UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
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For the Quarterly Period ended |
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
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| For the transition period from _______________ to ______________ |
Commission File Number
(Exact name of Registrant as Specified in its Charter)
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) |
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(Address of Principal Executive Offices) | (Zip Code) |
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(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 |
The |
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.
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).
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 ☐ |
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
There were
TABLE OF CONTENTS
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PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
PDF SOLUTIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(in thousands, except par value)
March 31, | December 31, | ||||||
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ASSETS |
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Current assets: |
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Cash and cash equivalents | $ | | $ | | |||
Short-term investments |
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Accounts receivable, net of allowance for doubtful accounts of $ |
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Prepaid expenses and other current assets |
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Total current assets |
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Property and equipment, net |
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Operating lease right-of-use assets, net |
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Goodwill |
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Intangible assets, net |
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Deferred tax assets, net |
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Other non-current assets |
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Total assets | $ | | $ | | |||
LIABILITIES AND STOCKHOLDERS’ EQUITY |
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Current liabilities: |
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Accounts payable | $ | | $ | | |||
Accrued compensation and related benefits |
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Accrued and other current liabilities |
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Operating lease liabilities – current portion |
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Deferred revenues – current portion |
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Billings in excess of recognized revenues |
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Total current liabilities |
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Long-term income taxes payable |
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Non-current operating lease liabilities |
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Other non-current liabilities |
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Total liabilities |
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Commitments and contingencies (Note 12) |
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Stockholders’ equity: |
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Preferred stock, $ | |||||||
Common stock, $ |
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Additional paid-in-capital |
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Treasury stock at cost, |
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Accumulated deficit |
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Accumulated other comprehensive loss |
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Total stockholders’ equity |
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Total liabilities and stockholders’ equity | $ | | $ | | |||
See accompanying Notes to Condensed Consolidated Financial Statements (unaudited)
3
PDF SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(unaudited)
(in thousands, except per share amounts)
Three Months Ended March 31, | ||||||
| 2022 |
| 2021 | |||
Revenues: |
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Analytics | $ | | $ | | ||
Integrated Yield Ramp |
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Total revenues |
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Costs and Expenses: |
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Costs of revenues |
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Research and development |
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Selling, general and administrative |
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Amortization of acquired intangible assets |
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Interest and other expense (income), net |
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Loss before income taxes |
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Income tax expense |
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Net loss | $ | ( | $ | ( | ||
Other comprehensive loss: |
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Foreign currency translation adjustments, net of tax | ( | ( | ||||
Change in unrealized losses related to available-for-sale debt securities, net of tax |
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Total other comprehensive income loss | ( | ( | ||||
Comprehensive loss | $ | ( | $ | ( | ||
Net loss per share, basic and diluted | ( | ( | ||||
Weighted average common shares used to calculate net loss per share, basic and diluted |
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See accompanying Notes to Condensed Consolidated Financial Statements (unaudited)
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PDF SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(unaudited)
(in thousands)
Three Months Ended March 31, 2022 | ||||||||||||||||||||||
Accumulated | ||||||||||||||||||||||
Additional | Other | Total | ||||||||||||||||||||
Common Stock | Paid-In | Treasury Stock | Accumulated | Comprehensive | Stockholders’ | |||||||||||||||||
| Shares |
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| Capital |
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| Deficit |
| Loss |
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Balances, December 31, 2021 | | $ | | $ | | | $ | ( | $ | ( | $ | ( | $ | | ||||||||
Issuance of common stock in connection with employee stock purchase plan |
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Issuance of common stock in connection with exercise of options |
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Vesting of restricted stock units |
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Purchases of treasury stock in connection with tax withholdings on restricted stock grants |
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Repurchase of common stock |
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Stock-based compensation expense |
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Comprehensive loss |
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Balances, March 31, 2022 |
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Three Months Ended March 31, 2021 | ||||||||||||||||||||||
Accumulated | ||||||||||||||||||||||
Additional | Other | Total | ||||||||||||||||||||
Common Stock | Paid-In | Treasury Stock | Accumulated | Comprehensive | Stockholders’ | |||||||||||||||||
| Shares |
| Amount |
| Capital |
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| Deficit |
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Balances, December 31, 2020 | | $ | | $ | | | $ | ( | $ | ( | $ | ( | $ | | ||||||||
Issuance of common stock in connection with employee stock purchase plan |
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Issuance of common stock in connection with exercise of options |
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Vesting of restricted stock units |
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Purchases of treasury stock in connection with tax withholdings on restricted stock grants |
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Repurchase of common stock | ( | — | — | | ( | — | — | ( | ||||||||||||||
Stock-based compensation expense |
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Comprehensive loss |
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Balances, March 31, 2021 |
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See accompanying Notes to Condensed Consolidated Financial Statements (unaudited)
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PDF SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
Three Months Ended March 31, | ||||||
| 2022 |
| 2021 | |||
Cash flows from operating activities: | ||||||
Net loss | $ | ( | $ | ( | ||
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |
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Depreciation and amortization |
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Stock-based compensation expense |
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Amortization of acquired intangible assets |
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Amortization of costs capitalized to obtain revenue contracts |
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Loss on disposal and write-down in value of property and equipment | — | | ||||
Deferred taxes |
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Other |
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Changes in operating assets and liabilities: |
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Accounts receivable |
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Prepaid expenses and other current assets |
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Operating lease right-of-use assets |
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Other non-current assets |
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Accounts payable |
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Accrued compensation and related benefits |
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Accrued and other liabilities |
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Deferred revenues |
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Billings in excess of recognized revenues |
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Operating lease liabilities |
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Net cash provided by (used in) operating activities |
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Cash flows from investing activities: | ||||||
Proceeds from maturities and sales of short-term investments |
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Purchases of short-term investments | ( | ( | ||||
Purchases of property and equipment | ( | ( | ||||
Net cash provided by investing activities |
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Cash flows from financing activities: |
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Proceeds from exercise of stock options |
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Proceeds from employee stock purchase plan |
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Payments for taxes related to net share settlement of equity awards |
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Repurchases of common stock |
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Net cash used in financing activities |
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Effect of exchange rate changes on cash and cash equivalents |
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Net change in cash, cash equivalents, and restricted cash |
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Cash, cash equivalents, and restricted cash at beginning of period |
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Cash, cash equivalents, and restricted cash at end of period | $ | | $ | | ||
Reconciliation of cash, cash equivalents, and restricted cash to the balance sheets: | ||||||
Cash and cash equivalents | $ | | $ | | ||
Restricted cash | — | | ||||
Total cash, cash equivalents, and restricted cash | $ | | $ | | ||
Continued on next page.
