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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

 

 

For the Quarterly Period ended June 30, 2021

or

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

 

 

 

For the transition period from _______________ to ______________   

Commission File Number 000-31311

PDF SOLUTIONS, INC.

(Exact name of Registrant as Specified in its Charter)

Delaware

25-1701361

(State or Other Jurisdiction of Incorporation or Organization)

(I.R.S. Employer Identification No.)

  

  

2858 De La Cruz Blvd.

  

Santa Clara, California 

95050 

(Address of Principal Executive Offices)

(Zip Code)

(408) 280-7900

(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $0.00015 par value

PDFS

The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes  No  

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

Large accelerated filer ☐

Accelerated filer ☐

Non-accelerated  filer

Smaller reporting company 

 

Emerging growth company 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No

There were 37,230,393 shares of the Registrant’s Common Stock outstanding as of August 5, 2021.

TABLE OF CONTENTS

 

    

Page

PART I  FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

Condensed Consolidated Balance Sheets

3

Condensed Consolidated Statements of Comprehensive Loss

4

Condensed Consolidated Statements of Stockholders’ Equity

5

Condensed Consolidated Statements of Cash Flows

6

Notes to Condensed Consolidated Financial Statements

8

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

28

Item 3. Quantitative and Qualitative Disclosures About Market Risk

41

Item 4. Controls and Procedures

41

PART II  OTHER INFORMATION

Item 1. Legal Proceedings

42

Item 1A. Risk Factors

42

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

42

Item 3. Defaults Upon Senior Securities

42

Item 4. Mine Safety Disclosures

42

Item 5. Other Information

42

Item 6. Exhibits

43

INDEX TO EXHIBITS

43

SIGNATURES

44

2

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

PDF SOLUTIONS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)

(in thousands, except par value)

June 30, 

December 31, 

    

2021

    

2020

ASSETS

 

  

 

  

Current assets:

 

  

 

  

Cash and cash equivalents

$

87,201

$

30,315

Short-term investments

 

51,993

 

114,981

Accounts receivable, net of allowance for doubtful accounts of $954 and $963 in 2021 and 2020, respectively

 

30,128

 

34,140

Prepaid expenses and other current assets

 

12,715

 

13,944

Total current assets

 

182,037

 

193,380

Property and equipment, net

 

37,977

 

39,242

Operating lease right-of-use assets, net

 

5,928

 

6,672

Goodwill

 

15,305

 

15,774

Intangible assets, net

 

22,875

 

24,573

Deferred tax assets, net

 

176

 

249

Other non-current assets

 

9,372

 

7,690

Total assets

$

273,670

$

287,580

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

  

 

  

Current liabilities:

 

  

 

  

Accounts payable

$

7,078

$

4,399

Accrued compensation and related benefits

 

7,278

 

8,339

Accrued and other current liabilities

 

5,913

 

6,309

Operating lease liabilities – current portion

 

1,770

 

1,926

Deferred revenues – current portion

 

15,946

 

19,895

Billings in excess of recognized revenues

 

2,185

 

1,337

Total current liabilities

 

40,170

 

42,205

Long-term income taxes payable

 

2,718

 

2,956

Non-current operating lease liabilities

 

5,832

 

6,516

Other non-current liabilities

 

1,826

 

1,397

Total liabilities

 

50,546

 

53,074

Commitments and contingencies (Note 13)

 

  

 

  

Stockholders’ equity:

 

  

 

  

Preferred stock, $0.00015 par value, 5,000 shares authorized, no shares issued and outstanding

$

$

Common stock, $0.00015 par value, 70,000 shares authorized; shares issued 47,011 and 46,400, respectively; shares outstanding 37,086 and 36,850, respectively

 

6

 

6

Additional paid-in-capital

 

415,063

 

407,173

Treasury stock at cost, 9,925 and 9,550 shares, respectively

 

(103,088)

 

(96,215)

Accumulated deficit

 

(88,314)

 

(76,233)

Accumulated other comprehensive loss

 

(543)

 

(225)

Total stockholders’ equity

 

223,124

 

234,506

Total liabilities and stockholders’ equity

$

273,670

$

287,580

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 June 30, 

Six Months Ended June 30, 

    

2021

    

2020

    

2021

    

2020

Revenues:

 

  

 

  

 

  

 

  

Analytics

$

19,578

$

15,172

$

38,971

$

28,420

Integrated Yield Ramp

 

