# PDF Solutions Inc: Form 10-Q for the period ended Sep 30, 2022

- Company: [PDF Solutions Inc](/companies/pdfs.md) (CIK 1120914)
- Form: 10-Q
- Filed: 2022-11-10
- Accepted by EDGAR: Nov 10, 2022, 21:22 ET
- Period: 2022-09-30
- Accession: 0001558370-22-017433
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1120914/000155837022017433/pdfs-20220930x10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1120914/000155837022017433/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2022-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2022-07-01 to 2022-09-30 | $39.9m | us-gaap:RevenueFromContractWithCustomerIncludingAssessedTax |
| Revenue | 9 months, 2022-01-01 to 2022-09-30 | $108.0m | us-gaap:RevenueFromContractWithCustomerIncludingAssessedTax |
| Cost of revenue | 3 months, 2022-07-01 to 2022-09-30 | $12.5m | us-gaap:CostOfRevenue |
| Cost of revenue | 9 months, 2022-01-01 to 2022-09-30 | $36.1m | us-gaap:CostOfRevenue |
| Research and development | 3 months, 2022-07-01 to 2022-09-30 | $14.3m | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 9 months, 2022-01-01 to 2022-09-30 | $41.8m | us-gaap:ResearchAndDevelopmentExpense |
| Selling, general and administrative | 3 months, 2022-07-01 to 2022-09-30 | $12.0m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2022-01-01 to 2022-09-30 | $32.6m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Income tax | 3 months, 2022-07-01 to 2022-09-30 | $815.0k | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2022-01-01 to 2022-09-30 | $3.3m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2022-07-01 to 2022-09-30 | $1.4m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2022-01-01 to 2022-09-30 | −$3.9m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2022-07-01 to 2022-09-30 | $0.04 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2022-01-01 to 2022-09-30 | −$0.10 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2022-07-01 to 2022-09-30 | $0.04 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2022-01-01 to 2022-09-30 | −$0.10 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2022-07-01 to 2022-09-30 | 38,054,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2022-01-01 to 2022-09-30 | 37,285,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2022-01-01 to 2022-09-30 | $8.0m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2022-01-01 to 2022-09-30 | $6.7m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Share repurchases | 9 months, 2022-01-01 to 2022-09-30 | $22.5m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2022-09-30 | $93.7m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2022-09-30 | $180.5m | us-gaap:AssetsCurrent |
| Total assets | at 2022-09-30 | $266.0m | us-gaap:Assets |
| Current liabilities | at 2022-09-30 | $52.4m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2022-09-30 | $62.8m | us-gaap:Liabilities |
| Shareholders' equity | at 2022-09-30 | $203.2m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 56,880 characters.

### 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. These statements include, but are not limited to, statements concerning: expectations about the effectiveness of our business and technology strategies; expectations regarding global economic trends; the impact of rising inflation and global interest rates, expectations regarding recent and future acquisitions; current semiconductor industry trends; expectations of the success and market acceptance of our intellectual property and our solutions; the continuing impact of COVID-19 on the semiconductor industry and our business, supply chain disruptions, possible impacts from the evolving trade regulatory environment and geopolitical tensions and our 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 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 K for the year ended December 31, 2021, filed with the Securities and Exchange Commission (“SEC”) on March 1, 2022. 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 logo are trademarks or registered trademarks of PDF Solutions, Inc. or its subsidiaries.

### Overview

We provide comprehensive data solutions designed to empower organizations across the semiconductor ecosystem to improve the yield and quality of their products and operational efficiency for increased profitability. Our offerings include proprietary software, professional services based on proven methodologies and using 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 derive revenues from two sources, Analytics and Integrated Yield Ramp, by monetizing our offerings through contract fees for on-premise licenses, SaaS, and other professional services and a value-based, variable fee or royalty, which we call Gainshare, on some Characterization services engagements. Our products and services have been sold to integrated device manufacturers (“IDMs”), fabless semiconductor companies, foundries, equipment manufacturers, electronics manufacturing suppliers (“EMS”), original device manufacturers (“ODMs”), out-sourced semiconductor assembly and test (“OSATs”), 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

The ongoing COVID-19 pandemic has significantly affected how we and our customers operate our businesses. We continue to closely monitor the COVID-19 situation with a focus on our employees’ safety as our employees, who were working in-office prior to COVID-19, have continued to return to working in-office for a certain number of days each week, subject to any current and future local restrictions. In addition, our personnel worldwide can be subject to various country-to-country travel restrictions, which limits the ability of some employees to travel to other offices or customer sites. We believe the lack of an ability to meet in person during most of 2021 and to some degree the first half of 2022 made it harder for us to sell complex or new technologies to some customers during these periods. As we continue to meet with these customers in person, we believe we may improve traction with them. To date, we have been able to provide uninterrupted access to our products and services due to our globally distributed workforce, many of whom were working remotely prior to the pandemic, and our pre-existing infrastructure, which supports secure access to our internal systems. The total duration and full extent of the impact from the COVID-19 pandemic depends on future developments that cannot be accurately predicted at this time, such as the ultimate severity and transmission rate of the virus and its variants, the extent and effectiveness of containment actions and vaccinations, and the impact of these and other factors on our employees, customers, partners, and suppliers. To date, one effect of the COVID-19 pandemic is a global shortage in semiconductors due primarily to supply chain disruptions and many companies, including in the automotive industry, have announced shortages in production. Although this shortage has 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.

Certain other 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 driving increased innovation in semiconductor and electronics manufacturing and analytics, as well as in the organization of 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 analytics programs. The combination of these latter two trends means that cloud-based, analytic programs that effectively manage identity management, physical security, and data protection are increasingly in demand for insights and efficiencies across the organizations of these companies. We believe that all these trends will continue for the next few years, and the challenges involved in adopting Industry 4.0 and secure cloud computing will create opportunities for our combination of advanced analytics capabilities, proven and established supporting infrastructure, and professional services to configure our products to meet customers’ specialized needs.

