor and product costs and expected productivity efficiencies. If circumstances arise that change the original estimates of revenues, costs, or extent of progress toward completion, revisions to the estimates are made. These revisions may result in increases or decreases in estimated revenues or costs, and such revisions are reflected in revenue on a cumulative catch-up basis in the period in which the circumstances that gave rise to the revision become known.

The Company’s contracts with customers often include promises to transfer products, licenses software and provide services, including professional services, technical support services, and rights to unspecified updates to a customer. Determining whether licenses and services are distinct performance obligations that should be accounted for separately, or not distinct and thus accounted for together, requires significant judgment. The Company rarely licenses software on a standalone basis, so the Company is required to estimate the range of SSPs for each performance obligation. In instances where SSP is not directly observable because the Company does not license the software or sell the service separately, the Company determines the SSP using information that may include market conditions and other observable inputs.

12

The Company is required to record Gainshare royalty revenue in the same period in which the usage occurs. Because the Company generally does not receive the acknowledgment reports from its customers during a given quarter within the time frame necessary to adequately review the reports and include the actual amounts in quarterly results for such quarter, the Company accrues the related revenue based on estimates of customers underlying sales achievement. The Company’s estimation process can be based on historical data, trends, seasonality, changes in the contract rate, knowledge of the changes in the industry and changes in the customer’s manufacturing environment learned through discussions with customers and sales personnel. As a result of accruing revenue for the quarter based on such estimates, adjustments will be required in the following quarter to true-up revenue to the actual amounts reported.

Contract Balances

The Company performs its obligations under a contract with a customer by licensing software or providing services in exchange for consideration from the customer. The timing of 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 a right to consideration that is conditional upon factors other than the passage of time. The majority of the Company’s contract assets represent unbilled amounts related to fixed-price service contracts when the revenue recognized exceeds the amount billed to the customer. The contract assets are generally classified as current and are recorded on a net basis with deferred revenue (i.e., contract liabilities) at the contract level. At September 30, 2022 and December 31, 2021, the total contract assets included in prepaid expenses and other current assets in the accompanying Condensed Consolidated Balance Sheets were $1.9 million and $0.4 million, respectively. The Company did not record any asset impairment charges related to contract assets for the periods presented.

Deferred revenues and billings in excess of recognized revenues consist substantially of amounts invoiced in advance of revenue recognition and are recognized as the revenue recognition criteria are met. Deferred revenues that will be recognized during the succeeding twelve-month period are recorded as current deferred revenues and the remaining portion is recorded as non-current deferred revenues in the accompanying Condensed Consolidated Balance Sheets. 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 $10.6 million and $7.0 million during the three months ended September 30, 2022 and 2021, respectively, and $16.3 million and $13.8 million during the nine months ended September 30, 2022 and 2021, respectively.

At September 30, 2022, the aggregate amount of the transaction price allocated to the remaining performance obligations related to customer contracts that were unsatisfied or partially unsatisfied was approximately $185.4 million. Given the applicable contract terms with customers, the majority of this amount is expected to be recognized as revenue over the next two years, with the remainder in the following three years. This amount does not include insignificant contracts to which the customer is not committed, nor significant contracts for which we recognize revenue equal to the amount we have the right to invoice for services performed, or future 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 $1.9 million and a decrease of $0.2 million during the three months ended September 30, 2022 and 2021, respectively, and an increase of $0.4 million and $34,000 during the nine months ended September 30, 2022 and 2021, respectively. These amounts primarily represent changes in estimated percentage-of-completion based contracts and changes in actual versus estimated Gainshare royalty.

13

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 costs. Amortization expense related to these capitalized costs is recognized over the period associated with the revenue from which the cost was incurred. Total capitalized direct sales commission costs included in prepaid expenses and other current assets in the accompanying Condensed Consolidated Balance Sheets as of September 30, 2022, and December 31, 2021, were $1.4 million and $0.6 million, respectively. Total capitalized direct sales commission costs included in other non-current assets in the accompanying Condensed Consolidated Balance Sheets as of September 30, 2022, and December 31, 2021, were $1.7 million and $2.1 million, respectively. Amortization of these assets were $0.4 million and $0.2 million during the three months ended September 30, 2022 and 2021, respectively, and $1.1 million and $0.5 million during the nine months ended September 30, 2022 and 2021, respectively. There was no impairment loss in relation to the costs capitalized for the periods presented.

Practical expedient

The Company does not adjust the transaction price for the effects of a significant financing component when the period between the transfers of the promised good or service to the customer and payment for that good or service by the customer is expected to be one year or less. The Company assessed each of its revenue generating arrangements in order to determine whether a significant financing component exists, and determined its contracts did not include a significant financing component during the three and nine months ended September 30, 2022 and 2021.

3. STRATEGIC PARTNERSHIP AGREEMENT WITH ADVANTEST AND RELATED PARTY TRANSACTIONS

On July 29, 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”) that included the following agreements.

A Securities Purchase Agreement for the purchase by Advantest of an aggregate of 3,306,924 shares of the Company’s common stock for aggregate gross proceeds of $65.2 million and a related Stockholder Agreement.
An Amendment #1 to that certain Software License and Related Services Agreement, dated as of March 25, 2020, for an exclusive commercial arrangement in which the Company and Advantest collaborate on, and the Company initially hosts, develops and maintains, an Advantest-specific cloud layer on the Exensio platform. On June 5, 2022, the parties amended Amendment #1 to provide another approved DEX Site (as defined therein).  
An Amended and Restated Master Development Agreement with Advantest, pursuant to which the Company and Advantest agreed to collaborate on extensions to or combinations of both of their existing technology and new technology to address mutual customers’ needs through one or more development phases subject to certain conditions as set forth therein. Costs and expenses incurred related to this agreement have not been significant for the three and nine months ended September 30, 2022 and 2021.
A Master Commercial Terms and Support Services Agreement for the commercialization and support of integrated products of the Company and Advantest that are the outcome of the above development agreement. No material costs and expenses were incurred related to the Commercial Agreement with Advantest during the three and nine months ended September 30, 2022 and 2021.

Analytics revenue recognized from Advantest was $2.8 million and $8.1 million during the three and nine months ended September 30, 2022, respectively, compared to $2.7 million and $7.9 million during the three and nine months ended September 30, 2021, respectively. Accounts receivable from Advantest amounted to $10.4 million as of September 30, 2022, and nil as of December 31, 2021, and deferred revenue amounted to $9.1 million and $6.8 million as of September 30, 2022 and December 31, 2021, respectively. There was no occurrence of any termination events under these agreements as of the issuance of these condensed consolidated financial statements.

14

The Company carries out transactions with Advantest on arm’s length commercial customary terms.

4. 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, included in accounts receivable, totaled $9.8 million and $11.8 million as of September 30, 2022, and December 31, 2021, respectively. Unbilled accounts receivable that are not expected to be billed and collected during the succeeding 12-month period is recorded in other non-current assets and totaled $1.0 million and $1.3 million as of September 30, 2022, and December 31, 2021, respectively.

The Company performs ongoing credit evaluations of its customers’ financial condition. An allowance for doubtful accounts is maintained for probable credit losses based upon the Company’s assessment of the expected collectability of the accounts receivable. The allowance for doubtful accounts is reviewed on a quarterly basis to assess the adequacy of the allowance.

Property and equipment

Property and equipment, net consist of the following (in thousands):

September 30, 

December 31, 

    

2022

    

2021

Computer equipment

$

11,711

$

11,924

Software

 

5,359

 

5,419

Furniture, fixtures and equipment

 

2,467

 

2,506

Leasehold improvements

 

6,277