We offer products and services designed to empower engineers and data scientists across the semiconductor ecosystem to connect, collect, manage, and analyze data about design, equipment, manufacturing, and test to improve the yield and quality of their products. We derive revenues from two sources: Analytics and Integrated Yield Ramp. Our offerings combine proprietary software, professional services using proven methodologies and third-party cloud-hosting platforms for SaaS, electrical measurement hardware tools, and physical IP for IC designs. We primarily monetize our offerings through license fees and contract fees for professional services and software as a service (or SaaS). In some cases, especially on our historical IYR engagements, we also receive a value-based variable fee or royalty, which we call Gainshare. Our products, services, and solutions have been sold to IDMs, fabless semiconductor companies, foundries, OSATs, capital equipment manufacturers, and system houses.
The COVID-19 pandemic has significantly affected how we and our customers operate our businesses. For example, most
U.S.states and countries worldwide imposed in 2020, and may continue to impose from time-to-time for the foreseeable future, restrictions on the physical movement of people to limit the spread of COVID-19, including travel restrictions and stay-at-home orders. As a result, during portions of 2021, many of our offices were temporarily shut down and our local employees were restricted from traveling to customer sites or visiting our other offices. We continue to closely monitor the COVID-19 situation and will reopen our corporate headquarters in the United Statesand other offices according to local restrictions, in each case, with a focus on our employees' safety. In addition, our personnel worldwide continue to be subject to various country-to-country travel restrictions, which limits the ability of some employees to travel to other offices or customer sites. We believe the lack of an ability to meet in person during most of 2020 and 2021 made it harder for us to sell complex or new technologies to some customers during these periods. Once we can again begin to meet with these customers in person, we believe we may improve traction with them. To date, we have been able to provide uninterrupted access to our products and services due to our globally distributed workforce, many of whom were working remotely prior to the pandemic, and our pre-existing infrastructure, which supports secure access to our internal systems. The total duration and full extent of the impact from the COVID-19 pandemic depends on future developments that cannot be accurately predicted at this time, such as the ultimate severity and transmission rate of the virus and variants, the extent and effectiveness of containment actions and vaccinations, and the impact of these and other factors on our employees, customers, partners, and suppliers. To date, one effect of the COVID-19 pandemic is a global shortage in semiconductors due primarily to supply chain disruptions and many companies, including automotive industry, have announced shortages in production. Although this shortage has not materially affected our business, this trend may affect our future business opportunities, particularly future Gainshare and Cimetrixrun-time licenses, if our customers' production volumes decrease. Certain other trends may affect our Analytics revenue specifically. In particular, the confluence of Industry 4.0 (i.e. the fourth industrial revolution, or the automation and data exchange in manufacturing technologies and processes) and cloud computing (i.e. the on-demand availability of computing resources and data storage without direct active management by the user) is driving increased innovation in semiconductor and electronics manufacturing and analytics, as well as in the organization of IT networks and computing at semiconductor and electronics companies across the ecosystem. First, the ubiquity of wireless connectivity and sensor technology enables any manufacturing company to augment its factories and visualize its entire production line. In parallel, the cost per terabyte of data storage has continually decreased year to year. The combination of these two trends means that more data is collected and stored than ever before. Further, semiconductor companies are striving to analyze these very large data sets in real-time to make rapid decisions that measurably improve manufacturing efficiency and quality. In parallel, the traditional practice of on-site data storage, even for highly sensitive data, is changing. The ability to cost-effectively and securely store, analyze, and retrieve massive quantities of data from the cloud versus on-premise enables data to be utilized across a much broader population of users, frequently resulting in greater demands on analytics programs. The combination of these latter two trends means that cloud-based, analytic programs that effectively manage identity management, physical security, and data protection are increasingly in demand for insights and efficiencies across the organizations of these companies. We believe that all these trends will continue for the next few years, and the challenges involved in adopting Industry 4.0 and secure cloud 33 Table of Contents computing will create opportunities for our combination of advanced analytics capabilities, proven and established supporting infrastructure, and professional services to configure our products to meet customers' specialized needs. Other trends may continue to affect our characterization services business and Integrated Yield Ramp revenue specifically. The logic foundry market at the leading edge nodes, such as 10nm, 7nm, and smaller, underwent significant change over the past few years. The leading foundry continues to dominate market share as other foundries started later than originally forecast in some cases. This trend will likely continue to impact our characterization services business and Integrated Yield Ramp business