Other trends may continue to affect our characterization services business and Integrated Yield Ramp revenue specifically. 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 these nodes. We expect most logic foundries to invest in derivatives of older process nodes, such as 28nm and 14nm, to extract additional value as many of their customers will not move to advanced nodes due to either technological barriers or restrictive economics. Foundries that participate at leading edge nodes are expected to continue to invest in new technologies such as memory, packaging, and multi-patterned and extreme ultraviolet lithography, as well as new innovations in process control and variability management. We expect China’s investment in semiconductors to continue. In order for these trends to provide opportunities for us to increase our business leveraging electrical characterization, Chinese semiconductors manufacturers will need to increase their production volumes on advanced technology nodes and continue to engage foreign suppliers, subject to compliance with changing U.S. export restrictions. 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 business trends that may affect our business opportunities generally. For instance, 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 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. For further instance, the ongoing Russo-Ukrainian war is negatively impacting the global supply chain generally, e.g., reducing the production of millions of new cars and trucks, which indirectly impacts the global semiconductor market, and also affecting global energy markets and causing shortages and rising prices of semiconductors directly. 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 in semiconductors. 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 may face a shortage of critical components for our own tools and our business may suffer if the business of our customers decreases. Rising prices of semiconductors may mean increased royalties to us and increased Integrated Yield Ramp revenue. We are also actively monitoring the macroeconomic environment, including the potential impact of inflationary pressures and increasing global interest rates, for impacts on our material, labor and other costs.

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 regulations that may be relevant to our business. 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 product or technology (“Item”) that is “subject to the EAR” or involves a “U.S. person” in providing, facilitating providing, or servicing an Item that is “not subject to the EAR.” Another change is a restriction on supply of an item “subject to the EAR” destined for use in P.R.C. development or production of certain IC manufacturing equipment. Industry members, including our Company, continue to generate questions and evaluate the effects of the new regulations. The U.S. government has committed to “rolling guidance” to resolve issues and answer questions in the coming months. In addition, the U.S. government expanded the “foreign direct product rule,” together with EAR jurisdiction and restrictions, to additional foreign-produced Items of certain types or in connection with additional restricted parties in the P.R.C. Based on our current assessments, we expect the impact of these expanded trade restrictions on our business to be limited. We will continue to monitor for any further trade restrictions, other regulatory or policy changes by the U.S. or foreign governments and any actions in response, and remain committed to complying with applicable law. The uncertainty caused by these recent regulations and the potential for additional future restrictions could, nonetheless, negatively affect our future sales in the P.R.C. market.

Geopolitical tension between the U.S. and P.R.C. continues to increase, with both governments taking actions and making statements that lean in the direction of confrontation, including on the issue of Taiwan. Growing tension also increases risk of unintended mishap, mistake, or accident leading to escalation and global supply chain disruption. The continuing tension between the U.S. and P.R.C. and/or Russian governments in trade and security matters or the perception of that tension could lead to disruptions or reductions in international trade, deter or prevent purchasing activity of customers, and negatively impact our China sales (with respect to U.S.-P.R.C. tensions) and financial results in general (with respect to global tensions).

### Financial Highlights

Financial highlights for the three months ended September 30, 2022, are as follows:

- Total revenues were $39.9 million, an increase of $10.3 million, or 35%, compared to the three months ended September 30, 2021. Analytics revenue was $32.9 million, an increase of $5.7 million, or 21%, compared to the three months ended September 30, 2021. The increase in Analytics revenue was driven by increases in revenue from CV systems and DFI systems across multiple contracts and customers, and increases in revenues from Cimetrix and Exensio software licenses. Integrated Yield Ramp revenue increased $4.6 million, or 196%, compared to the three months ended September 30, 2021, primarily due to an increase in Gainshare royalty from increased customer wafer shipments at non-leading edge nodes and hours worked on fixed fee engagements.
- Costs of revenues increased $1.5 million, compared to the three months ended September 30, 2021, primarily due to increases in personnel-related costs, cloud-delivery costs and subcontractor costs. These increases were partially offset by decreases in facilities and information technology-related costs including depreciation expenses.
- Net income was $1.4 million, compared to a $2.4 million loss for the three months ended September 30, 2021. The increase in net income was primarily attributable to an increase in total revenues and other income from net foreign currency exchange gain, partially offset by increases in costs of revenues and operating expenses related primarily to our research and development, sales and marketing activities, and general and administrative expenses, which were primarily related to increases in personnel-related costs, cloud-services related costs, subcontractor costs, and an increase in income tax expense.

Financial highlights for the nine months ended September 30, 2022, are as follows:

- Total revenues were $108.0 million, an increase of $26.9 million, or 33%, compared to the nine months ended September 30, 2021. Analytics revenue was $94.4 million, an increase of $28.3 million, or 43%, compared to the nine months ended September 30, 2021. The increase in Analytics revenue was driven by increases in revenue from CV systems and DFI systems across multiple contracts and customers, and increases in revenues from Cimetrix and Exensio software licenses. Integrated Yield Ramp revenue decreased $1.4 million, or 9%, compared to the nine months ended September 30, 2021, primarily due to the end of Gainshare periods, partially offset by an increase in hours worked on fixed fee engagements.
- Costs of revenues increased $3.6 million, compared to the nine months ended September 30, 2021, primarily due to increases in personnel-related costs, cloud-delivery costs, and subcontractor costs. These increases were partially offset by decreases in facilities and information technology-related costs, including depreciation expenses, software royalties, and license expenses.
- Net loss was $3.9 million, compared to a $14.5 million loss for the nine months ended September 30, 2021. The decrease in net loss was primarily attributable to an increase in total revenues and other income from net foreign currency exchange gain, partially offset by increases in costs of revenues and operating expenses related primarily to our research and development, sales and marketing activities, and general and administrative expenses, which were primarily related to increases in personnel-related costs, cloud-services related costs and subcontractor costs, and an increase in income tax expense.
- Cash, cash equivalents and short-term investments decreased $24.1 million to $116.1 million at September 30, 2022, from $140.2 million at December 31, 2021, primarily due to cash used to repurchase shares of common stock and payment for taxes related to net share settlement of equity awards, and for the purchase of property and equipment, partially offset by proceeds from the exercise of stock options, proceeds from purchases under our employee stock purchase plans and cash provided by operating activities.