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PDF SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS – CONTINUED
(unaudited)
(in thousands)
Three Months Ended March 31, | ||||||
| 2022 |
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Supplemental disclosure of cash flow information: |
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Cash paid during the period for taxes | $ | | $ | | ||
Cash paid for amounts included in the measurement of operating lease liabilities | $ | | $ | | ||
Supplemental disclosure of noncash information: |
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Property and equipment received and accrued in accounts payable and accrued and other liabilities | $ | | $ | | ||
Advances for purchase of fixed assets transferred from prepaid assets to property and equipment | $ | | $ | — | ||
Release of restricted cash reducing goodwill due to the acquisition purchase price adjustment | $ | — | $ | | ||
See accompanying Notes to Condensed Consolidated Financial Statements (unaudited)
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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.
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 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 (“U.S. GAAP”) 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, fair values of assets acquired and liabilities assumed in business combinations, 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 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 Adopted
Management has reviewed recently issued accounting pronouncements and has determined there are not any that would have a material impact on the condensed consolidated financial statements.
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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 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 if it continues to be classified as an SRC. 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. Early adoption is permitted. 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.
In August 2020, the FASB issued ASU No. 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-20): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which is intended to simplify the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. The guidance allows for either full retrospective adoption or modified retrospective adoption. Additionally, the ASU will require entities to use the “if-converted” method when calculating diluted earnings per share for convertible instruments. The ASU will be effective for annual reporting periods beginning after December 15, 2023 for SRCs and interim periods within those annual periods. Early adoption is permitted. The Company does not anticipate that the adoption of this ASU will have a significant impact on its condensed consolidated financial statements or the related disclosures.
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
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 |
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| ● | 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”).
Analytics Revenue
Analytics revenue is derived from the following primary offerings: licenses and services for standalone software (which is primarily Exensio® and Cimetrix® products), 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 judgement. Please refer to “Significant Judgments” section of this Note for further discussion.
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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 judgement. Please refer to “Significant Judgments” section of this Note for further discussion.
The Gainshare royalty contained in IYR 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 by timing of revenue:
Three Months Ended March 31, |
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| 2022 |
| 2021 | ||
Over time | | % | | % | |
Point-in-time |
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Total |
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International revenues accounted for approximately
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,
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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.
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 March 31, 2022 and December 31, 2021, the total contract assets included in prepaid expenses and other current assets in the Condensed Consolidated Balance Sheets $
Deferred 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 in the other non-current liabilities in the Condensed Consolidated Balance Sheets. At March 31, 2022 and December 31, 2021, the non-current portion of deferred revenues included in non-current liabilities was $
At March 31, 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 $
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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 $
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 March 31, 2022, and December 31, 2021, were $
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 months ended March 31, 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 |
| ● | 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. |
| ● | 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 months ended March 31, 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 months ended March 31, 2022 and 2021. |
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Analytics revenue recognized from Advantest was $
The Company carries out transactions with Advantest on arm’s length commercial customary terms.
4. BALANCE SHEET COMPONENTS
Accounts receivable
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):
March 31, | December 31, | |||||
| 2022 |
| 2021 | |||
Computer equipment | $ | | $ | | ||
Software |
| |
| | ||
Furniture, fixtures and equipment |
| |
| | ||
Leasehold improvements |
| |
| | ||
Laboratory and other equipment |
| |
| | ||
Test equipment |
| |
| | ||
Construction-in-progress |
| |
| | ||
| |
| | |||
Less: accumulated depreciation and amortization |
| ( |
| ( | ||
Total | $ | | $ | | ||
Test equipment includes DFI systems assets at customer sites that are contributing to revenue. The construction-in-progress balance related to construction of DFI™ systems assets totaled $
In the fourth quarter of 2021, the Company wrote down the value of its property and equipment by $
Goodwill and Intangible Assets, Net
As of March 31, 2022, and December 31, 2021, the carrying amount of goodwill was $
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Intangible assets, net, consisted of the following (in thousands):
March 31, 2022 | December 31, 2021 | |||||||||||||||||||
Amortization | Gross | Net | Gross | Net | ||||||||||||||||
Period | Carrying | Accumulated | Carrying | Carrying | Accumulated | Carrying | ||||||||||||||
(Years) |
| Amount |
| Amortization |
| Amount |
| Amount |
| Amortization |
| Amount | ||||||||
Acquired identifiable intangibles: | ||||||||||||||||||||
Customer relationships |
| $ | | $ | ( | $ | | $ | | $ | ( | $ | | |||||||
Developed technology |
|
| |
| ( |
| |
| |
| ( |
| | |||||||
Tradename and trademarks |
|
| |
| ( |
| |
| |
| ( |
| | |||||||
Patent |
|
| |
| ( |
| |
| |
| ( |
| | |||||||
Noncompetition agreements |
|
| |
| ( |
| |
| |
| ( |
| | |||||||
Total | $ | | $ | ( | $ | | $ | | $ | ( | $ | | ||||||||
The weighted average amortization period for acquired identifiable intangible assets was years as of March 31, 2022. The following table summarizes intangible assets amortization expense in the Condensed Consolidated Statements of Comprehensive Loss (in thousands):
Three Months Ended March 31, | ||||||
| 2022 |
| 2021 | |||
Amortization of acquired technology included under Costs of Revenues | $ | | $ | | ||
Amortization of acquired intangible assets presented separately under Costs and Expenses |
| |
| | ||
Total amortization of acquired intangible assets | $ | | $ | | ||