on these nodes. We expect most logic foundries to invest in derivatives of older process nodes, such as 28nm and 14nm, to extract additional value as many of their customers will not move to advanced nodes due to either technological barriers or restrictive economics. Foundries that participate at leading edge nodes are expected to continue to invest in new technologies such as memory, packaging, and multi-patterned and EUV lithography, as well as new innovations in process control and variability management. We expect China'sinvestment in semiconductors to continue. In order for these trends to provide opportunities for us to increase our business leveraging electrical characterization, Chinese semiconductors manufacturers will need to increase their production volumes on advanced technology nodes and continue to engage foreign suppliers, subject to compliance with changing U.S.export restrictions. As a result of these market developments, we have chosen to focus our resources and investments in products, services, and solutions for analytics. There are other business trends that may affect our business opportunities generally. For instance, the demand for consumer electronics, communications devices, and high-performance computing continues to drive technological innovation in the semiconductor industry as the need for products with greater performance, lower power consumption, reduced costs, and smaller size continues to grow with each new product generation. In addition, advances in computing systems and mobile devices continue to fuel demand for higher capacity memory chips. To meet these demands, IC manufacturers and designers are constantly challenged to improve the overall performance of their ICs by designing and manufacturing ICs with more embedded applications to create greater functionality while lowering power and cost per transistor. As this trend continues, companies will continually be challenged to improve process capabilities to optimally produce ICs with minimal random and systematic yield loss, which is driven by the lack of compatibility between the design and its respective manufacturing process. We believe that these difficulties will continue to create a need for our products and services that address yield loss across the IC product life cycle. The U.S.government continues to expand and intensify export controls and sanctions, including the addition of many P.R.C. companies to the U.S.Export Administration Regulations ("EAR") Entity List. These listings restrict supply to designees of items that are subject to the EAR. After an internal evaluation, we determined that a large percentage of our software products are not of U.S.origin and are, thus, not subject to the EAR. Our standard operations include development, distribution processes, software download sites, and professional service centers and processes located in various geographies around the world to better serve our customers. Some customers have nonetheless expressed concerns to us that continued action by the U.S.government could potentially interrupt their ability to make use of our products or services. The continuing tension between the U.S.and P.R.C. governments in trade and security matters or the perception of that tension could lead to disruptions or reductions in international trade, deter or prevent purchasing activity of customers, and negatively impact our Chinasales and financial results.
December 1, 2020, we completed the acquisition of Cimetrixfor approximately $31.6 millionin cash consideration, net of cash on Cimetrix'sbalance sheet as of closing, and other closing adjustments, for all of the outstanding equity of Cimetrix. The combination of Cimetrixconnectivity products with our Exensio platform, which leverages machine learning, is intended to enable IC, assembly, and equipment manufacturer customers to extract more intelligence from their tools, not just data, to build more reliable chips and systems at lower manufacturing costs. We accounted for this acquisition as a business combination in accordance with FASB ASC Topic 805, Business Combinations. For further information about this acquisition, see Note 4 of "Notes to Consolidated Financial Statements" (Item 8 of Part II of this Annual Report). 34 Table of Contents Financial Highlights
The following are our financial highlights for the year ended
Total revenues were
compared to the year ended
million, an increase of
? from Exensio software licenses due to higher demand from customers, and a
million increase in revenue from CV systems due to higher hours for
characterization services worked across multiple contracts and customers.
Integrated Yield Ramp revenue decreased
the year ended
royalty from certain customers due to the end of Gainshare periods on certain
contracts and lower hours worked on other contracts.
Costs of revenues increased
compared to the year ended
personnel-related costs due to higher headcount resulting from the acquisition
acquired intangible assets. These increases were partially offset by decreases
in facilities and information technology-related costs and due to the timing of
deferral of contract costs. Net loss was
$21.5 million, compared to $40.4 millionfor the year ended
increases in total revenues and other income, and a
income tax expense, partially offset by increases in costs of revenues and
operating expenses. Our income tax expense in fiscal 2020 was higher due
primarily to the recognition of a full valuation allowance against our
? deferred tax assets. Increases in operating expenses were related primarily to
our research and development, sales and marketing activities, general and
administrative expenses primarily due to increase in personnel-related costs
due primarily to higher headcount as a result of the
subcontractor costs, facilities and information technology-related costs, fees
for legal services for the arbitration proceeding over a disputed customer
contract, amortization expense of acquired intangible assets, and a write-down
in value of property and equipment.