7,841

 

6,237

 

12,648

 

14,147

Total revenues

 

27,419

 

21,409

 

51,619

 

42,567

Costs and Expenses:

 

  

 

  

 

  

 

  

Costs of revenues

 

10,785

 

8,946

 

21,448

 

17,433

Research and development

 

11,064

 

7,754

 

21,905

 

16,344

Selling, general and administrative

 

9,410

 

7,737

 

18,874

 

15,632

Amortization of other acquired intangible assets

 

313

 

174

 

627

 

347

Interest and other expense (income), net

 

243

 

150

 

(198)

 

170

Loss before income taxes

 

(4,396)

 

(3,352)

 

(11,037)

 

(7,359)

Income tax expense (benefit)

 

88

 

300

 

1,044

 

(3,179)

Net loss

$

(4,484)

$

(3,652)

$

(12,081)

$

(4,180)

Other comprehensive loss:

 

  

 

  

 

  

 

  

Foreign currency translation adjustments, net of tax

216

207

(314)

41

Change in unrealized losses related to available-for-sale debt securities, net of tax

 

(6)

 

 

(4)

 

Total other comprehensive loss

210

207

(318)

41

Comprehensive loss

$

(4,274)

$

(3,445)

$

(12,399)

$

(4,139)

Net loss per share, basic and diluted

$

(0.12)

$

(0.11)

$

(0.33)

$

(0.13)

Weighted average common shares used to calculate net loss per share, basic and diluted

 

37,004

 

32,886

 

36,989

 

32,795

See accompanying Notes to Condensed Consolidated Financial Statements (unaudited)

4

PDF SOLUTIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(unaudited)

(in thousands)

Six Months Ended June 30, 2021

Accumulated

Additional

Other

Total

Common Stock

Paid-In

Treasury Stock

Accumulated

Comprehensive

Stockholders’

    

Shares

    

Amount

    

Capital

    

Shares

    

Amount

    

Deficit

    

Loss

    

Equity

Balances, December 31, 2020

36,850

$

6

$

407,173

9,550

$

(96,215)

$

(76,233)

$

(225)

$

234,506

Issuance of common stock in connection with employee stock purchase plan

 

100

 

 

921

 

 

 

 

 

921

Issuance of common stock in connection with exercise of options

 

81

 

 

568

 

 

 

 

 

568

Vesting of restricted stock units

 

149

 

 

 

 

 

 

 

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

 

 

 

 

73

 

(1,463)

 

 

 

(1,463)

Repurchase of common stock

 

(251)

 

 

 

251

 

(4,523)

 

 

 

(4,523)

Stock-based compensation expense

 

 

 

3,369

 

 

 

 

 

3,369

Comprehensive loss

 

 

 

 

 

 

(7,597)

 

(528)

 

(8,125)

Balances, March 31, 2021

 

36,929

6

412,031

 

9,874

(102,201)

(83,830)

(753)

$

225,253

Issuance of common stock in connection with exercise of options

 

39

 

 

290

 

 

 

 

 

290

Vesting of restricted stock units

 

118

 

 

 

 

 

 

 

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

 

 

 

 

51

 

(887)

 

 

 

(887)

Stock-based compensation expense

 

 

 

2,742

 

 

 

 

 

2,742

Comprehensive income (loss)

 

 

 

 

 

 

(4,484)

 

210

 

(4,274)

Balances, June 30, 2021

 

37,086

$

6

$

415,063

 

9,925

$

(103,088)

$

(88,314)

$

(543)

$

223,124

Six Months Ended June 30, 2020

Accumulated

Additional

Other

Total

Common Stock

Paid-In

Treasury Stock

Accumulated

Comprehensive

Stockholders’

    

Shares

    

Amount

    

Capital

    

Shares

    

Amount

    

Deficit

    

Loss

    

Equity

Balances, December 31, 2019

32,503

$

5

$

325,197

9,294

$

(91,695)

$

(35,870)

$

(1,480)

$

196,157

Issuance of common stock in connection with employee stock purchase plan

 

89

 

 

810

 

 

 

 

 

810

Issuance of common stock in connection with exercise of options

 

21

 

 

161

 

 

 

 

 

161

Vesting of restricted stock units

 

182

 

 

 

 

 

 

 

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

 

 

 

 

93

 

(1,478)

 

 

 

(1,478)

Stock-based compensation expense

 

