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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, 2022


☐	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 37,276,873 shares of the Registrant’s Common Stock outstanding as of August 5, 2022.

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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		25
Item 3. Quantitative and Qualitative Disclosures About Market Risk		37
Item 4. Controls and Procedures		37
PART II OTHER INFORMATION
Item 1. Legal Proceedings		38
Item 1A. Risk Factors		38
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		38
Item 3. Defaults Upon Senior Securities		39
Item 4. Mine Safety Disclosures		39
Item 5. Other Information		39
Item 6. Exhibits		40
INDEX TO EXHIBITS		40
SIGNATURES		41

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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)


	June 30,		December 31,
	2022		2021
ASSETS
Current assets:
Cash and cash equivalents	$	81,343	$	27,684
Short-term investments		35,907		112,542
Accounts receivable, net of allowance for doubtful accounts of $890 as of June 30, 2022 and December 31, 2021		36,117		40,087
Prepaid expenses and other current assets		10,408		8,194
Total current assets		163,775		188,507
Property and equipment, net		38,390		35,295
Operating lease right-of-use assets, net		5,240		5,408
Goodwill		14,123		14,123
Intangible assets, net		19,505		21,239
Deferred tax assets, net		46		75
Other non-current assets		8,088		9,121
Total assets	$	249,167	$	273,768

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	3,382	$	5,554
Accrued compensation and related benefits		10,634		9,495
Accrued and other current liabilities		6,237		3,328
Operating lease liabilities – current portion		1,493		1,758
Deferred revenues – current portion		19,568		23,691
Billings in excess of recognized revenues		480		—
Total current liabilities		41,794		43,826
Long-term income taxes payable		2,475		2,656
Non-current portion of operating lease liabilities		5,275		5,258
Non-current portion of deferred revenues		1,748		2,443
Total liabilities		51,292		54,183
Commitments and contingencies (Note 12)
Stockholders’ equity:
Preferred stock, $0.00015 par value, 5,000 shares authorized, no shares issued and outstanding		—		—
Common stock, $0.00015 par value, 70,000 shares authorized; shares issued 48,058 and 47,414, respectively; shares outstanding 36,975 and 37,411, respectively		6		6
Additional paid-in-capital		434,784		423,069
Treasury stock at cost, 11,083 and 10,003 shares, respectively		(131,365)		(104,705)
Accumulated deficit		(103,018)		(97,721)
Accumulated other comprehensive loss		(2,532)		(1,064)
Total stockholders’ equity		197,875		219,585
Total liabilities and stockholders’ equity	$	249,167	$	273,768

See accompanying Notes to Condensed Consolidated Financial Statements (unaudited)

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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,
	2022		2021		2022		2021
Revenues:
Analytics	$	31,117	$	19,578	$	61,543	$	38,971
Integrated Yield Ramp		3,551		7,841		6,623		12,648
Total revenues		34,668		27,419		68,166		51,619

Costs and Expenses:
Costs of revenues		12,042		10,785		23,571		21,448
Research and development		13,374		11,064		27,463		21,905
Selling, general and administrative		9,770		9,410		20,609		18,874
Amortization of acquired intangible assets		314		313		628		627
Interest and other expense (income), net		(991)		243		(1,301)		(198)
Income (loss) before income taxes		159		(4,396)		(2,804)		(11,037)
Income tax expense		1,306		88		2,493		1,044
Net loss	$	(1,147)	$	(4,484)	$	(5,297)	$	(12,081)

Other comprehensive loss:
Foreign currency translation adjustments, net of tax		(1,037)		216		(1,434)		(314)
Change in unrealized losses related to available-for-sale debt securities, net of tax		—		(6)		(34)		(4)
Total other comprehensive income (loss)		(1,037)		210		(1,468)		(318)
Comprehensive loss	$	(2,184)	$	(4,274)	$	(6,765)	$	(12,399)

Net loss per share, basic and diluted	$	(0.03)	$	(0.12)	$	(0.14)	$	(0.33)