### Critical Accounting Policies and Estimates

See Note 1, *Basis of Presentation And Summary of Significant Accounting Policies,* to our condensed consolidated financial statements in this Quarterly Report on Form 10-Q, for a description of recent accounting pronouncements and accounting changes, including the expected dates of adoption and estimated effects, if any, on our condensed consolidated financial statements, and to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on March 1, 2022.

There were no material changes during the nine months ended September 30, 2022, 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, 2021.

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 base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. The most significant estimates and assumptions relate to revenue recognition, valuation of long-lived assets including goodwill and intangible assets, and the realization of deferred tax assets. Actual amounts may differ from such estimates under different assumptions or conditions.

### Revenue Recognition

We derive revenue from two sources: Analytics and Integrated Yield Ramp.

### Analytics Revenue

Analytics revenue is derived from the following primary offerings: licenses and services for standalone Software (which consists primarily of Exensio and Cimetrix products), SaaS (which consists primarily of Exensio products), and DFI and CV systems (including Characterization services) that do not include performance incentives based on customers’ yield achievement.

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

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

Revenue from DFI systems and CV systems (including Characterization services) that do not include performance incentives based on customers’ yield achievement is recognized primarily as services are performed. Where there are distinct performance obligations, we allocate revenue to all deliverables based on their SSPs. For these contracts with multiple performance obligations, we allocate the transaction price of the contract to each performance obligation on a relative basis using SSP attributed to each performance obligation. 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.

### Integrated Yield Ramp Revenue

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

Revenue under these project–based contracts, which are delivered over a specific period of time typically for a fixed fee component paid on a set schedule, is recognized as services are performed using a percentage of completion method based on costs or labor-inputs, whichever is the most appropriate measure of the progress towards completion of the contract. Where there are distinct performance obligations, we allocate revenue to all deliverables based on their SSPs and allocate the transaction price of the contract to each performance obligation on a relative basis using SSP. Similar to the services provided in connection with DFI systems and CV systems that are contributing to Analytics revenue, due to the nature of the work performed in these arrangements, the estimation of percentage of completion method is complex and subject to many variables that require significant judgment.

The Gainshare royalty contained in the Integrated Yield Ramp contracts is a variable fee related to continued usage of our IP after the fixed-fee service period ends, based on the customers’ yield achievement. Revenue derived from Gainshare is contingent upon our customers reaching certain defined production yield levels. Gainshare royalty periods are generally subsequent to the delivery of all contractual services and performance obligations. We record Gainshare as a usage-based royalty derived from customers’ usage of intellectual property and record it in the same period in which the usage occurs.

### Income Taxes

We are required to assess whether it is “more-likely-than-not” that we will realize our deferred tax assets. If we believe that they are not likely to be fully realizable before the expiration dates applicable to such assets, then to the extent we believe that recovery is not likely, we must establish a valuation allowance. Based on all available evidence, both positive and negative, we determined a full valuation allowance was still appropriate for our U.S. federal and state net deferred tax assets (“DTAs”), primarily driven by a cumulative loss incurred over the 12-quarter period ended September 30, 2022, and the likelihood that we may not utilize tax attributes before they expire. The valuation allowance was approximately $51.6 million as of September 30, 2022, and December 31, 2021. We will continue to evaluate the need for a valuation allowance and may change our conclusion in a future period based on changes in facts (e.g., 12-quarter cumulative profit, significant new revenue, etc.). If we conclude that we are more likely than not to utilize some or all of our U.S. DTAs, we will release some or all of our valuation allowance and our tax provision will decrease in the period in which we make such determination.

We evaluate our DTAs for realizability considering both positive and negative evidence, including our historical financial performance, projections of future taxable income, future reversals of existing taxable temporary differences, tax planning strategies and any carryback availability. In evaluating the need for a valuation allowance, we estimate future taxable income based on management approved business plans. This process involves significant management judgment about assumptions that are subject to change from period to period based on changes in tax laws or variances between future projected operating performance and actual results. Changes in the net DTAs, less offsetting valuation allowance, in a period are recorded through the income tax provision and could have a material impact on the Condensed Consolidated Statements of Comprehensive Income (Loss).

Our income tax calculations are based on application of applicable U.S. federal, state, or foreign tax law. Our tax filings, however, are subject to audit by the respective tax authorities. Accordingly, we recognize tax liabilities based upon our estimate of whether, and the extent to which, additional taxes will be due when such estimates are more-likely-than-not to be sustained. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. To the extent the final tax liabilities are different than the amounts originally accrued, the increases or decreases are recorded as income tax expense or benefit in the Condensed Consolidated Statements of Comprehensive Income (Loss). At September 30, 2022, no deferred taxes have been provided on undistributed earnings from our international subsidiaries. We intend to reinvest the earnings of our non-U.S. subsidiaries in those operations indefinitely. As such, we have not provided for any foreign withholding taxes on the earnings of foreign subsidiaries as of September 30, 2022. The earnings of our foreign subsidiaries are taxable in the U.S. in the year earned under the Global Intangible Low-Taxed Income rules implemented under 2017 Tax Cuts and Jobs Act.