 

 

3,513

 

 

 

 

 

3,513

Comprehensive loss

 

 

 

 

 

 

(528)

 

(166)

 

(694)

Balances, March 31, 2020

 

32,795

5

329,681

 

9,387

(93,173)

(36,398)

(1,646)

198,469

Issuance of common stock in connection with exercise of options

 

56

 

 

463

 

 

 

 

 

463

Vesting of restricted stock units

 

131

 

 

 

 

 

 

 

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

 

 

 

 

52

 

(795)

 

 

 

(795)

Stock-based compensation expense

 

 

 

3,013

 

 

 

 

 

3,013

Comprehensive income (loss)

 

 

 

 

 

 

(3,652)

 

207

 

(3,445)

Balances, June 30, 2020

 

32,982

$

5

$

333,157

$

9,439

$

(93,968)

$

(40,050)

$

(1,439)

$

197,705

See accompanying Notes to Condensed Consolidated Financial Statements (unaudited)

5

PDF SOLUTIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands)

Six Months Ended June 30, 

    

2021

    

2020

Cash flows from operating activities:

Net loss

$

(12,081)

$

(4,180)

Adjustments to reconcile net loss to net cash (used in) provided by operating activities:

 

  

 

  

Depreciation and amortization

 

3,345

 

3,375

Stock-based compensation expense

 

6,111

 

6,346

Amortization of acquired intangible assets

 

1,698

 

635

Amortization of costs capitalized to obtain revenue contracts

 

327

 

234

Deferred taxes

 

84

 

(4,384)

Others

 

133

 

175

Changes in operating assets and liabilities:

 

  

 

  

Accounts receivable

 

3,989

 

12,008

Prepaid expenses and other current assets

 

1,235

 

544

Operating lease right-of-use assets

 

740

 

704

Other non-current assets

 

362

 

1,624

Accounts payable

 

(1,723)

 

(3,993)

Accrued compensation and related benefits

 

(1,028)

 

198

Accrued and other liabilities

 

116

 

(133)

Deferred revenues

 

(3,514)

 

(1,120)

Billings in excess of recognized revenues

 

848

 

(620)

Operating lease liabilities

 

(837)

 

(783)

Net cash (used in) provided by operating activities

 

(195)

 

10,630

  

Cash flows from investing activities:

Proceeds from maturities of short-term investments

 

109,000

 

Purchases of short-term investments

(45,992)

Purchases of property and equipment

 

(1,121)

 

(3,940)

Net cash provided by (used in) investing activities

 

61,887

 

(3,940)

  

Cash flows from financing activities:

 

 

  

Proceeds from exercise of stock options

 

793

 

624

Proceeds from employee stock purchase plan

 

921

 

810

Payments for taxes related to net share settlement of equity awards

 

(2,350)

 

(2,273)

Repurchases of common stock

 

(4,523)

 

Net cash used in financing activities

 

(5,159)

 

(839)

Effect of exchange rate changes on cash and cash equivalents

 

(128)

 

(15)

Net change in cash, cash equivalents, and restricted cash

 

56,405

 

5,836

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

 

33,815

 

97,605

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

$

90,220

$

103,441

Reconciliation of cash, cash equivalents, and restricted cash to the balance sheets:

Cash and cash equivalents

$

87,201

$

103,441

Restricted cash

3,019

Total cash, cash equivalents, and restricted cash

$

90,220

$

103,441

Continued on next page.

6

PDF SOLUTIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS – CONTINUED

(unaudited)

(in thousands)

Six Months Ended June 30, 

    

2021

    

2020

Supplemental disclosure of cash flow information:

 

  

 

  

Cash paid during the period for taxes

$

1,275

$

1,765

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

$

1,076

$

922

Supplemental disclosure of noncash information:

 

 

  

Stock-based compensation capitalized as software development costs

$

$

190

Property and equipment received and accrued in accounts payable and accrued and other liabilities

$

530

$

280

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

$

963

$

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

$

469

$

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

$

$

151

See accompanying Notes to Condensed Consolidated Financial Statements (unaudited)

7

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, 2020.

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, 2020, 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, assumptions made in analysis of allowance for doubtful accounts, impairment of goodwill and long-lived assets, realization of deferred tax assets (“DTAs”), and accounting for lease obligations, stock-based compensation expense, and income taxes. Actual results could differ from those estimates.