Cash, cash equivalents and short-term investments decreased
primarily due to repurchases of common stock, cash used to purchase property
? and equipment, payment for taxes related to net share settlement of equity
awards, payment of the holdback amount to
offset by cash provided by operating activities and proceeds from the exercise
of stock options and proceeds from purchases under our employee stock purchase
Critical Accounting Policies and Estimates
The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in
the United Statesrequires us to make judgments, assumptions, and estimates that affect the amounts reported in the Consolidated Financial Statements and accompanying notes. Notes 1 and 2 of Notes to Consolidated Financial Statements describe the significant accounting policies and methods used in the preparation of the Consolidated Financial Statements. We consider the accounting policies described below to be our critical accounting policies. These critical accounting policies are impacted significantly by judgments, assumptions, and estimates used in the preparation of the Consolidated Financial Statements and actual results could differ materially from the amounts reported based on these policies. 35 Table of Contents Revenue Recognition
We derive revenue from two sources: Analytics and Integrated Yield Ramp.
Analytics revenue is derived from the following primary offerings: licenses and services for standalone Software (which consists primarily of Exensio and
Cimetrixproducts), SaaS (which consists primarily of Exensio products), and DFI and CV systems (including Characterization services) that do not include performance incentives based on customers' yield achievement. Revenue from standalone software is recognized depending on whether the license is perpetual or time-based. Perpetual (one-time charge) license software is recognized at the time of the inception of the arrangement when control transfers to the customers, if the software license is distinct from the services offered by us. Revenue from post-contract support is recognized over the contract term on a straight-line basis, because we are providing (i) support and (ii) unspecified software updates on a when-and-if available basis over the contract term. Revenue from time-based-licensed software is allocated to each performance obligation and is recognized either at a point in time or over time as follows. The license component is recognized at the time when control transfers to customers, with the post-contract support component recognized ratably over the committed term of the contract. For contracts with any combination of licenses, support, and other services, distinct performance obligations are accounted for separately. For contracts with multiple performance obligations, we allocate the transaction price of the contract to each performance obligation on a relative basis using the standalone selling price ("SSP") attributed to each performance obligation. Revenue from SaaS arrangements, which allow for the use of a cloud-based software product or service over a contractually determined period of time without taking possession of software, is accounted for as subscriptions and is recognized as revenue ratably, on a straight-line basis, over the subscription period beginning on the date the service is first made available to customers. Revenue from DFI systems and CV systems (including Characterization services) that do not include performance incentives based on customers' yield achievement is recognized primarily as services are performed. Where there are distinct performance obligations, we allocate revenue to all deliverables based on their SSPs. For these contracts with multiple performance obligations, we allocate the transaction price of the contract to each performance obligation on a relative basis using SSP attributed to each performance obligation. Where there are not discrete performance obligations, historically, revenue is primarily recognized as services are performed using a percentage of completion method based on costs or labor-hours inputs, whichever is the most appropriate measure of the progress towards completion of the contract. The estimation of percentage of completion method is complex and subject to many variables that require significant judgment.
Integrated Yield Ramp Revenue
Integrated Yield Ramp revenue is derived from our yield ramp engagements that include Gainshare or other performance incentives based on customers’ yield achievement.
Revenue under these project-based contracts, which are delivered over a specific period of time typically for a fixed fee component paid on a set schedule, is recognized as services are performed using a percentage of completion method based on costs or labor-inputs, whichever is the most appropriate measure of the progress towards completion of the contract. Where there are distinct performance obligations, we allocate revenue to all deliverables based on their SSPs and allocate the transaction price of the contract to each performance obligation on a relative basis using SSP. Similar to the services provided in connection with DFI systems and CV systems that are contributing to Analytics revenue, due to the nature of the work performed in these arrangements, the estimation of percentage of completion method is complex and subject to many variables that require significant judgment. The Gainshare royalty contained in yield ramp contracts is a variable fee related to continued usage of our IP after the fixed-fee service period ends, based on the customers' yield achievement. Revenue derived from Gainshare is contingent 36 Table of Contents upon our customers reaching certain defined production yield levels. Gainshare royalty periods are generally subsequent to the delivery of all contractual services and performance obligations. We record Gainshare as a usage-based royalty derived from customers' usage of intellectual property and record it in the same period in which the usage occurs.