The 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 U.S. corporations with average adjusted financial statement income over a three year period in excess of $1 billion. While the details of the computation of the tax and implementation of the incentives will be subject to regulations that have not yet been released by the U.S. Department of the Treasury, the Company does not expect the Act to materially impact its 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 intended 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. 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.

### Valuation of Long-lived Assets including Goodwill and Intangible Assets

We record goodwill when the purchase consideration of an acquisition exceeds the fair value of the net tangible and identified intangible assets as of the date of acquisition. We have one operating segment and one operating unit. We perform an annual impairment assessment of goodwill during the fourth quarter of each calendar year or more frequently, if required to determine if any events or circumstances exist, such as an adverse change in business climate or a decline in the overall industry demand, that would indicate that it would more likely than not reduce the fair value of a reporting unit below its carrying amount, including goodwill. If events or circumstances do not indicate that the fair value of a reporting unit is below its carrying amount, then goodwill is not considered to be impaired and no further testing is required. If the carrying amount exceeds its fair value, an impairment loss would be recognized equal to the amount of excess, limited to the amount of total goodwill. There was no impairment of goodwill for the three and nine months ended September 30, 2022.

Our long-lived assets, excluding goodwill, consist of property, equipment, and intangible assets. We periodically review our long-lived assets for impairment. For assets to be held and used, we initiate our review whenever events or changes in circumstances indicate that the carrying amount of a long-lived asset group may not be recoverable. Recoverability of an asset group is measured by comparison of its carrying amount to the expected future undiscounted cash flows that the asset group is expected to generate. If it is determined that an asset group is not recoverable, an impairment loss is recorded in the amount by which the carrying amount of the asset group exceeds its fair value. There was no impairment of long-lived assets for the three and nine months ended September 30, 2022.

### Recent Accounting Pronouncements and Accounting Changes

See Note 1, *Basis of Presentation and Summary of Significant Accounting Policies,* to our 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

### Discussion of Financial Data for the Three and Nine Months ended September 30, 2022

### Revenues, Costs of Revenues, and Gross Margin

*(Dollars in thousands)*

| ​ ​ ​ Revenues: | ​ ​ ​ Three Months Ended September 30, 2022 ​ | ​ ​ ​ ​ 2021 ​ | ​ ​ ​ ​ Change $% ​ | ​ ​ | ​ ​ ​ ​ ​ | ​ ​ ​ | ​ ​ ​ Nine Months Ended September 30, 2022 ​ | ​ ​ ​ ​ 2021 ​ | ​ ​ ​ Change $% ​ | ​ ​ | ​ ​ ​ ​ ​ |
| --- | ---: | ---: | ---: | --- | ---: | --- | ---: | ---: | ---: | --- | ---: |
| Analytics | $32,879 ​ | $27,194 ​ | $5,685 |  | 21% | ​ | $94,422 ​ | $66,165 ​ | $28,257 |  | 43% |
| Integrated Yield Ramp | 6,981 ​ | 2,361 ​ | 4,620 |  | 196% | ​ | 13,604 ​ | 15,009 ​ | (1,405) |  | (9)% |
| Total revenues | ​ 39,860 ​ | ​ 29,555 ​ | ​ 10,305 |  | 35% | ​ | ​ 108,026 ​ | ​ 81,174 ​ | ​ 26,852 |  | 33% |
| Costs of revenues | 12,545 ​ | 11,070 ​ | 1,475 |  | 13% | ​ | 36,116 ​ | 32,518 ​ | 3,598 |  | 11% |
| Gross profit | $27,315 ​ | $18,485 ​ | $8,830 |  | 48% | ​ | $71,910 ​ | $48,656 ​ | $23,254 |  | 48% |
| Gross margin | 69% | 63% |  |  | ​ ​ | ​ | 67% | 60% |  |  | ​ ​ |
| ​ | ​ ​ ​ | ​ ​ ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ ​ | ​ ​ ​ | ​ ​ | ​ | ​ ​ |
| Analytics revenue as a percentage of total revenues | 82% | 92% |  |  | ​ | ​ | 87% | 82% |  |  | ​ |
| Integrated Yield Ramp revenue as a percentage of total revenues | 18% | 8% |  |  | ​ | ​ | 13% | 18% |  |  | ​ |

### Analytics Revenue

Analytics revenue increased $5.7 million for the three months ended September 30, 2022, compared to the three months ended September 30, 2021. The increase in Analytics revenue was primarily driven by increases in revenues from CV systems and DFI systems across multiple contracts and customers, and increases in revenues from Cimetrix and Exensio software licenses.

Analytics revenue increased $28.3 million for the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021. The increase in Analytics revenue was primarily driven by increases in revenues from CV systems and DFI systems across multiple contracts and customers, and increases in revenues from Cimetrix and Exensio software licenses.

### Integrated Yield Ramp Revenue

Integrated Yield Ramp revenue increased $4.6 million for the three months ended September 30, 2022, compared to the prior year period, primarily due to an increase in Gainshare royalty from increased customer wafer shipments at non-leading edge nodes and hours worked on fixed fee engagements.

Integrated Yield Ramp revenue decreased $1.4 million for the nine months ended September 30, 2022, compared to the prior year period, due to the end of Gainshare periods, partially offset by an increase in hours worked on fixed fees engagements.

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

Our Analytics and Integrated Yield Ramp revenues may 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 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, including due to adverse changes in their own business.

### Costs of Revenues

Costs of revenues consist primarily of costs incurred to provide and support our services, costs recognized in connection with licensing our software, and amortization of acquired technology. Service costs include material, personnel-related costs and related benefits including stock-based compensation expense, subcontractor costs, overhead costs, travel and allocated facilities-related costs. Software license costs consist of costs associated with cloud-delivery related expenses and licensing third-party software used by us in providing services to our customers in solution engagements or sold in conjunction with our software products.