The Company expects annual amortization of acquired identifiable intangible assets to be as follows (in thousands):
Year Ending December 31, |
| Amount | |
2022 (remaining nine months) | $ | | |
2023 |
| | |
2024 |
| | |
2025 |
| | |
2026 |
| | |
2027 and thereafter |
| | |
Total future amortization expense | $ | | |
There were
5. LEASES
The Company leases administrative and sales offices and certain equipment under non-cancellable operating leases, which contain various renewal options and, in some cases, require payment of common area costs, taxes and utilities. These operating leases expire at various dates through 2028. The Company had
In the first quarter of 2022, the Company early terminated an office lease contract. The termination of this lease reduces the Company’s operating lease right-of-use assets and lease liabilities by approximately $
15
Lease expense was comprised of the following (in thousands):
Three Months Ended March 31, | ||||||
| 2022 |
| 2021 | |||
Operating lease expense (1) | $ | | $ | | ||
Short-term lease and variable lease expense (2) |
| |
| | ||
Total lease expense | $ | | $ | | ||
| (1) | Net of gain recognized upon lease termination of $ |
| (2) | Leases with an initial term of 12 months or less are not recorded on the Condensed Consolidated Balance Sheets, and the Company recognizes lease expense for these leases on a straight-line basis over the lease term. Variable lease expense for the periods presented primarily included common area maintenance charges. |
Supplemental balance sheets information related to operating leases was as follows:
March 31, | December 31, |
| |||||
| 2022 |
| 2021 |
| |||
Weighted average remaining lease term under operating ROU leases (in years) | |||||||
Weighted average discount rate for operating lease liabilities |
| | % | | % | ||
Maturities of operating lease liabilities as of March 31, 2022, were as follows (in thousands):
Year Ending December 31, |
| Amount (1) | |
2022 (remaining nine months) | $ | | |
2023 |
| | |
2024 |
| | |
2025 |
| | |
2026 |
| | |
2027 and thereafter | | ||
Total future minimum lease payments | $ | | |
Less: Interest (2) |
| ( | |
Present value of future minimum lease payments under operating lease liabilities (3) | $ | | |
| (1) | As of March 31, 2022, the total operating lease liability includes approximately $ |
| (2) | Calculated using incremental borrowing interest rate for each lease. |
| (3) | Includes the current portion of operating lease liabilities of $ |
6. STOCKHOLDERS’ EQUITY
Stock Repurchase Program
On June 4, 2020, the Company’s Board of Directors adopted a stock repurchase program (the “2020 Program”) to repurchase up to $
16
On April 11, 2022, the Board of Directors terminated that 2020 Program, and adopted a new program (the “2022 Program”) to repurchase up to $
7. EMPLOYEE BENEFIT PLANS
On March 31, 2022, the Company had the following stock-based compensation plans:
Employee Stock Purchase Plan
In July 2001, the Company’s stockholders initially approved the 2001 Employee Stock Purchase Plan, which was subsequently amended and restated in 2010 (as amended, the “2010 Purchase Plan”) to extend the term of the plan through May 17, 2020. Under the 2010 Purchase Plan, eligible employees could contribute up to
The Company estimated the fair value of purchase rights granted under the 2010 and the 2021 Purchase Plans during the period using the Black-Scholes-Merton option-pricing model with the following weighted average assumptions, resulting in the following weighted average fair values:
2021 Purchase Plan | 2010 Purchase Plan | |||||||
Three Months Ended March 31, |
| Three Months Ended March 31, |
| |||||
| 2022 |
|
| 2021 |
| |||
Expected life (in years) |
| |||||||
Volatility | | % | | % | ||||
Risk-free interest rate | | % | | % | ||||
Expected dividend | |
| | |||||
Weighted average fair value of purchase rights granted during the period | $ | | $ | | ||||
During the three months ended March 31, 2022, a total of approximately
Stock Incentive Plans
On November 16, 2011, the Company’s stockholders initially approved the 2011 Stock Incentive Plan, which has been amended and restated and approved by the Company’s stockholders a number of times since then (as amended, the “2011 Plan”). Under the 2011 Plan, the Company may award stock options, stock appreciation rights (“SARs”), stock grants or stock units covering shares of the Company’s common stock to employees, directors, non-employee directors and contractors. The aggregate number of shares reserved for awards under this plan is
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shares issued pursuant to such awards. The exercise price for stock options must generally be at prices no less than the fair market value at the date of grant. Stock options generally expire
On April 26, 2022, the Company’s Board of Directors amended the 2011 Plan, subject to stockholder approval, to increase the number of shares reserved for awards under it to a total of
As of March 31, 2022,
The Company estimated the fair value of share-based awards granted under the 2011 Stock Plan during the period using the Black-Scholes-Merton option-pricing model. There were
Stock-Based Compensation
Stock-based compensation is estimated at the grant date based on the award’s fair value and is recognized on a straight-line basis over the vesting periods, generally
Three Months Ended March 31, | ||||||
| 2022 |
| 2021 | |||
Costs of revenues | $ | | $ | | ||
Research and development |
| |
| | ||
Selling, general and administrative |
| |
| | ||
Stock-based compensation expenses | $ | | $ | | ||
Additional information with respect to options under the Stock Plans during the three months ended March 31, 2022, is as follows:
Outstanding Options | ||||||||||
Weighted | ||||||||||
Weighted | Average | |||||||||
Average | Remaining | Aggregate | ||||||||
Number of | Exercise | Contractual | Intrinsic | |||||||
Options | Price | Term | Value | |||||||
| (in thousands) |
| per Share |
| (Years) |
| (in thousands) | |||
Outstanding, January 1, 2022 |
| | $ | |
|
|
|
| ||
Granted |
| — | — |
|
|
|
| |||
Exercised |
| ( | |
|
|
|
| |||
Canceled |
| ( | |
|
|
|
| |||
Expired |
| — | — |
|
|
|
| |||
Outstanding, March 31, 2022 |
| | $ | |
| $ | | |||
Vested and expected to vest, March 31, 2022 |
| | $ | |
| $ | | |||
Exercisable, March 31, 2022 |
| | $ | |
| $ | | |||
The aggregate intrinsic value in the table above represents the total intrinsic value based on the Company’s closing stock price of $
18
As of March 31, 2022, there was $
Nonvested restricted stock unit activity during the three months ended March 31, 2022, was as follows:
Weighted | |||||
Average Grant | |||||
Shares | Date Fair Value | ||||
| (in thousands) |
| Per Share | ||
Nonvested, January 1, 2022 |
| | $ | | |
Granted |
| | $ | | |
Vested |
| ( | $ | | |
Forfeited |
| ( | $ | | |
Nonvested, March 31, 2022 |
| | $ | | |
As of March 31, 2022, there was $
8. INCOME TAXES
Income tax expense increased $
The Company’s total amount of unrecognized tax benefits, excluding interest and penalties, as of March 31, 2022, was $
The valuation allowance was approximately $
The Company conducts business globally and, as a result, files numerous consolidated and separate income tax returns in the U.S. federal, various state and foreign jurisdictions. For U.S. federal and California income tax purposes, the statute of limitations currently remains open for the tax years ending 2018 to present and 2017 to present, respectively. In addition, due to NOL carryback claims, the tax years 2013 through 2015 may be subject to federal examination and all of the net operating loss and research and development credit carryforwards that may be utilized in future years may be subject to federal and state examination. The Company is not subject to income tax examinations in any other of its major foreign subsidiaries’ jurisdictions.