We are required to assess whether it is "more-likely-than-not" that we will realize our deferred tax assets. If we believe that they are not likely to be fully realizable before the expiration dates applicable to such assets, then to the extent we believe that recovery is not likely, we must establish a valuation allowance. Based on all available evidence, both positive and negative, we determined a full valuation allowance was still appropriate for our
U.S.federal and state net deferred tax assets ("DTAs"), primarily driven by a cumulative loss incurred over the 12-quarter period ended December 31, 2021, and the likelihood that we may not utilize tax attributes before they expire. The valuation allowance was approximately $51.6 millionand $41.9 millionas of December 31, 2021and 2020, respectively. We will continue to evaluate the need for a valuation allowance and may change our conclusion in a future period based on changes in facts (e.g., 12-quarter cumulative profit, significant new revenue, etc.). If we conclude that we are more likely than not to utilize some or all of our U.S.DTAs, we will release some or all of our valuation allowance and our tax provision will decrease in the period in which we make such determination. We evaluate our DTAs for realizability considering both positive and negative evidence, including our historical financial performance, projections of future taxable income, future reversals of existing taxable temporary differences, tax planning strategies and any carryback availability. In evaluating the need for a valuation allowance, we estimate future taxable income based on management approved business plans. This process involves significant management judgment about assumptions that are subject to change from period to period based on changes in tax laws or variances between future projected operating performance and actual results. Changes in the net DTAs, less offsetting valuation allowance, in a period are recorded through the income tax provision and could have a material impact on the Consolidated Statements of Comprehensive Loss. Our income tax calculations are based on application of applicable U.S.federal, state, or foreign tax law. Our tax filings, however, are subject to audit by the respective tax authorities. Accordingly, we recognize tax liabilities based upon our estimate of whether, and the extent to which, additional taxes will be due when such estimates are more-likely-than-not to be sustained. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. To the extent the final tax liabilities are different than the amounts originally accrued, the increases or decreases are recorded as income tax expense or benefit in the Consolidated Statements of Comprehensive Loss. At December 31, 2021, no deferred taxes have been provided on undistributed earnings from our international subsidiaries. We intend to reinvest the earnings of our non- U.S.subsidiaries in those operations indefinitely. As such, we have not provided for any foreign withholding taxes on the earnings of foreign subsidiaries as of December 31, 2021. The earnings of our foreign subsidiaries are taxable in the U.S.in the year earned under the Global Intangible Low-Taxed Income rules implemented under 2017 Tax Cuts and Jobs Act. On March 11, 2021, the American Rescue Plan Act of 2021 ("American Rescue Plan") was signed into law to provide additional relief in connection with the ongoing COVID-19 pandemic. The American Rescue Plan includes, among other things, provisions relating to Paycheck Protection Program (PPP) loan expansion, defined pension contributions, excessive employee remuneration, and the repeal of the election to allocate interest expense on a worldwide basis. Under ASC 740 the effects of new legislation are recognized upon enactment. Accordingly, the American Rescue Plan became effective beginning in the quarter ended March 31, 2021. Such provisions did not have a material impact on the Company's consolidated financial statements.
Software Development Costs
Internally developed software is software developed to meet our internal needs to provide certain services to our customers. Our capitalized software development costs consist of internal compensation related costs and external direct costs incurred during the application development stage and are amortized over their useful lives, which is generally five to six years. The costs to develop software that is marketed externally have not been capitalized as we believe our current software development process is essentially completed concurrent with the establishment of technological feasibility. As 37
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such, all related software development costs are expensed as incurred and included in research and development expense in our Consolidated Statements of Comprehensive Loss.
Stock-Based Compensation We account for stock-based compensation using the fair value method, which requires us to measure stock-based compensation based on the grant-date fair value of the awards and recognize the compensation expense over the requisite service period. As stock-based compensation expense recognized is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The fair value of our restricted stock units is equal to the market value of our common stock on the date of the grant. These awards are subject to time-based vesting which generally occurs over a period of four years. The fair value of our stock options is estimated using the Black-Scholes-Merton option-pricing model, which incorporates various assumptions including volatility, expected life and interest rates. The expected volatility is based on the historical volatility of our common stock over the most recent period commensurate with the estimated expected life of our stock options. The expected life is based on historical experience and on the terms and conditions of the stock options granted. The interest rate assumption is based upon observed
Treasuryyield curve rates appropriate for the expected life of our stock options.