The increase in costs of revenues of $1.5 million for the three months ended September 30, 2022, compared to the three months ended September 30, 2021, was primarily due to (i) a $0.9 million increase in personnel-related costs due to worldwide merit increases, increases in benefit costs, stock-based compensation expense, and bonus expense, (ii) a $0.4 million increase in cloud-delivery costs, and (iii) a $0.2 million increase in subcontractor costs. These were partially offset by a $0.2 million decrease in facilities and information technology-related costs including depreciation expense.

The increase in costs of revenues of $3.6 million for the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021, was primarily due to (i) a $2.6 million increase in personnel-related costs due to worldwide merit increases, increases in benefit costs, stock-based compensation expense, and bonus expense, (ii) a $1.2 million increase in cloud-delivery costs, and (iii) a $0.6 million increase in subcontractor costs. These were partially offset by (i) a $0.7 million decrease in facilities and information technology-related costs including depreciation expense and (ii) a $0.1 million decrease in software royalties and license expenses.

### Gross Margin

Gross margin increased 6 percentage points for the three months ended September 30, 2022, to 69%, compared to 63% for the three months ended September 30, 2021. The higher gross margin during the three months ended September 30, 2022 was primarily due to higher total revenue when compared to the year-ago period.

Gross margin increased 7 percentage points for the nine months ended September 30, 2022, to 67%, compared to 60% for the nine months ended September 30, 2021. The higher gross margin during the nine months ended September 30, 2022 was primarily due to higher total revenue and decreases in certain costs of revenues, as discussed above, which decreased the costs of revenues as a percentage of total revenues, when compared to the year-ago period.

### Operating Expenses:

### Research and Development

*(Dollars in thousands)*

| ​ ​ ​ | ​ ​ ​ | ​ ​ ​ Three Months Ended September 30, 2022 | ​ ​ ​ ​ ​ 2021 | ​ ​ ​ ​ Change $​% | ​ ​ ​ ​ ​ ​ | ​ ​ ​ | ​ ​ ​ Nine Months Ended September 30, 2022 | ​ ​ ​ ​ ​ 2021 | ​ ​ ​ Change $​% | ​ ​ ​ ​ ​ ​ |
| --- | --- | ---: | ---: | ---: | ---: | --- | ---: | ---: | ---: | ---: |
| Research and development | ​ | $14,303 ​ | $10,657 ​ | $3,646 | 34% | ​ | $41,766 ​ | $32,562 ​ | $9,204 | 28% |
| As a percentage of total revenues | ​ | 36% | 36% |  | ​ | ​ | 39% | 40% |  | ​ |

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

Research and development expenses increased for the three months ended September 30, 2022, compared to the three months ended September 30, 2021, primarily due to (i) a $2.7 million increase in personnel-related costs primarily resulting from increases in stock-based compensation expense, headcount, bonus expense, benefit costs, and worldwide merit increases, (ii) a $0.6 million increase in subcontractor expenses primarily related to DFI systems and Cimetrix software, (iii) a $0.1 million increase in facilities and information technology-related costs including depreciation expense, and (iv) a $0.1 million increase in travel expenses.

Research and development expenses increased for the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021, primarily due to (i) a $7.3 million increase in personnel-related costs primarily resulting from increases in stock-based compensation expense, headcount, bonus expense, benefit costs, and worldwide merit increases, (ii) a $1.1 million increase in subcontractor expenses primarily related to CV systems and Exensio and Cimetrix software, and (iii) a $0.5 million increase in facilities and information technology-related costs including depreciation expense, and (iv) a $0.3 million increase in travel expense.

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

### Selling, General, and Administrative

*(Dollars in thousands)*

| ​ ​ ​ | ​ ​ ​ | ​ ​ ​ Three Months Ended September 30, 2022 | ​ ​ ​ ​ ​ 2021 | ​ ​ ​ Change $​% | ​ ​ ​ ​ | ​ ​ ​ | ​ ​ ​ Nine Months Ended September 30, 2022 | ​ ​ ​ ​ ​ 2021 | ​ ​ ​ Change $​% | ​ ​ ​ ​ ​ ​ |
| --- | --- | ---: | ---: | ---: | ---: | --- | ---: | ---: | ---: | ---: |
| Selling, general and administrative | ​ | $12,005 ​ | $9,609 ​ | $2,396 | 25% | ​ | $32,614 ​ | $28,482 ​ | $4,132 | 15% |
| As a percentage of total revenues | ​ | 30% | 33% |  | ​ | ​ | 30% | 35% |  | ​ |

Selling, general, and administrative expenses consist primarily of compensation, benefits and stock-based compensation expense for sales, marketing and general and administrative personnel, legal and accounting services, marketing communications expenses, third-party cloud-services related costs, travel and facilities cost allocations.

Selling, general, and administrative expenses increased for the three months ended September 30, 2022, compared to the three months ended September 30, 2021, primarily due to (i) a $2.2 million increase in personnel-related costs mainly resulting from increases in stock-based compensation expense, headcount, bonus and commission expenses, benefit costs, and worldwide merit increases, (ii) a $0.2 million increase in facilities and information technology-related costs, including third-party cloud-services related costs, (iii) a $0.3 million increase in travel and other expenses, and (iv) a $0.2 million increase in legal fees related to the arbitration proceeding over a disputed customer contract. These were partially offset by a $0.5 million decrease in subcontractor expenses.

Selling, general, and administrative expenses increased for the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021, primarily due to (i) a $4.0 million increase in personnel-related costs mainly resulting from increases in stock-based compensation expense, headcount, bonus and commission expense, benefit costs, and worldwide merit increases, (ii) a $0.4 million increase in facilities and information technology-related costs including depreciation expense, (iii) a $0.4 million increase in third-party cloud-services related costs, and (iv) a $0.2 million increase in travel expenses. These were partially offset by a (i) a $0.7 million decrease in subcontractor expenses, and (ii) a $0.2 million decrease in legal fees related to the arbitration proceeding over a disputed customer contract.