9. NET LOSS PER SHARE
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Three Months Ended March 31, | ||||||
| 2022 |
| 2021 | |||
Numerator: |
|
|
|
| ||
Net loss | $ | ( | $ | ( | ||
Denominator: |
|
|
|
| ||
Basic weighted-average shares outstanding |
| |
| | ||
Effect of dilutive options and restricted stock units |
| — |
| — | ||
Diluted weighted-average shares outstanding |
| |
| | ||
Net loss per share, basic and diluted | ( | ( | ||||
For the three months ended March 31, 2022 and 2021, because the Company was in a loss position, basic net loss per share is the same as diluted net loss per share as the inclusion of the potential common shares would have been anti-dilutive.
The following table sets forth potential shares of common stock that were not included in the diluted net loss per share calculation above because to do so would be anti-dilutive for the periods indicated (in thousands):
Three Months Ended March 31, | ||||
| 2022 |
| 2021 | |
Outstanding options |
| |
| |
Nonvested restricted stock units |
| |
| |
Employee Stock Purchase Plan |
| |
| |
Total |
| |
| |
10. CUSTOMER AND GEOGRAPHIC INFORMATION
Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or group, in deciding how to allocate resources and in assessing performance.
The Company’s chief operating decision maker, the chief executive officer, reviews discrete financial information presented on a consolidated basis for purposes of regularly making operating decisions, allocation of resources, and assessing financial performance. Accordingly, the Company considers itself to be in
The Company had revenues from individual customers that are approximately 10% or more of the Company’s consolidated total revenues as follows:
Three Months Ended March 31, |
| ||||
Customer |
| 2022 |
| 2021 |
|
A | * | % | | % | |
D | | % | * | % | |
E | * | % | | % | |
* represents less than 10%
20
Gross accounts receivable balances (including amounts that are unbilled) from individual customers that are approximately 10% or more of the Company’s gross accounts receivable balance as follows:
March 31, | December 31, |
| |||
Customer |
| 2022 |
| 2021 |
|
C | * | % | | % | |
D |
| | % | | % |
* represents less than 10%
Revenues from customers by geographic area based on the location of the customers’ work sites are as follows (amounts in thousands):
Three Months Ended March 31, |
| ||||||||||
2022 | 2021 |
| |||||||||
Percentage | Percentage |
| |||||||||
| Revenues |
| of Revenues |
| Revenues |
| of Revenues |
| |||
United States | $ | |
| | % | $ | | | % | ||
China |
| |
| |
| | | ||||
Japan | | | | | |||||||
Rest of the world |
| |
| |
| | | ||||
Total revenue | $ | |
| | % | $ | |
| | % | |
Long-lived assets, net by geographic area are as follows (in thousands):
March 31, | December 31, | |||||
| 2022 |
| 2021 | |||
United States (1) | $ | | $ | | ||
Rest of the world |
| |
| | ||
Total long-lived assets, net | $ | | $ | | ||
(1) Includes assets deployed at customer sites which could be outside the U.S.
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11. FAIR VALUE MEASUREMENTS
Fair value is the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. The multiple assumptions used to value financial instruments are referred to as inputs, and a hierarchy for inputs used in measuring fair value is established, that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs reflect assumptions market participants would use in pricing an asset or liability based on market data obtained from independent sources while unobservable inputs reflect a reporting entity’s pricing based upon its own market assumptions. These inputs are ranked according to a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels.
Level 1 - | Inputs are quoted prices in active markets for identical assets or liabilities. |
|
|
Level 2 - | Inputs are quoted prices for similar assets or liabilities in an active market, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable and market-corroborated inputs which are derived principally from or corroborated by observable market data. |
|
|
Level 3 - | Inputs are derived from valuation techniques in which one or more significant inputs or value drivers are unobservable. |
The following table represents the Company’s assets measured at fair value on a recurring basis as of March 31, 2022, and December 31, 2021, and the basis for those measurements (in thousands):
Fair Value Measurements Using | ||||||||||||
Quoted | ||||||||||||
Prices in | ||||||||||||
Active | Significant | |||||||||||
Markets for | Other | |||||||||||
Identical | Observable | Significant | ||||||||||
March 31, | Assets | Inputs | Unobservable | |||||||||
Assets |
| 2022 |
| (Level 1) |
| (Level 2) |
| Inputs (Level 3) | ||||
Cash equivalents |
|
|
|
|
|
|
|
| ||||
Money market mutual funds | $ | | $ | | $ | — | $ | — | ||||
Short-term investments (available-for-sale debt securities) |
|
|
|
|
|
|
|
| ||||
U.S. Government securities (1) |
| |
| |
| — |
| — | ||||
Total | $ | | $ | | $ | — | $ | — | ||||
Fair Value Measurements Using | ||||||||||||
Quoted | ||||||||||||
Prices in | ||||||||||||
Active | Significant | |||||||||||
Markets for | Other | Significant | ||||||||||
Identical | Observable | Unobservable | ||||||||||
December 31, | Assets | Inputs | Inputs | |||||||||
Assets |
| 2021 |
| (Level 1) |
| (Level 2) |
| (Level 3) | ||||
Cash equivalents |
|
|
|
|
|
|
|
| ||||
Money market mutual funds | $ | | $ | | $ | — | $ | — | ||||
Short-term investments (available-for-sale debt securities) | ||||||||||||
U.S. Government securities (1) | | | — | — | ||||||||
Total | $ | | $ | | $ | — | $ | — | ||||
| (1) | As of March 31, 2022, and December 31, 2021, the amortized cost of the Company’s investments in U.S Government Securities approximated their fair value due to their short-term maturities, and there have been no events or changes |
22
| in circumstances that would have had a significant effect on the fair value of these securities in the periods presented. There was no material realized or unrealized gains or losses, either individually or in the aggregate. |
12. COMMITMENTS AND CONTINGENCIES
Strategic Partnership with Advantest — See Note 3, Strategic Partnership Agreement with Advantest And Related Party Transactions, for the discussion about the Company’s commitments under the strategic partnership with Advantest.