The global COVID-19 pandemic has impacted the operations and purchasing decisions of companies worldwide. It also has created and may continue to create significant uncertainty in the global economy. The Company has undertaken measures to protect its employees, partners, customers, and vendors. In addition, the Company’s personnel worldwide are subject to various travel restrictions, which limit the ability of the Company to provide services to customers and its affiliates. The Company believes the lack of an ability to meet in person in most of 2020 through the first half of 2021 may have made it harder for us to sell complex or new technologies to new customers during 2020 and 2021. Once the Company can again begin to meet with customers in person, it may improve traction with new customers. To date, the Company has been able to provide uninterrupted access to its products and services due to its globally distributed workforce, many of whom are working remotely, and its pre-existing infrastructure that supports secure access to the Company’s internal systems. If, however, the COVID-19 pandemic, including spikes in different regions from time to time, has a substantial impact on the productivity of the Company’s employees, or supplies, or its partners’ or customers’ decision to use the Company’s products and services, the results of the Company’s operations and overall financial performance may be adversely impacted. The duration and extent of the impact from the COVID-19 pandemic depends on future developments that cannot be accurately predicted at this time. As of the date of issuance of the condensed consolidated financial statements, the Company is not aware of any specific event or circumstance 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

8

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

In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2019-12, Income Taxes (Topic 740), Simplifying the Accounting for Income Taxes, related to simplifying the accounting for income taxes. The guidance eliminates certain exceptions from Accounting Standards Codification (“ASC”) 740 related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The guidance also clarifies and simplifies other aspects of the accounting for income taxes. The guidance is effective for the Company beginning in the first quarter of 2021 on a prospective basis. The Company adopted this standard on January 1, 2021, and it did not have a material impact on the Company’s condensed consolidated financial statements or the related disclosures.

In January 2020, the FASB issued ASU No. 2020-01-Investments-Equity Securities (Topic 321), Investments-Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815)-Clarifying the Interactions between Topic 321, Topic 323, and Topic 815. This ASU clarifies the interaction between accounting standards related to equity securities (ASC 321), equity method investments (ASC 323), and certain derivatives (ASC 815). The amendments in this ASU are effective for fiscal years beginning after December 15, 2020. The Company adopted this standard on January 1, 2021, and it did not have a material impact on the Company’s condensed consolidated financial statements or the related disclosures.

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.

9

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 two sources: Analytics revenue and Integrated Yield Ramp revenue.

The Company recognizes revenue in accordance with FASB ASC Topic 606, Revenue from Contracts with Customers, and its related amendments (collectively known as “ASC 606”). ASC 606 outlines a single comprehensive model to use in accounting for revenue arising from contracts with customers. Revenue is recognized when control of products or services is transferred to customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those promised products or services.

The Company determines revenue recognition through the following five steps:

Identification of the contract, or contracts, with a customer
Identification of the performance obligations in the contract
Determination of the transaction price
Allocation of the transaction price to the performance obligations in the contract
Recognition of revenue when, or as, performance obligations are satisfied

The Company accounts for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance, and collectability of consideration is probable.

Contracts with multiple performance obligations

The Company enters into contracts that can include various combinations of licenses, products and services, some of which are distinct and are accounted for as separate performance obligations. For contracts with multiple performance obligations, the Company allocates the transaction price of the contract to each performance obligation on a relative basis using the standalone selling price.

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

10

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 standalone selling price (“SSP”) attributed to each performance obligation.

Revenue from SaaS arrangements, which allow for the use of a cloud-based software product or service over a contractually determined period of time without the customer having to take possession of 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 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 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.

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.

11

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 June 30, 

 

Six Months Ended
June 30, 

 

    

2021

    

2020

 

2021

    

2020

 

Over time

57

%

64

%

54

%

61

%

Point-in-time

 

43

%

36

%

46

%

39

%

Total

 

100

%  

100

%

100

%  

100

%

International revenues accounted for approximately 56% and 60% of our total revenues during the three and six months ended June 30, 2021, respectively, compared to 54% and 56% of our total revenues during the three and six months ended June 30, 2020, respectively. See Note 11, Customer and Geographic Information.

Significant Judgments

Judgments and estimates are required under ASC 606. Due to the complexity of certain contracts, the actual revenue recognition treatment required under ASC 606 for the Company’s arrangements may be dependent on contract-specific terms and may vary in some instances.