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

### Amortization of Other Acquired Intangible Assets

*(Dollars in thousands)*

| ​ ​ ​ | ​ ​ ​ | ​ ​ Three Months Ended September 30, 2022 | ​ | ​ ​ 2021 | ​ ​ ​ | ​ ​ ​ ​ Change $​% | ​ ​ ​ ​ ​ ​ | ​ ​ ​ | ​ ​ Nine Months Ended September 30, 2022 | ​ | ​ ​ 2021 | ​ ​ ​ | ​ ​ ​ ​ Change $​% | ​ ​ ​ ​ ​ ​ |
| --- | --- | ---: | --- | ---: | --- | ---: | ---: | --- | ---: | --- | ---: | --- | ---: | ---: |
| Amortization of acquired intangible assets | ​ | $318 | ​ | $314 | ​ | $4 | 1% | ​ | $946 | ​ | $942 | ​ | $4 | 0% |

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

### Interest and Other Expense (Income), Net

*(Dollars in thousands)*

| ​ ​ ​ | ​ ​ ​ | ​ ​ Three Months Ended September 30, 2022 | ​ | ​ ​ 2021 | ​ ​ ​ | ​ ​ ​ Change $​% | ​ ​ ​ ​ | ​ ​ ​ | ​ ​ Nine Months Ended September 30, 2022 | ​ | ​ ​ 2021 | ​ ​ ​ | ​ ​ ​ Change $​% | ​ ​ ​ ​ ​ ​ |
| --- | --- | ---: | --- | ---: | --- | ---: | ---: | --- | ---: | --- | ---: | --- | ---: | ---: |
| Interest and other expense (income), net | ​ | $(1,511) | ​ | $(194) | ​ | $(1,317) | 679% | ​ | $(2,812) | ​ | $(391) | ​ | $(2,421) | 619% |

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

Interest and other expense (income), net increased for the three and nine months ended September 30, 2022, compared to the year-ago periods, primarily due to a higher foreign currency exchange gain resulting from a net favorable fluctuation in foreign exchange rates and interest income.

### Income Tax Expense

*(Dollars in thousands)*

| ​ ​ ​ | ​ ​ ​ | ​ ​ Three Months Ended September 30, 2022 | ​ | ​ ​ 2021 | ​ ​ ​ | ​ ​ ​ ​ Change $​% | ​ ​ ​ ​ ​ ​ | ​ ​ ​ | ​ ​ Nine Months Ended September 30, 2022 | ​ | ​ ​ 2021 | ​ ​ ​ | ​ ​ ​ ​ Change $​% | ​ ​ ​ ​ ​ ​ |
| --- | --- | ---: | --- | ---: | --- | ---: | ---: | --- | ---: | --- | ---: | --- | ---: | ---: |
| Income tax expense | ​ | $815 | ​ | $506 | ​ | $309 | 61% | ​ | $3,308 | ​ | $1,549 | ​ | $1,759 | 114% |

Income tax expense increased for the three and nine months ended September 30, 2022, compared to the three and nine months ended September 30, 2021, primarily due to increases in foreign withholding taxes and changes in the geographic mix of worldwide income, which is subject to taxation at different statutory tax rates.

Any significant change in our future effective tax rates could adversely impact our consolidated financial position, results of operations and cash flows. Our future tax rates may be adversely affected by a number of factors including increase in expenses not deductible for tax purposes, tax legislations in the United States and in foreign countries where we are subject to tax jurisdictions, the geographic composition of our pre-tax income, the amount of our pre-tax income as business activities fluctuate, our ability to use tax attributes such as research and development tax credits and net operation losses, the tax effects of employee stock activity, audit examinations with adverse outcomes, changes in generally accepted accounting principles and the effectiveness of our tax planning strategies.

### Liquidity and Capital Resources

As of September 30, 2022, our working capital, defined as total current assets less total current liabilities, was $128.1 million, compared to $144.7 million as of December 31, 2021. Total cash and cash equivalents, and short-term investments were $116.1 million as of September 30, 2022, compared to cash and cash equivalents of $140.2 million as of December 31, 2021. As of September 30, 2022, and December 31, 2021, cash and cash equivalents held by our foreign subsidiaries were $6.9 million and $5.3 million, respectively. We believe that our existing cash resources and anticipated funds from operations will satisfy our cash requirements to fund our operating activities, capital expenditures, other obligations for at least the next twelve months.

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, 2021, filed with the SEC on March 1, 2022.

### Repurchase of Company’s Common Stock

On June 4, 2020, the Company’s Board of Directors adopted a stock repurchase program (the “2020 Program”) to repurchase up to $25.0 million of the Company’s common stock both on the open market and in privately negotiated transactions, including through Rule 10b5-1 plans, over the next two years. During the nine months ended September 30, 2022, the Company repurchased 218,858 shares under the 2020 Program at an average price of $26.40 per share, for a total price of $5.8 million. Through April 10, 2022, under the 2020 Program, the Company repurchased a total of 470,070 shares at an average price of $21.91 per share, for a total price of $10.3 million. On April 11, 2022, the Board of Directors terminated the 2020 stock repurchase 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. During the nine months ended September 30, 2022, the Company repurchased 714,600 shares under the 2022 Program at an average price of $23.36 per share, for a total price of $16.7 million.