We allocate the fair value of purchase consideration to the tangible assets acquired, liabilities assumed and intangible assets acquired based on their estimated fair values at the date of the business combination. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. Such valuations require us to make significant estimates and assumptions, especially with respect to intangible assets. Significant estimates in valuing certain intangible assets include, but are not limited to, estimated replacement costs and future expected cash flows from acquired customers, acquired technology, acquired patents, and trade names from a market participant perspective, useful lives and discount rates. The estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. Allocation of purchase consideration to identifiable assets and liabilities affects our amortization expense, as acquired finite-lived intangible assets are amortized over the useful life, whereas any indefinite lived intangible assets, including IPR&D and goodwill, are not amortized. During the measurement period, which is not to exceed one year from the acquisition date, we record 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 in the Consolidated Statements of Comprehensive Loss. As part of a prior acquisition, we recorded at the time of the acquisition acquired IPR&D for a project in progress that had not yet reached technological feasibility. Acquired IPR&D is initially accounted for as an indefinite-lived intangible asset and tested annually for impairment. Once the acquired IP R&D asset becomes available for use, it will be amortized over the estimated useful life or will be written off upon abandonment.
Valuation of Long-lived Assets including
We record goodwill when the purchase consideration of an acquisition exceeds the fair value of the net tangible and identified intangible assets as of the date of acquisition. We have one operating segment and one operating unit. We perform an annual impairment assessment of goodwill during the fourth quarter of each calendar year or more frequently, if required to determine if any events or circumstances exist, such as an adverse change in business climate or a decline in the overall industry demand, that would indicate that it would more likely than not reduce the fair value of a reporting unit below its carrying amount, including goodwill. If events or circumstances do not indicate that the fair value of a reporting unit is below its carrying amount, then goodwill is not considered to be impaired and no further testing is required. If the carrying amount exceeds its fair value, an impairment loss would be recognized equal to the amount of excess, limited to the amount of total goodwill. There was no impairment of goodwill for the year ended
December 31, 2021and 2020. 38
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Our long-lived assets, excluding goodwill, consist of property, equipment, and intangible assets. We periodically review our long-lived assets for impairment. For assets to be held and used, we initiate our review whenever events or changes in circumstances indicate that the carrying amount of a long-lived asset group may not be recoverable. Recoverability of an asset group is measured by comparison of its carrying amount to the expected future undiscounted cash flows that the asset group is expected to generate. If it is determined that an asset group is not recoverable, an impairment loss is recorded in the amount by which the carrying amount of the asset group exceeds its fair value. There was no impairment of intangible assets for the year ended
December 31, 2021and 2020. In fiscal 2021, we wrote down the value of property and equipment aggregating $3.2 millionpertaining to our first-generation of e-beam tools for DFI™ systems where carrying values may not be fully recoverable due to lack of market demand and future needs of our customers for these tools.
We have operating leases for our administrative and sales offices, research and development laboratory and clean room. We recognize our long-term operating lease rights and commitments as operating lease right-of-use assets, operating lease liabilities and operating lease liabilities, non-current, respectively, on our Consolidated Balance Sheets. We determine if an arrangement is, or contains, a lease at inception. Operating lease right-of-use assets, and operating lease liabilities are initially recorded based on the present value of lease payments over the lease term. Lease terms include the minimum unconditional term of the lease, and may include options to extend or terminate the lease when it is reasonably certain at the commencement date that such options will be exercised. The decision to include these options involves consideration of our overall future business plans and other relevant business economic factors that may affect our business. Since the determination of the lease term requires an application of judgment, lease terms that differ in reality from our initial judgment may potentially have a material impact on our Consolidated Balance Sheets. In addition, our leases do not provide an implicit rate. In determining the present value of our expected lease payments, the discount rate is calculated using our incremental borrowing rate determined based on the information available, which requires additional judgment.
Recent Accounting Pronouncements and Accounting Changes
See our Note 1, "Description of Business and Summary of Significant Accounting Policies" of "Notes to Consolidated Financial Statements" included under Part II, Item 8 of this Form 10-K for a description of recent accounting pronouncements and accounting changes, including the expected dates of adoption and estimated effects, if any, on our consolidated financial statements.