Weighted average common shares used to calculate net loss per share, basic and diluted		37,028		37,004		37,316		36,989

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 and Six Months Ended June 30, 2022
											Accumulated
				Additional							Other		Total
	Common Stock			Paid-In		Treasury Stock			Accumulated		Comprehensive		Stockholders’
	Shares	Amount		Capital		Shares	Amount		Deficit		Loss		Equity
Balances, December 31, 2021	37,411	$	6	$	423,069	10,003	$	(104,705)	$	(97,721)	$	(1,064)	$	219,585
Issuance of common stock in connection with employee stock purchase plan	95		—		1,502	—		—		—		—		1,502
Issuance of common stock in connection with exercise of options	75		—		675	—		—		—		—		675
Vesting of restricted stock units	232		—		—	—		—		—		—		—
Purchases of treasury stock in connection with tax withholdings on restricted stock grants	—		—		—	113		(3,389)		—		—		(3,389)
Repurchase of common stock	(219)		—		—	219		(5,778)		—		—		(5,778)
Stock-based compensation expense	—		—		5,553	—		—		—		—		5,553
Comprehensive loss	—		—		—	—		—		(4,150)		(431)		(4,581)
Balances, March 31, 2022	37,594	$	6	$	430,799	10,335	$	(113,872)	$	(101,871)	$	(1,495)	$	213,567
Issuance of common stock in connection with exercise of options	12		—		113	—		—		—		—		113
Vesting of restricted stock units	84		—		—	—		—		—		—		—
Purchases of treasury stock in connection with tax withholdings on restricted stock grants	—		—		—	33		(800)		—		—		(800)
Repurchase of common stock	(715)		—		—	715		(16,693)		—		—		(16,693)
Stock-based compensation expense	—		—		3,872	—		—		—		—		3,872
Comprehensive loss	—		—		—	—		—		(1,147)		(1,037)		(2,184)
Balances, June 30, 2022	36,975	$	6	$	434,784	11,083	$	(131,365)	$	(103,018)	$	(2,532)	$	197,875


	Three and 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

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)


	Six Months Ended June 30,
	2022		2021
Cash flows from operating activities:
Net loss	$	(5,297)	$	(12,081)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization		2,773		3,345
Stock-based compensation expense		9,425		6,111
Amortization of acquired intangible assets		1,734		1,698
Amortization of costs capitalized to obtain revenue contracts		755		327
Deferred taxes		17		84
Other		20		133
Changes in operating assets and liabilities:
Accounts receivable		3,910		3,989
Prepaid expenses and other current assets		(3,208)		1,235
Operating lease right-of-use assets		1,238		740
Other non-current assets		1,002		362
Accounts payable		(3,633)		(1,723)
Accrued compensation and related benefits		1,362		(1,028)
Accrued and other liabilities		2,147		116
Deferred revenues		(4,789)		(3,514)
Billings in excess of recognized revenues		480		848
Operating lease liabilities		(1,316)		(837)
Net cash provided by (used in) operating activities		6,620		(195)

Cash flows from investing activities:
Proceeds from maturities and sales of short-term investments		112,500		109,000
Purchases of short-term investments		(35,920)		(45,992)
Purchases of property and equipment		(4,454)		(1,121)
Prepayment for the purchase of property and equipment		(133)		—
Net cash provided by investing activities		71,993		61,887

Cash flows from financing activities:
Proceeds from exercise of stock options		788		793
Proceeds from employee stock purchase plan		1,502		921
Payments for taxes related to net share settlement of equity awards		(4,189)		(2,350)
Repurchases of common stock		(22,471)		(4,523)
Net cash used in financing activities		(24,370)		(5,159)

Effect of exchange rate changes on cash and cash equivalents		(584)		(128)
Net change in cash, cash equivalents, and restricted cash		53,659		56,405
Cash, cash equivalents, and restricted cash at beginning of period		27,684		33,815
Cash, cash equivalents, and restricted cash at end of period	$	81,343	$	90,220

Reconciliation of cash, cash equivalents, and restricted cash to the condensed consolidated balance sheet:
Cash and cash equivalents	$	81,343	$	87,201
Restricted cash		—		3,019
Total cash, cash equivalents, and restricted cash	$	81,343	$	90,220

Continued on next page.