### Cash Flow Data

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

*(In thousands)*

| ​ ​ ​ Net cash flows provided by (used in): | ​ ​ | ​ ​ Nine Months Ended September 30, 2022 ​ ​ | ​ | ​ ​ 2021 ​ ​ | ​ ​ | ​ ​ ​ ​ $ Change ​ ​ |
| --- | --- | ---: | --- | ---: | --- | ---: |
| Operating activities | ​ | $8,023 | ​ | $3,827 | ​ | $4,196 |
| Investing activities | ​ | 83,354 | ​ | 42,302 | ​ | 41,052 |
| Financing activities | ​ | (24,186) | ​ | (5,494) | ​ | (18,692) |
| Effect of exchange rate changes on cash and cash equivalents | ​ | (1,147) | ​ | (193) | ​ | (954) |
| Net increase in cash, cash equivalents, and restricted cash | ​ | $66,044 | ​ | $40,442 | ​ | $25,602 |

### Net Cash Flows Provided by Operating Activities

Cash flows provided by operating activities during the nine months ended September 30, 2022, consisted of net loss, adjusted for certain non-cash items which primarily consisted of depreciation and amortization, stock-based compensation expense, amortization of acquired intangible expense, amortization of costs capitalized to obtain revenue contracts and net change in operating assets and liabilities. The $4.2 million increase in cash flows from operating activities for the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021, was driven primarily by a $10.6 million decrease in net loss, a $11.4 million decrease in net change from operating assets and liabilities, and a $5.0 million increase in non-cash adjustments to net loss, which mainly resulted from an increase in stock-based compensation expense of $5.1 million and an increase in amortization of costs capitalized to obtain revenue contracts of $0.6 million, partially offset by a decrease in depreciation and amortization of $0.6 million.

The major contributors to the net change in operating assets and liabilities for the nine months ended September 30, 2022, were as follows:

- Accounts receivable increased by $15.0 million, primarily due to contractual invoicing activity partially offset by collections from customers;
- Prepaid expense and other current assets increased by $2.8 million, primarily due to the timing of billing of contract assets related to fixed-price service contracts, and increase in deferred commission expense, partially offset by a decrease in prepaid expenses related to third party software licenses and cloud-subscription related costs and a decrease in income tax receivable;
- Other non-current assets decreased by $1.5 million primarily due to the amortization of non-current prepaid expenses, deferred costs to obtain contracts with customers and lower unbilled accounts receivable;
- Accounts payable decreased by $2.9 million primarily due to the timing of payments of vendor invoices;
- Accrued and other liabilities increased by $2.6 million primarily due to the timing of vendor invoices and accrued income taxes;
- Accrued compensation and related benefits increased by $3.6 million primarily due to accrued bonuses, unused vacation, and accrued sales commissions, partially offset by a decrease in accrual due to exercise of purchase rights under employee stock purchase plans; and
- Deferred revenue increased by $2.3 million, primarily due to the timing of billing and revenue recognition.

### Net Cash Flows Provided by Investing Activities

Cash provided by investing activities increased by $41.1 million for the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021.

For the nine months ended September 30, 2022, cash provided by investing activities primarily related to proceeds from maturities and sales of short-term investments of $136.0 million, partially offset by purchases of short-term investments of $45.8 million, and purchases of and prepayments for property and equipment of $6.7 million primarily related to our DFI systems and CV systems.

For the nine months ended September 30, 2021, cash provided by investing activities primarily related to proceeds from maturities and sales of short-term investments of $136.0 million, offset by purchases of short-term investments of $91.0 million and property and equipment of $2.7 million primarily related to our DFI systems.

### Net Cash Flows Used in Financing Activities

Net cash used in financing activities increased by $18.7 million for the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021.

For the nine months ended September 30, 2022, net cash used in financing activities primarily consisted of $22.5 million for the repurchase of shares of our common stock and $5.8 million in cash payments for taxes related to net share settlement of equity awards, partially offset by $4.1 million of proceeds from our employee stock purchase plans and exercise of stock options.

For the nine months ended September 30, 2021, net cash used in financing activities primarily consisted of $4.5 million for the repurchase of shares of our common stock and $3.3 million in cash payments for taxes related to net share settlement of equity awards, partially offset by $2.3 million of proceeds from our employee stock purchase plan and exercise of stock options.

### Related Party Transactions

Refer to Note 3, *Strategic Partnership Agreement with Advantest and Related Party Transactions,* to our condensed consolidated financial statements in this Quarterly Report on Form 10-Q, for a discussion on related party transactions between the Company and Advantest.

### Off-Balance Sheet Agreements

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

## Market risk

As filed, 2,587 characters.

We are exposed to three primary types of market risks: credit risk and counterparty risk, foreign currency exchange rate risk and interest rate 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 September 30, 2022, we had cash and cash equivalents and short-term investments of $116.1 million. Cash and cash equivalents consisted of cash and highly liquid money market 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 September 30, 2022, 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.

At September 30, 2022 and periodically throughout the year, we have maintained cash balances in various operating accounts in excess 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 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 are subject to foreign currency risks. From 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 financial institution that we believe is creditworthy, and therefore, we believe the credit risk of counterparty non-performance is not significant. As of September 30, 2022, we had no outstanding forward contracts.

## Controls and procedures

As filed, 1,266 characters.

### 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 September 30, 2022, in connection with the filing of this Quarterly Report on Form 10-Q. Based on that evaluation as of September 30, 2022, 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 rules and forms of the SEC and accumulated and communicated to our management as appropriate to allow timely decisions regarding required disclosure.

### Changes in Internal Control over Financial Reporting

There were no changes in the Company’s internal control over financial reporting during the three months ended September 30, 2022, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

## Risk factors

As filed, 9,354 characters.

As of the date of this Quarterly Report on Form 10-Q, there have been no material changes from the risk factors disclosed in Part I, Item 1A, “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on March 1, 2022, except as set forth immediately below.

***We are subject to governmental export and import requirements that could subject us to liability and restrict our ability to sell our products and services, which could impair our ability to compete in international markets.***

We are subject to export controls and economic sanctions laws and regulations that restrict selling, shipping or transmitting our products and services and transferring our technology outside the United States. These requirements also restrict domestic release of software and technology to foreign nationals. In addition, we are subject to customs and other import requirements that regulate imports that are important for our business. If we fail to comply with the U.S. Export Administration Regulations or other U.S. or non-U.S. export requirements (collectively, the “Export Regulations”), we could be subject to substantial civil and criminal penalties, including fines for the Company and the possible loss of the ability to engage in exporting and other international transactions. Due to the nature of our business and technology, the Export Regulations may also subject us to governmental inquiries regarding transactions between us and certain foreign entities.