Operating Leases — Refer to Note 5, Leases, for the discussion about the Company’s lease commitments. The Company entered into lease agreements with total future minimum lease payments of $
Indemnifications — The Company generally provides a warranty to its customers that its software will perform substantially in accordance with documented specifications typically for a period of
Purchase Obligations — The Company has purchase obligations with certain suppliers for the purchase of goods and services entered in the ordinary course of business. As of March 31, 2022, total outstanding purchase obligations were $
Indemnification of Officers and Directors — As permitted by the Delaware general corporation law, the Company has included a provision in its certificate of incorporation to eliminate the personal liability of its officers and directors for monetary damages for breach or alleged breach of their fiduciary duties as officers or directors, other than in cases of fraud or other willful misconduct.
In addition, the Bylaws of the Company provide that the Company is required to indemnify its officers and directors even when indemnification would otherwise be discretionary, and the Company is required to advance expenses to its officers and directors as incurred in connection with proceedings against them for which they may be indemnified. The Company has entered into indemnification agreements with its officers and directors containing provisions that are in some respects broader than the specific indemnification provisions contained in the Delaware general corporation law. The indemnification agreements require the Company to indemnify its officers and directors against liabilities that may arise by reason of their status or service as officers and directors other than for liabilities arising from willful misconduct of a culpable nature, to advance their expenses incurred as a result of any proceeding against them as to which they could be indemnified, and to obtain directors’ and officers’ insurance if available on reasonable terms. The Company has obtained directors’ and officers’ liability insurance in amounts comparable to other companies of the Company’s size and in the Company’s industry. Since a maximum obligation of the Company is not explicitly stated in the Company’s Bylaws or in its indemnification agreements and will depend on the facts and circumstances that arise out of any future claims, the overall maximum amount of the obligations cannot be reasonably estimated.
Legal Proceedings — From time to time, the Company is subject to various claims and legal proceedings that arise in the ordinary course of business. The Company accrues for losses related to litigation when a potential loss is probable, and the loss can be reasonably estimated in accordance with FASB requirements. As of March 31, 2022, except as disclosed below, the Company was not party to any material legal proceedings, thus no loss was probable and
On May 6, 2020, the Company initiated an arbitration proceeding with the Hong Kong International Arbitration Center against SMIC New Technology Research & Development (Shanghai) Corporation (“SMIC”) due to SMIC’s failure to pay fees due to PDF under a series of contracts. The Company seeks to recover the unpaid fees, a declaration requiring SMIC to pay fees under the contracts in the future, and costs associated with bringing the arbitration proceeding. SMIC denies liability and the arbitration is on-going.
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13. SUBSEQUENT EVENTS
Refer to Note 7, Employee Benefits Plans, for the discussion about the amendment to the 2011 Stock Incentive Plan.
Refer to Note 6, Stockholder’s Equity, for the discussion about the adoption of the 2022 Stock Repurchase Program.
On April 12, 2022, the Company repurchased approximately
24
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
The following discussion of our financial condition and results of operations contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements other than statements of historical fact may be forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may,” “could,” “projected,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential”, “target” or “continue,” the negative effect of terms like these or other similar expressions. 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 inflation, 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 the coronavirus (COVID-19) on the semiconductor industry and our business 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 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, 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 COVID-19 pandemic has significantly affected how we and our customers operate our businesses. For example, most U.S. states and countries worldwide imposed in 2020, and may continue to impose from time-to-time for the foreseeable future, restrictions on the physical movement of people to limit the spread of COVID-19, including travel restrictions and stay-at-home orders. We continue to closely monitor the COVID-19 situation and expect to ask employees to return to working in offices according to local restrictions, in each case, with a focus on our employees’ safety. In addition, our personnel worldwide continue to 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 quarter of 2022 made it harder for us to sell complex or new technologies to some customers during these periods. Once we can again begin 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
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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 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 EUV 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
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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.
The U.S. government continues to expand and intensify export controls and sanctions, including the addition of many P.R.C. and Russian companies to the U.S. Export Administration Regulations (“EAR”) Entity 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. 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 March 31, 2022, are as follows:
| ● | Total revenues were $33.5 million, an increase of $9.3 million, or 38%, compared to the three months ended March 31, 2021. Analytics revenue was $30.4 million, an increase of $11.0 million, or 57%, compared to the three months ended March 31, 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 Exensio and Cimetrix software licenses. Integrated Yield Ramp revenue decreased $1.7 million, or 36%, compared to the year-ago period primarily due to a decrease due to the end of Gainshare periods, partially offset by an increase in hours worked on fixed fees engagements. |
| ● | Costs of revenues increased $0.9 million, compared to the three months ended March 31, 2021, primarily due to increases in personnel-related costs, cloud-delivery costs, software royalty and licenses expense. These increases were partially offset by decreases in facilities and information technology-related costs including depreciation expenses. |
| ● | Net loss was $4.2 million, compared to $7.6 million for the three months ended March 31, 2021. The decrease in net loss was primarily attributable to an increase in total revenues, 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, all of which were primarily related to increases in personnel-related costs due to higher compensation and benefit costs, and stock-based compensation expense, facilities and information technology-related costs, legal expenses, cloud-services related costs and an increase in income tax expense. |
| ● | Cash, cash equivalents and short-term investments decreased $6.0 million to $134.2 million at March 31, 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 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. |
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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.