For revenue under project-based contracts for fixed-price implementation services, revenue is recognized as services are performed using a percentage-of-completion method based on costs or labor-hours input method, whichever is the most appropriate measure of the progress towards completion of the contract. Due to the nature of the work performed in these arrangements, the estimation of percentage of completion method is complex, subject to many variables and requires significant judgment. Key factors reviewed by the Company to estimate costs to complete each contract are future labor and product costs and expected productivity efficiencies. If circumstances arise that change the original estimates of revenues, costs, or extent of progress toward completion, revisions to the estimates are made. These revisions may result in increases or decreases in estimated revenues or costs, and such revisions are reflected in revenue on a cumulative catch-up basis in the period in which the circumstances that gave rise to the revision become known.

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

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.

12

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 June 30, 2021, and December 31, 2020, contract assets were $2.1 million and $3.7 million, respectively, and are included in prepaid expenses and other current assets in the Condensed Consolidated Balance Sheets. The Company did not record any asset impairment charges related to contract assets for the periods presented.

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 June 30, 2021, and December 31, 2020, the non-current portion of deferred revenues included in non-current liabilities was $1.7 million and $1.2 million, respectively. Revenue recognized that was included in the deferred revenues and billings in excess of recognized revenues balances at the beginning of each reporting period was $6.5 million and $5.9 million during the three months ended June 30, 2021 and 2020, respectively, and $10.5 million and $7.7 million during the six months ended June 30, 2021 and 2020, respectively.

At June 30, 2021, 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 $138.6 million. Given the applicable contract terms with customers, the majority of this amount is expected to be recognized as revenue over the next two years, with the remainder in the following three years. This amount does not include insignificant contracts to which the customer is not committed, nor significant contracts for which we recognize revenue equal to the amount we have the right to invoice for services performed, or future sales-based or usage-based royalty payments in exchange for a license of intellectual property. This amount is subject to change due to future revaluations of variable consideration, terminations, other contract modifications, or currency adjustments. The estimated timing of the recognition of remaining unsatisfied performance obligations is subject to change and is affected by changes to the scope, change in timing of delivery of products and services, or contract modifications.

The adjustment to revenue recognized from performance obligations satisfied (or partially satisfied) in previous periods was a decrease of ($0.4) million and ($0.5) million during the three months ended June 30, 2021 and 2020, respectively, and an increase of $0.1 million and $0.6 million during the six months ended June 30, 2021 and 2020, respectively. These amounts primarily represent changes in estimated percentage-of-completion based contracts and changes in actual versus estimated Gainshare royalty.

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 June 30, 2021, and December 31, 2020 were $0.8 million and $0.8 million, respectively. Total capitalized direct sales commission costs included in other non-current assets in the accompanying Condensed Consolidated Balance Sheets as of June 30, 2021, and December 31, 2020 were $1.6 million and $0.9 million, respectively. Amortization of these assets were $0.2 million and $0.1 million during the three months ended June 30, 2021 and 2020, respectively, and $0.3 million and $0.2 million during the six months ended June 30, 2021 and 2020, respectively. There was no impairment loss in relation to the costs capitalized for the periods presented.

13

Certain eligible initial project costs are capitalized when the costs relate directly to the contract, the costs generate or enhance resources of the Company that will be used in satisfying the performance obligation in the future, and the costs are expected to be recovered. These costs primarily consist of transition and set-up costs related to the installation of systems and processes and other deferred fulfillment costs eligible for capitalization. Capitalized costs are amortized consistent with the transfer to the customer of the services to which the asset relates and recorded as a component of cost of revenues. The Company also incurs certain direct costs to provide services in relation to the specific anticipated contracts. The Company recognizes such costs as a component of cost of revenues, the timing of which is dependent upon identification of a contract arrangement. At the end of the reporting period, the Company evaluates its deferred costs for their probable recoverability. The deferred costs balance included in prepaid expenses and other current assets and in other non-current assets in the accompanying Condensed Consolidated Balance Sheets was immaterial as of as of June 30, 2021 and December 31, 2020. The Company recognizes impairment of deferred costs when it has determined that the costs no longer have future benefits and are no longer recoverable. There was no impairment loss in relation to the costs capitalized for the periods presented.

The Company does not adjust transaction price for the effects of a significant financing component when the period between the transfers of the promised good or service to the customer and payment for that good or service by the customer is expected to be one year or less. The Company assessed each of its revenue generating arrangements in order to determine whether a significant financing component exists, and determined its contracts did not include a significant financing component during the three and six months ended June 30, 2021 and 2020.