We believe that current Export Regulations do not materially impact our business at this time, but we cannot predict the impact that additional regulatory changes may have on our business in the future. The Export Regulations are fluid. For example, in October 2022 the U.S. Bureau of Industry and Security (the “BIS”) promulgated broad, novel restrictions that could cover supply of our products and other aspects of our business in connection with China. Also, BIS has placed certain entities on its entity list (the “Entity List”), which restricts supply of items to or in connection with the named entities. Further, in some circumstances the Export Administration Regulations require a license to export an item if the recipient will use the item to design or produce an item for a Huawei-affiliated company or certain other organizations on the Entity List. These regulations can also require licenses for exports that involve Chinese military or intelligence-related end users or end uses.

Future changes in the Export Regulations, including changes in the enforcement and scope of such regulations, may create delays in the introduction of our products or services in international markets or could prevent our customers with international operations from deploying our products or services globally. In some cases, such changes could prevent the export or import of our products or services to certain countries, governments or persons altogether. Any such delays or restrictions could adversely affect our business, financial condition and results of operations.

***We are exposed to risks related to information technology infrastructure, information management and protection, cybersecurity threats, and cyber incidents.***

We are heavily reliant on our technology and infrastructure, as well as the public cloud to an increasing degree, to provide our products and services to our customers. Additionally, we must frequently expand our internal information system to meet increasing demand in storage, computing and communication, which may result in increased costs. Our internal information system is expensive to expand and must be highly secure due to the sensitive nature of our customers’ information that we transmit. Building and managing the support necessary for our growth places significant demands on our management and resources. These demands may divert these resources from the continued growth of our business and implementation of our business strategy.

We have experienced in the past, and may experience in the future, interruptions in our information systems on which our global operations depend. We may in the future experience unplanned downtime of the infrastructure that delivers our SaaS products. Further, we may face attempts by others to gain unauthorized access through the Internet to our information technology systems whether hosted by us or service providers, to intentionally hack, interfere with, or cause physical or digital damage to or failure of such systems (such as significant viruses or worms), which attempts we or they may be unable to prevent. Our security measures may also be breached due to employee errors, malfeasance, or otherwise. Further, territorial invasions like Russia’s invasion of Ukraine can lead to cybersecurity attacks on technology companies, such as ours, located far outside of the conflict zone. In the event of prolonged business interruptions due to geopolitical events, we could incur significant losses, require substantial recovery time and experience significant expenditures in order to resume our business operations.

In addition, we collect, use, store or disclose (collectively, “process”) an increasingly large amount of personal information, including from employees and customers, in connection with the operation of our business. The personal information we process is subject to an increasing number of federal, state, local and foreign laws regarding privacy and data security, as well as contractual commitments. Any failure or perceived failure by us to comply with such obligations may result in governmental enforcement actions, fines, litigation, or public statements against us by consumer advocacy groups or others and could cause our customers to lose trust in us, which could have an adverse effect on our reputation and business. Additionally, changes to applicable privacy or data security laws could impact how we process personal information, and therefore limit the effectiveness of our solutions or our ability to develop or deliver new products or services. For example, the European Union General Data Protection Regulation imposes stringent data protection requirements and provides for significant penalties for noncompliance of up to the greater of €20 million or four percent of worldwide annual revenues. Regulation is also increasingly occurring at the U.S. state level to supplement federal legislative action or inaction, as indicated by the California Consumer Privacy Act (the “CCPA”), which first became enforceable in 2020, and similar statutes that have been adopted in other states.

Despite our on-going efforts to enhance our network security measures, our information systems are susceptible to computer viruses, cyber-related security breaches and similar disruptions from unauthorized intrusions, tampering, misuse, criminal acts including phishing, or other events or developments that we may be unable to anticipate or fail to mitigate and we are subject to the inherent vulnerabilities of network security measures. For example, in the middle of 2020, we became aware that a malicious third-party actor had fraudulently obtained one-time credentials to a limited set of hosts in a small, segregated part of our network due to a vulnerability in a third-party VPN device. Third parties may also attempt to influence employees, users, suppliers or customers to disclose sensitive information in order to gain access to our, our customers’ or our business partners’ data. Additionally, third parties with whom we work, such as vendors or developers, may violate applicable laws or our policies and such violations can place personal information of our customers at risk. We or our service providers could be unaware of an incident or its magnitude and effects until after it is too late to prevent it and the damage it may cause. Further, because the techniques used to obtain unauthorized access to the information systems change frequently, and may not be recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures.

The theft, unauthorized use, or a cybersecurity attack that results in the publication of our trade secrets and other confidential business information as a result of such an incident could negatively affect our competitive position, the value of our investment in product or research and development, and third parties might assert against us or our customers claims related to such losses of confidential or proprietary information or end-user data and/or system reliability. We carry insurance that provides some protection against the potential losses arising from a cybersecurity incident, but it will likely not cover all such losses, and the losses it does not cover may be significant. In any such event, our business could be subject to significant disruption, which could impact our revenues or cause customers to cease doing business with us, and we could suffer monetary and/or other losses, including reputational harm, which costs we may not be able to recover from our service providers. Our operations are dependent upon our ability to protect our technology infrastructure against damage from business continuity events that could have a significant disruptive effect on our operations.

Filed Nov 10, 2022.
Source: SEC EDGAR, the filing index for accession 0001558370-22-017433. Last ingested by Listed: Oct 24, 2026, 15:05 ET. No prices; not investment advice.