There were no material changes during the three months ended March 31, 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 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.
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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 yield ramp engagements that include Gainshare or other performance incentives based on customers’ yield achievement.
Revenue under these project–based contracts, which are delivered over a specific period of time typically for a fixed fee component paid on a set schedule, is recognized as services are performed using a percentage of completion method based on costs or labor-inputs, whichever is the most appropriate measure of the progress towards completion of the contract. Where there are distinct performance obligations, we allocate revenue to all deliverables based on their SSPs and allocate the transaction price of the contract to each performance obligation on a relative basis using SSP. Similar to the services provided in connection with DFI systems and CV systems that are contributing to Analytics revenue, due to the nature of the work performed in these arrangements, the estimation of percentage of completion method is complex and subject to many variables that require significant judgment.
The Gainshare royalty contained in yield ramp contracts is a variable fee related to continued usage of our IP after the fixed-fee service period ends, based on the customers’ yield achievement. 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 March 31, 2022, and the likelihood that we may not utilize tax attributes before they expire. The valuation allowance was approximately $51.6 million as of March 31, 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 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
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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 Loss. At March 31, 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 March 31, 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.
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 months ended March 31, 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 months ended March 31, 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 of 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.
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Results of Operations
Discussion of Financial Data for the Three Months ended March 31, 2022
Revenues, Costs of Revenues, and Gross Margin
Three Months Ended |
|
| |||||||||
March 31, | Change | ||||||||||
(Dollars in thousands) | 2022 |
| 2021 |
| $ |
| % |
| |||
Revenues: |
|
|
|
|
|
|
| ||||
Analytics | $ | 30,426 | $ | 19,393 | $ | 11,033 |
| 57 | % | ||
Integrated Yield Ramp |
| 3,072 |
| 4,807 |
| (1,735) |
| (36) | % | ||
Total revenues | 33,498 | 24,200 | 9,298 |
| 38 | % | |||||
Costs of revenues |
| 11,529 |
| 10,663 |
| 866 |
| 8 | % | ||
Gross profit | $ | 21,969 | $ | 13,537 | $ | 8,432 |
| 62 | % | ||
Gross margin |
| 66 | % |
| 56 | % |
|
|
| ||
|
| ||||||||||
Analytics revenue as a percentage of total revenues |
| 91 | % |
| 80 | % |
|
|
|
| |
Integrated Yield Ramp revenue as a percentage of total revenues |
| 9 | % |
| 20 | % |
|
|
|
| |
Analytics Revenue
Analytics revenue increased $11.0 million for the three months ended March 31, 2022, compared to the three months ended March 31, 2021. The increase in Analytics revenue was primarily driven by increases in revenue from CV systems and DFI systems across multiple contracts and customer, and increases in revenues from Exensio and Cimetrix software licenses.
Integrated Yield Ramp Revenue
Integrated Yield Ramp revenue decreased $1.7 million for the three months ended March 31, 2022, compared to the prior year period, due to a decrease 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, employee compensation 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 $0.9 million for the three months ended March 31, 2022, compared to the three months ended March 31, 2021, was primarily due to (i) a $0.6 million increase in cloud-delivery costs, software royalty, and
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licenses expense, and (ii) a $0.4 million increase in personnel-related costs. These were partially offset by a $0.3 million decrease in facilities and information technology-related costs including depreciation expense.
Gross Margin
Gross margin increased 10% for the three months ended March 31, 2022, to 66%, compared to 56% for the year-ago period. The higher gross margin during three months ended March 31, 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
Three Months Ended |
| |||||||||||
March 31, | Change | |||||||||||
(Dollars in thousands) |
| 2022 |
| 2021 |
| $ | % |
| ||||
Research and development | $ | 14,089 | $ | 10,841 | $ | 3,248 |
| 30 | % | |||
As a percentage of total revenues |
| 42 | % |
| 45 | % |
|
|
|
| ||
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 March 31, 2022, compared to the year-ago period, primarily due to (i) a $2.7 million increase in personnel-related costs due to higher compensation and benefit costs, and stock-based compensation expense, (ii) a $0.3 million increase in subcontractor expenses primarily related to our DFI systems and Exensio and Cimetrix software, and (iii) a $0.3 million increase in facilities and information technology-related costs.
We anticipate our expenses in research and development will fluctuate in absolute dollars from period to period as a result of the size and the timing of product development projects.
Selling, General, and Administrative
Three Months Ended |
| |||||||||||
March 31, | Change | |||||||||||
(Dollars in thousands) |
| 2022 |
| 2021 |
| $ | % |
| ||||
Selling, general and administrative | $ | 10,839 | $ | 9,464 | $ | 1,375 |
| 15 | % | |||
As a percentage of total revenues |
| 32 | % |
| 39 | % |
|
|
|
| ||
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 March 31, 2022, compared to the year-ago period, primarily due to (i) a $1.1 million increase in personnel-related costs due to higher compensation and benefit costs and stock-based compensation expense, (ii) a $0.2 million increase in general legal expenses, (iii) a $0.2 million increase in legal fees related to the arbitration proceeding over a disputed customer contract, and (iv) a $0.2 million increase in cloud-services related costs. These were partially offset by a (i) $0.4 million decrease in subcontractor expenses and (ii) a $0.1 million decrease in accounting related fees.
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We anticipate our selling, general, and administrative expenses will fluctuate in absolute dollars from period to period as a result of cost control initiatives and to support increased selling efforts in the future.
Amortization of Other Acquired Intangible Assets
Three Months Ended |
| |||||||||||
March 31, | Change | |||||||||||
(Dollars in thousands) |
| 2022 |
| 2021 |
| $ | % |
| ||||
Amortization of acquired intangible assets | $ | 314 | $ | 314 | $ | — |
| — | % | |||
Amortization of other acquired intangible assets consists of amortization of intangibles acquired as a result of certain business combinations.