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PDF SOLUTIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS – CONTINUED

(unaudited)

(in thousands)


	Six Months Ended June 30,
	2022		2021
Supplemental disclosure of cash flow information:
Cash paid during the period for taxes	$	1,690	$	1,275
Cash paid for amounts included in the measurement of operating lease liabilities	$	795	$	1,076

Supplemental disclosure of noncash information:
Property and equipment received and accrued in accounts payable and accrued and other liabilities	$	2,466	$	530
Advances for purchase of fixed assets transferred from prepaid assets to property and equipment	$	333	$	963
Operating lease liabilities arising from obtaining right-of-use assets	$	1,137	$	—
Release of restricted cash reducing goodwill due to the acquisition purchase price adjustment	$	—	$	469

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, filed with the Securities and Exchange Commission on March 1, 2022.

The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries after the elimination of all intercompany balances and transactions.

The condensed consolidated balance sheet at December 31, 2021, has been derived from the audited consolidated financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates in these financial statements include revenue recognition, the estimated useful lives of property and equipment and intangible assets, assumptions made in analysis of allowance for doubtful accounts, impairment of goodwill and long-lived assets, valuation for deferred tax assets, and accounting for lease obligations, stock-based compensation expense, and income tax uncertainties and contingencies. Actual results could differ from those estimates and may result in material effects on the Company’s operating results and financial position.

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

Recent Accounting Standards

Accounting Standards Not Yet Adopted

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASU 2016-13), which requires measurement and recognition of expected credit losses for financial assets held at the reporting date based on internal information, external information, or a combination of both relating to past events, current conditions, and reasonable and supportable forecasts. ASU No. 2016-13 replaces the existing incurred loss impairment model with a forward-looking expected credit loss model, which will result in earlier recognition of credit losses. Subsequent to the issuance of ASU No. 2016-13, the FASB issued ASU No. 2018-19, Codification

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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 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.

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Contracts with multiple performance obligations

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

Analytics Revenue

Analytics revenue is derived from the following primary offerings: licenses and services for standalone software (which is primarily Exensio^® and Cimetrix^® products), software-as-a-service (“SaaS”) (which is primarily Exensio^® products), and 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 the “Significant Judgments” section of this Note for further discussion.

Integrated Yield Ramp Revenue

Integrated Yield Ramp revenue is derived from the Company’s fixed-fee engagements that include performance incentives based on customers’ yield achievement (which consists primarily of Gainshare royalties) typically based on customer’s wafer shipments, pertaining to these fixed-price contracts, which royalties are variable.

Revenue under these project–based contracts, which are delivered over a specific period of time, typically for a fixed fee component paid on a set schedule, is recognized as services are performed using a percentage of completion method based on costs or labor-inputs, whichever is the most appropriate measure of the progress towards completion of the contract. Where there are distinct performance obligations, the Company allocates revenue to all deliverables based on their SSPs and allocates the transaction price of the contract to each performance obligation on a relative basis using SSP. Similar to the services

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provided in connection with DFI systems and CV systems that are contributing to Analytics revenue, due to the nature of the work performed in these arrangements, the estimation of percentage of completion method is complex and subject to many variables that require significant judgment. Please refer to the “Significant Judgments” section of this Note for further discussion.

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

Disaggregation of Revenue

The Company disaggregates revenue from contracts with customers into the timing of the transfer of goods and services and the geographical regions. The Company determined that disaggregating revenue into these categories achieves the disclosure objective to depict how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors.

The Company’s performance obligations are satisfied either over time or at a point-in-time. The following table represents a disaggregation of revenue percentage by timing of revenue:


	Three Months Ended June 30,				Six Months Ended June 30,
	2022		2021		2022		2021
Over time	74		57	%	72	%	54	%
Point-in-time	26		43	%	28	%	46	%
Total	100	%	100	%	100	%	100	%

International revenues accounted for approximately 51% and 49% of our total revenues during the three and six months ended June 30, 2022, respectively, compared to 56% and 60% of our total revenues during the three and six months ended June 30, 2021, respectively. See Note 10, Customer and Geographic Information.