3. STRATEGIC PARTNERSHIP AGREEMENT WITH ADVANTEST AND RELATED PARTY TRANSACTIONS

On July 29, 2020, the Company entered into a long-term strategic partnership with Advantest Corporation through its wholly-owned subsidiary, Advantest America, Inc. (collectively referred to herein as “Advantest”) that included the following agreements.

A Securities Purchase Agreement for the purchase by Advantest of an aggregate of 3,306,924 shares of the Company’s common stock for aggregate gross proceeds of $65.2 million and a related Stockholder Agreement.
An Amendment #1 to that certain Software License and Related Services Agreement, dated as of March 25, 2020, for an exclusive commercial arrangement in which the Company and Advantest will collaborate on, and the Company will initially host, develop and maintain, 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 and six months ended June 30, 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. There were no material costs and expenses were incurred related to the Commercial Agreement with Advantest during the three and six months ended June 30, 2021.

Analytics revenue recognized from Advantest were $2.6 million and $5.2 million during the three and six months ended June 30, 2021, respectively. Accounts receivable from Advantest, comprised of billed and unbilled accounts receivable, related to this agreement amounted to $0.1 million and nil as of June 30, 2021 and December 31, 2020, respectively, and deferred revenue amounted to $0.8 million and nil as of June 30, 2021 and December 31, 2020, respectively.

There was no occurrence of any termination events under these agreements as of the issuance of these condensed consolidated financial statements.

The Company carries out transactions with Advantest on arm’s length commercial customary terms. For more information about these agreements with Advantest, see Note 3, Strategic Partnership Agreement with Advantest and

14

Related Party Transactions, of Part II, Item 8. “Financial Statements and Supplementary Data” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.

4. BUSINESS COMBINATION

On December 1, 2020 (the “Acquisition Date”), the Company acquired all the stock of Cimetrix Incorporated (“Cimetrix”). Total payment made for this acquisition in 2020 amounted to $28.6 million, net of cash acquired, and was funded from the available cash of the Company. In 2020, the Company held back $3.5 million of the purchase price (the “Holdback Amount”) to satisfy adjustments and claims for indemnity arising out of breaches of certain representations, warranties and covenants, and certain other enumerated items in the merger agreement. During the first quarter of 2021, the Company recorded a measurement period adjustment as described below which reduced the Holdback Amount to $3.0 million. This reduction was released from the restricted cash on the Company’s Condensed Consolidated Balance Sheet. The Holdback Amount, as adjusted, is expected to be paid to the participating equity holders on approximately the twelve-month anniversary of the Acquisition Date. The Holdback Amount is recorded under accrued and other current liabilities account in the Condensed Consolidated Balance Sheets.

The Company is required to maintain cash specifically designated to pay for the Holdback Amount, which the Company has classified as restricted cash. Restricted cash amounted to $3.0 million and $3.5 million as of June 30, 2021 and December 31, 2020, respectively, and is included in the “Prepaid expenses and other current assets” account in the Company’s Condensed Consolidated Balance Sheet.

The Company is still finalizing the allocation of the purchase price to the individual assets acquired. Accordingly, the estimates set forth below are preliminary and are subject to change during the measurement period, which is not to exceed one year from the acquisition date. During the measurement period, the Company records adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Upon the conclusion of the measurement period, any subsequent adjustments are recorded to earnings. During the first quarter of 2021, the Company recorded a measurement period adjustment to the estimated fair values initially recorded in 2020, which resulted in a reduction in Holdback Amount of $0.5 million with a corresponding change to goodwill. The measurement period adjustment did not have an impact on the Company’s Condensed Consolidated Statements of Comprehensive Loss during the three and six months ended June 30, 2021. As of June 30, 2021, the allocation of the purchase price for this acquisition is as follows (in thousands, except amortization period):

Amortization

    

Amount

    

Period (Years)

Assets

 

  

 

  

Fair value of tangible assets (including cash of $5,900)

$

8,403

 

  

Fair value of intangible assets:

 

  

 

  

Developed technology

 

12,541

 

8

In-process R&D

 

3,635

 

N/A

Customer relationships

 

1,967

 

10

Noncompetition agreements

 

848

 

3

Tradenames and trademarks

 