Interest and Other Expense (Income), Net
Three Months Ended |
| |||||||||||
March 31, | Change | |||||||||||
(Dollars in thousands) |
| 2022 |
| 2021 |
| $ | % |
| ||||
Interest and other expense (income), net | $ | (310) | $ | (441) | $ | 131 |
| (30) | % | |||
Interest and other expense (income), net, primarily consists of interest income, and foreign currency transaction exchange gains and losses.
Interest and other expense (income), net decreased for the three months ended March 31, 2022, compared to the year-ago period, primarily due to a lower foreign currency exchange gain resulting from a net favorable fluctuation in foreign exchange rates.
Income Tax Expense
Three Months Ended |
| |||||||||||
March 31, | Change | |||||||||||
(Dollars in thousands) |
| 2022 |
| 2021 |
| $ | % |
| ||||
Income tax expense | $ | 1,187 | $ | 956 | $ | 231 |
| 24 | % | |||
Income tax expense increased for the three months ended March 31, 2022, compared to the same year-ago period, 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 general accepted accounting principles and the effectiveness of our tax planning strategies.
Liquidity and Capital Resources
As of March 31, 2022, our working capital, defined as total current assets less total current liabilities, was $138.3 million, compared to $144.7 million as of December 31, 2021. Total cash and cash equivalents, and short-term investments were $134.2 million as of March 31, 2022, compared to cash and cash equivalents of $140.2 million as of December 31, 2021. As of March 31, 2022, and December 31, 2021, cash and cash equivalents held by our foreign subsidiaries were $5.6 million and
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$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 Item 1A, Risk Factors on Part I 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 three months ended March 31, 2022, 218,858 shares were repurchased at an average price of $26.40 per share, for a total price of $5.8 million under the 2020 Program. Through April 10, 2022, approximately 470,000 shares had been repurchased at an average price of $21.91 per share, for a total price of $10.3 million under the 2020 Program. On April 11, 2022, the Board of Directors terminated that 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.
On April 12, 2022, the Company repurchased approximately 715,000 shares of its common stock in a privately negotiated transaction for $16.7 million under the 2022 Stock Repurchase Program. The stock repurchase was made in a block trade in compliance with Rule 10b-18 under the Securities Exchange Act of 1934, as amended (the Exchange Act).
Cash Flow Data
The following table summarizes our cash flows for the periods presented:
Three Months Ended March 31, | |||||||||
| 2022 |
| 2021 |
| $ Change | ||||
(In thousands) |
|
|
|
|
|
| |||
Net cash flows provided by (used in): |
|
|
|
|
|
| |||
Operating activities | $ | 2,996 | $ | (8,325) | $ | 11,321 | |||
Investing activities |
| 12,276 |
| 56,417 |
| (44,141) | |||
Financing activities |
| (6,990) |
| (4,497) |
| (2,493) | |||
Effect of exchange rate changes on cash and cash equivalents |
| (167) |
| (104) |
| (63) | |||
Net increase in cash, cash equivalents, and restricted cash | $ | 8,115 | $ | 43,491 | $ | (35,376) | |||
Net Cash Flows Provided by Operating Activities
Cash flows provided by operating activities during the three months ended March 31, 2022, consisted of net loss, adjusted for certain non-cash items which primarily consisted of depreciation and amortization, share-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 $11.3 million increase in cash flows from operating activities for the three months ended March 31, 2022, compared to the year-ago period, was driven primarily by a $6.0 million increase in net change from operating assets and liabilities, a $3.4 million decrease in net loss, and a $1.9 million increase in non-cash adjustments to net
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loss, which was primarily due to an increase in stock-based compensation expense of $2.2 million, partially offset by a decrease in depreciation and amortization of $0.3 million.
The major contributors to the net change in operating assets and liabilities for the three months ended March 31, 2022, were as follows:
| ● | Accounts receivable decreased by $2.3 million, primarily due to the collections from customers partially offset by an increase in sales and higher contractual invoicing activity during the first quarter of 2022; |
| ● | Prepaid expense and other current assets increased by $1.0 million, primarily due to the increase in deferred commission and prepaid expenses related to third party software licenses; |
| ● | Accounts payable decreased by $2.1 million primarily due to the timing of payments of vendor invoices; and |
| ● | Accrued compensation and related benefits decreased by $0.9 million primarily due to the timing of payments of accrued bonuses, accrued sales commissions and accrued payroll taxes, and exercised of purchase rights under employee stock purchase plans, partially offset by an increased in accrued vacation. |
Net Cash Flows Provided by Investing Activities
Cash provided by investing activities decreased by $44.1 million for the three months ended March 31, 2022, compared to the year-ago period.
For the three months ended March 31, 2022, cash provided by investing activities primarily related to proceeds from maturities and sales of short-term investments of $32.0 million and $3.0 million, respectively, partially offset by purchases of short-term investments of $21.0 million and property and equipment of $1.8 million primarily related to our DFI systems.
For the three months ended March 31, 2021, cash provided by investing activities primarily related to proceeds from maturities of short-term investments of $68.0 million, offset by purchases of short-term investments of $11.0 million and property and equipment of $0.6 million.
Net Cash Flows Used in Financing Activities
Net cash used in financing activities increased by $2.5 million for the three months ended March 31, 2022 compared to the year-ago period.
For the three months ended March 31, 2022, net cash used in financing activities primarily consisted of $5.8 million for the repurchase of shares of our common stock and $3.4 million in cash payments for taxes related to net share settlement of equity awards, partially offset by $2.2 million of proceeds from our employee stock purchase plans and exercise of stock options.
For the three months ended March 31, 2021, net cash used in financing activities primarily consisted of $4.5 million for the repurchase of shares of our common stock and $1.5 million in cash payments for taxes related to net share settlement of equity awards, partially offset by $1.5 million of proceeds from our 2010 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.