Significant Judgments

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

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

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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 June 30, 2022 and December 31, 2021, the total contract assets included in prepaid expenses and other current assets in the Condensed Consolidated Balance Sheets were $2.8 million and $0.4 million, respectively. The Company did not record any asset impairment charges related to contract assets for the periods presented.

Deferred revenues and billings in excess of recognized revenues consist substantially of amounts invoiced in advance of revenue recognition and are recognized as the revenue recognition criteria are met. Deferred revenues that will be recognized during the succeeding twelve-month period are recorded as current deferred revenues and the remaining portion is recorded as non-current deferred revenues in the Condensed Consolidated Balance Sheets. Revenue recognized that was included in the deferred revenues and billings in excess of recognized revenues balances at the beginning of each reporting period was $7.2 million and $6.5 million during the three months ended June 30, 2022 and 2021, respectively, and $11.8 million and $10.5 million during the six months ended June 30, 2022 and 2021, respectively.

At June 30, 2022, the aggregate amount of the transaction price allocated to the remaining performance obligations related to customer contracts that were unsatisfied or partially unsatisfied was approximately $184.4 million. Given the applicable contract terms with customers, the majority of this amount is expected to be recognized as revenue over the next two years, with the remainder in the following three years. This amount does not include insignificant contracts to which the customer is not committed, nor significant contracts for which we recognize revenue equal to the amount we have the right to invoice for services performed, or future sales-based or usage-based royalty payments in exchange for a license of intellectual property. This amount is subject to change due to future revaluations of variable consideration, terminations, other contract modifications, or currency adjustments. The estimated timing of the recognition of remaining unsatisfied performance obligations is subject to change and is affected by changes to the scope, change in timing of delivery of products and services, or contract modifications.

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The adjustment to revenue recognized from performance obligations satisfied (or partially satisfied) in previous periods was an increase of $0.5 million and a decrease $0.4 million during the three months ended June 30, 2022 and 2021, respectively, and an increase of $0.5 million and an increase of $0.1 million during the six months ended June 30, 2022 and 2021, respectively. These amounts primarily represent changes in estimated percentage-of-completion based contracts and changes in actual versus estimated Gainshare royalty.

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, 2022, and December 31, 2021, were $1.1 million and $0.6 million, respectively. Total capitalized direct sales commission costs included in other non-current assets in the accompanying Condensed Consolidated Balance Sheets as of June 30, 2022, and December 31, 2021, were $1.8 million and $2.1 million, respectively. Amortization of these assets were $0.6 million and $0.2 million during the three months ended June 30, 2022 and 2021, respectively, and $0.8 million and $0.3 million during the six months ended June 30, 2022 and 2021, respectively. There was no impairment loss in relation to the costs capitalized for the periods presented.

Practical expedient

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

3. STRATEGIC PARTNERSHIP AGREEMENT WITH ADVANTEST AND RELATED PARTY TRANSACTIONS

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

●

A Securities Purchase Agreement for the purchase by Advantest of an aggregate of 3,306,924 shares of the Company’s common stock for aggregate gross proceeds of $65.2 million and a related Stockholder Agreement.

●

An Amendment #1 to that certain Software License and Related Services Agreement, dated as of March 25, 2020, for an exclusive commercial arrangement in which the Company and Advantest collaborate on, and the Company initially hosts, develops and maintains, an Advantest-specific cloud layer on the Exensio platform.

●

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, 2022 and 2021.

●

A Master Commercial Terms and Support Services Agreement for the commercialization and support of integrated products of the Company and Advantest that are the outcome of the above development agreement. No material costs and expenses were incurred related to the Commercial Agreement with Advantest during the three and six months ended June 30, 2022 and 2021.