808

 

10

Goodwill

 

13,012

 

N/A

Total assets acquired

$

41,214

 

  

Liabilities

 

  

 

  

Accounts payable and accrued expenses

$

1,437

 

  

Deferred revenue

 

391

 

  

Operating lease liabilities

 

132

 

  

Deferred tax liabilities

 

1,743

 

  

Total liabilities assumed

$

3,703

 

  

Total purchase price allocation

$

37,511

 

  

15

Pursuant to the merger agreement, the Company will also pay approximately $1.4 million to certain employees, subject to their continued employment with Cimetrix or the Company, at various scheduled payout dates through the second quarter of 2024. This amount will be recognized as compensation expense over the period as services are rendered. As of June 30, 2021, the estimated remaining total cash payout is approximately $0.9 million. The accrued compensation balance included under accrued compensation and related benefits account in the Company’s Condensed Consolidated Balance Sheet was $0.1 million and $0.3 million as of June 30, 2021 and December 31, 2020, respectively.

Transaction expenses related to the acquisition of Cimetrix amounted to $1.6 million in 2020. These costs consist of professional fees and administrative costs and were expensed as incurred in the Company’s Condensed Consolidated Statement of Comprehensive Loss. No transaction costs were incurred during the three months ended June 30, 2021. Transaction costs were immaterial during the six months ended June 30, 2021.

The financial results of the acquisition of Cimetrix were considered immaterial for purposes of unaudited pro forma financial disclosures.

5. BALANCE SHEET COMPONENTS

Accounts receivable

Accounts receivable include amounts that are unbilled at the end of the period that are expected to be billed and collected within a 12-month period. Unbilled accounts receivable, included in accounts receivable, totaled $5.7 million and $7.2 million as of June 30, 2021, and December 31, 2020, respectively. Unbilled accounts receivable that are not expected to be billed and collected during the succeeding 12-month period is recorded in other non-current assets and totaled $1.6 million and $2.0 million as of June 30, 2021, and December 31, 2020, respectively.

Property and equipment

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

June 30, 

December 31, 

    

2021

    

2020

Computer equipment

$

11,662

$

11,585

Software

 

5,442

 

5,451

Furniture, fixtures and equipment

 

2,507

 

2,507

Leasehold improvements

 

6,276

 

6,255

Laboratory and other equipment

 

3,621

 

3,451

Test equipment

 

24,804

 

26,010

Construction-in-progress

 

22,340

 

20,278

 

76,652

 

75,537

Less: accumulated depreciation and amortization

 

(38,675)

 

(36,295)

Total

$

37,977

$

39,242

Test equipment includes systems assets at customer sites that are contributing to DFI™ systems revenues. The construction-in-progress balance related to construction of DFI™ systems assets totaled $20.9 million and $18.9 million as of June 30, 2021, and December 31, 2020, respectively. Depreciation and amortization expense was $1.6 million and $1.7 million during the three months ended June 30, 2021 and 2020, respectively, and $3.3 million and $3.4 million during the six months ended June 30, 2021 and 2020, respectively.

16

Goodwill and Intangible Assets, Net

The change in the carrying amount of goodwill during the six months ended June 30, 2021, was as follows (in thousands):

Balance at beginning of period, January 1, 2021

$

15,774

Measurement period acquisition adjustment (1)

 

469

Balance at end of period, June 30, 2021

$

15,305

(1)Goodwill adjustment was recorded within the measurement period with a corresponding reduction in the Holdback Amount. See Note 4, Business Combination.

There were no impairments to goodwill during the six months ended June 30, 2021.

Intangible assets, net, consisted of the following (in thousands):

June 30, 2021

December 31, 2020

Amortization

Gross

Net

Gross

Net

Period

Carrying

Accumulated

Carrying

Carrying

Accumulated

Carrying

(Years)

    

Amount

    

Amortization

    

Amount

    

Amount

    

Amortization

    

Amount

Acquired identifiable intangibles:

Customer relationships

 

1-10

$

9,407

$

(5,719)

$

3,688

$

9,407

$

(5,398)

$

4,009

Developed technology

 

4-9

 

30,000

 

(16,150)

 

13,850

 

30,000

 

(14,987)

 

15,013

Tradename and trademarks

 

2-10

 

1,598

 

(759)

 

839

 

1,598

 

(706)

 

892

Patent

 

7-10

 

1,800

 

(