35
Off-Balance Sheet Agreements
We do not have any off-balance sheet arrangements, investments in special purpose entities or undisclosed borrowings or debt.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
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 March 31, 2022, we had cash and cash equivalents and short-term investments of $134.2 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 March 31, 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 March 31, 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 March 31, 2022, we had no outstanding forward contracts.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our principal executive officer and principal financial and accounting officer, evaluated the effectiveness of our “disclosure controls and procedures” as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) as of March 31, 2022, in connection with the filing of this Quarterly Report on Form 10-Q. Based on that evaluation as of March 31, 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 March 31, 2022, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
36
PART II — OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, we are subject to various claims and legal proceedings that arise in the ordinary course of business. We accrue for losses related to litigation when a potential loss is probable and the loss can be reasonably estimated in accordance with FASB requirements. As of March 31, 2022, except as disclosed below, we were not a party to any material legal proceedings where a loss was probable, and thus no amount was accrued.
On May 6, 2020, the Company initiated an arbitration proceeding with the Hong Kong International Arbitration Center against SMIC New Technology Research & Development (Shanghai) Corporation (“SMIC”) due to SMIC’s failure to pay fees due to PDF under a series of contracts. The Company seeks to recover the unpaid fees, a declaration requiring SMIC to pay fees under the contracts in the future, and costs associated with bringing the arbitration proceeding. SMIC denies liability and the arbitration is on-going.
Item 1A. Risk Factors
As of the date of this Quarterly Report on Form 10-Q, there have been no material changes from the risk factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the Securities and Exchange Commission on March 1, 2022. Any of such factors could result in a significant or material adverse effect on our result of operations or financial conditions. Additional risk factors not presently known to us or that we currently deem immaterial may also impair our business or results of operations. We may disclose changes to such factors or disclose additional factors from time to time in our future filings with the SEC.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
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.
The table below sets forth the information with respect to purchases made under the 2020 Program by or on behalf of the Company or any “affiliated purchaser” (as the term is defined in Rule 10b-18(a)(3) under the Exchange Act) of our common stock during the three months ended March 31, 2022. Under the 2020 Program, $14.7 million of common stock remained available for future repurchases as of March 31, 2022.
Approximate | ||||||||||
Total Number |
| Dollar | ||||||||
of Shares |
| Value of | ||||||||
Purchased |
| Shares that | ||||||||
| Total | as Part of |
| May Yet Be | ||||||
| Number of | Publicly |
| Purchased | ||||||
| Shares | Average | Announced |
| Under | |||||
| Purchased | Price Paid | Programs |
| Programs | |||||
Period |
| (in thousands) |
| Per Share |
| (in thousands) |
| (in thousands) | ||
January 1, 2022 through January 31, 2022 | — | $ | — | — |
| $ | 20,477 | |||
February 1, 2022 through February 28, 2022 | 60 | $ | 26.48 | 60 |
| $ | 18,885 | |||
March 1, 2022 through March 31, 2022 | 159 | $ | 26.37 | 159 |
| $ | 14,700 | |||
Total | 219 | $ | 26.40 | 219 | ||||||
On April 11, 2022, the Board of Directors terminated that 2020 Program, and adopted a new program (the “2022 Program”) to repurchase up to $35.0 million of the Company’s common stock both on the open market and in privately negotiated transactions, from time to time, over the next two years.
37
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
None.
Item 5. Other Information
None.
38
INDEX TO EXHIBITS
Item 6. Exhibits
Exhibit |
| Description |
31.01 | ||
|
| |
31.02 | ||
|
| |
32.01 | ||
|
| |
32.02 | ||
|
| |
101 | The following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2022, formatted in Inline XBRL: (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Comprehensive Loss, (iii) Condensed Consolidated Statements of Stockholders’ Equity, (iv) Condensed Consolidated Statements of Cash Flows and (v) Notes to Condensed Consolidated Financial Statements, tagged as blocks of text and including detailed tags.† | |
|
| |
104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).† |
† | Filed herewith. |
** | Furnished, and not filed. |
39
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
PDF SOLUTIONS, INC. | ||
Date: May 12, 2022 | By: | /s/ JOHN K. KIBARIAN |
John K. Kibarian | ||
President and Chief Executive Officer | ||
(principal executive officer) | ||
Date: May 12, 2022 | By: | /s/ ADNAN RAZA |
Adnan Raza | ||
Executive Vice President, Finance and Chief | ||
Financial Officer | ||
(principal financial and accounting officer) | ||
40
Exhibit 31.01
CERTIFICATIONS
I, John K. Kibarian, certify that:
1. I have reviewed this quarterly report on Form 10-Q of PDF Solutions, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| By: |
/s/ John K. Kibarian |
|
| John K. Kibarian |
|
| President and Chief Executive Officer |
|
| (principal executive officer) |
| | |
Date: May 12, 2022 | | |
Exhibit 31.02
CERTIFICATIONS
I, Adnan Raza, certify that:
1. I have reviewed this quarterly report on Form 10-Q of PDF Solutions, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| By: | /s/ Adnan Raza |
|
| Adnan Raza |
|
| Executive Vice President, Finance |
| | and Chief Financial Officer |
|
| (principal financial and accounting |
| | officer) |
| | |
Date: May 12, 2022 | | |
Exhibit 32.01
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of PDF Solutions, Inc. (the “Company”) on Form 10-Q for the quarter ended March 31, 2022, as filed with the Securities and Exchange Commission on May 12, 2022 (the “Report”), I, John K. Kibarian, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.
| By: | /s/ John K. Kibarian |
|
| John K. Kibarian |
|
| President and Chief Executive |
| | Officer |
|
| (principal executive officer) |
| | |
Date: May 12, 2022 | | |
Exhibit 32.02
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of PDF Solutions, Inc. (the “Company”) on Form 10-Q for the quarter ended March 31, 2022, as filed with the Securities and Exchange Commission on May 12, 2022 (the “Report”), I, Adnan Raza, Executive Vice President, Finance and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.
| By: | /s/ Adnan Raza |
|
| Adnan Raza |
|
| Executive Vice President, Finance |
| | and Chief Financial Officer |
|
| (principal financial and accounting |
| | officer) |
| | |
Date: May 12, 2022 | | |