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Analytics revenue recognized from Advantest was $2.6 million and $5.3 million during the three and six months ended June 30, 2022, respectively, compared to $2.6 million and $5.2 million during the three and six months ended June 30, 2021, respectively. There were no outstanding accounts receivable from Advantest as of June 30, 2022, and December 31, 2021, and deferred revenue amounted to $1.6 million and $6.8 million as of June 30, 2022 and December 31, 2021, respectively. There was no occurrence of any termination events under these agreements as of the issuance of these condensed consolidated financial statements.

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

4. BALANCE SHEET COMPONENTS

Accounts receivable

Accounts receivable include amounts that are unbilled at the end of the period that are expected to be billed and collected within a 12-month period. Unbilled accounts receivable, included in accounts receivable, totaled $8.9 million and $11.8 million as of June 30, 2022, and December 31, 2021, respectively. Unbilled accounts receivable that are not expected to be billed and collected during the succeeding 12-month period is recorded in other non-current assets and totaled $1.1 million and $1.3 million as of June 30, 2022, and December 31, 2021, respectively.

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

Property and equipment

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


	June 30,		December 31,
	2022		2021
Computer equipment	$	11,640	$	11,924
Software		5,391		5,419
Furniture, fixtures and equipment		2,491		2,506
Leasehold improvements		6,294		6,272
Laboratory and other equipment		4,249		3,981
Test equipment		28,204		24,452
Construction-in-progress		23,690		22,158
		81,959		76,712
Less: accumulated depreciation and amortization		(43,569)		(41,417)
Total	$	38,390	$	35,295

Test equipment mainly includes DFI™ systems and CV^® systems assets at customer sites that are contributing to revenue. Among assets under construction, the construction-in-progress balance related to construction of DFI™ systems assets amounted to $19.8 million and $20.0 million as of June 30, 2022, and December 31, 2021, respectively. Depreciation and amortization expense was $1.4 million and $1.6 million during the three months ended June 30, 2022 and 2021, respectively, and $2.8 million and $3.3 million during the six months ended June 30, 2022 and 2021, respectively.

In the fourth quarter of 2021, the Company wrote down the value of its property and equipment by $3.2 million related to its first-generation of e-beam tools for DFI™ systems wherein carrying values may not be fully recoverable due to lack of market demand and future needs of our customers for these tools.

Goodwill and Intangible Assets, Net

As of June 30, 2022, and December 31, 2021, the carrying amount of goodwill was $14.1 million.

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


		June 30, 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	1-10	$	9,407	$	(6,363)	$	3,044	$	9,407	$	(6,041)	$	3,366
Developed technology	4-9		33,635		(18,447)		15,188		33,635		(17,250)		16,385
Tradename and trademarks	2-10		1,598		(865)		733		1,598		(812)		786
Patent	7-10		1,800		(1,660)		140		1,800		(1,640)		160
Noncompetition agreements	3		848		(448)		400		848		(306)		542
Total		$	47,288	$	(27,783)	$	19,505	$	47,288	$	(26,049)	$	21,239

The weighted average amortization period for acquired identifiable intangible assets was 6.4 years as of June 30, 2022. The following table summarizes intangible assets amortization expense in the Condensed Consolidated Statements of Comprehensive Loss (in thousands):


	Three Months Ended June 30,				Six Months Ended June 30,
	2022		2021		2022		2021
Amortization of acquired technology included under Costs of Revenues	$	553	$	536	$	1,106	$	1,071
Amortization of acquired intangible assets presented separately under Costs and Expenses		314		313		628		627
Total amortization of acquired intangible assets	$	867	$	849	$	1,734	$	1,698

The Company expects annual amortization of acquired identifiable intangible assets to be as follows (in thousands):


Year Ending December 31,	Amount
2022 (remaining six months)	$	1,734
2023		3,444
2024		3,046
2025		2,882
2026		2,712
2027 and thereafter		5,687
Total future amortization expense	$	19,505

There were no impairment charges for goodwill and intangible assets during the three and six months ended June 30, 2022 and 2021.

5. LEASES

The Company leases administrative and sales offices and certain equipment un