Results of Operations
Discussion of Financial Data for the years ended
Revenues, Costs of Revenues, and Gross Margin
Year Ended December 31, $ Change % Change (Dollars in thousands) 2021 2020 2020 to 2021 Revenues: Analytics
$ 93,415 $ 57,232 $ 36,18363 % Integrated Yield Ramp 17,645 30,814 (13,169) (43) % Total revenues $ 111,060 $ 88,046 $ 23,01426 % Costs of revenues 44,193 36,765 7,428 20 % Gross profit $ 66,867 $ 51,281 $ 15,58630 % Gross margin 60 % 58 % Analytics revenue as a percentage of total revenues 84 % 65 % Integrated Yield Ramp revenue as a percentage of total revenues 16 % 35 %
39 Table of Contents Analytics Revenue
Analytics revenue was
$93.4 million, an increase of $36.2 million, or 63%, compared to the year ended December 31, 2020. The increase in Analytics revenue was primarily driven by a $30.1 millionincrease in revenue, of which a substantial amount was from Cimetrixdue to full year included results post acquisition and remainder was from Exensio software licenses due to higher demand from customers, and a $6.1 millionincrease in revenue from CV systems due to higher hours worked across multiple contracts and customers.
Integrated Yield Ramp Revenue
Integrated Yield Ramp revenue was
$17.6 millionfor the year ended December 31, 2021, a decrease of $13.2 million, compared to the year ended December 31, 2020, primarily due to a decrease in Gainshare royalty due to the end of Gainshare periods from certain contracts and lower hours worked on other contracts. Our Integrated Yield Ramp revenue may continue to fluctuate from period to period primarily due to the contribution of Gainshare royalty, which is dependent on many factors that are outside our control, including among others, continued production of ICs by our customers at facilities at which we generate Gainshare, sustained yield improvements by our customers, and whether we enter into new contracts containing Gainshare. Our revenues may also fluctuate in the future due to other factors, including the semiconductor industry's continued acceptance of our products, services and solutions, the timing of purchases by existing and new customers, cancellations by existing customers, our ability to attract new customers and penetrate new markets, supply chain challenges and further penetration of our current customer base. Fluctuations in future results may also occur if any of our significant customers renegotiate pre-existing contractual commitments, including due to adverse changes in their own business.
Costs of Revenues
Costs of revenues consist primarily of costs incurred to provide and support our services, costs recognized in connection with licensing our software, and amortization of acquired technology. Services costs include material, employee compensation and related benefits including stock-based compensation expense, subcontractor costs, overhead costs, travel, and allocated facilities-related costs. Software license costs consist of costs associated with cloud-delivery related expenses and licensing third-party software used by us in providing services to our customers in solution engagements or sold in conjunction with our software products. The increase in costs of revenues of
$7.4 millionfor the year ended December 31, 2021, compared to the year ended December 31, 2020, was primarily due to (i) a $5.6 millionincrease in personnel-related costs due to higher headcount as a result of the Cimetrixacquisition, higher benefit costs, and merit increases, partially offset by a decrease in stock-based compensation expense, (ii) a $2.2 millionincrease in third-party cloud-delivery costs, software licenses costs, and hardware costs, and (iii) a $1.4 millionincrease in amortization of acquired intangible assets. These were partially offset by (i) a $1.0 milliondecrease in facilities and information technology-related costs including depreciation expense, (ii) a $0.4 milliondecrease due to the timing of deferral of contract costs, and (iii) a $0.3 milliondecrease in
other expenses. Gross Margin
Gross margin for the year ended
December 31, 2021, was 60% compared to 58% for the year-ago period, or an increase of 2%. The higher gross margin during year ended December 31, 2021, was primarily due to higher total revenue growth and decreases in certain costs of revenues, as discussed above, which decreased the costs of revenues as a percentage of total revenues, when compared to the year-ago period. 40 Table of Contents Operating Expenses: Research and Development Year Ended December 31, $ Change % Change (Dollars in thousands) 2021 2020 2020 to 2021 Research and development $ 43,780 $ 34,654 $ 9,12626 % As a percentage of total revenues 39 % 39 % Research and development expenses consist primarily of personnel-related costs including compensation, benefits and stock-based compensation expense, outside development services, travel, third-party cloud-services related costs, and facilities cost allocations to support product development activities. Research and development expenses increased 26% for the year ended December 31, 2021, compared to the year-ago period, primarily due to (i) a $6.6 millionincrease in personnel-related costs due to higher headcount as a result of the Cimetrixacquisition, higher benefit costs, merit increases and higher stock-based compensation expense, (ii) a $2.6 millionincrease in subcontractor expenses primarily related to our characterization services and Exensio and Cimetrixsoftware, (iii) a $0.4 millionincrease in third-party cloud-services related costs, and (iv) a $0.3 millionincrease in facilities and information technology-related costs. These were partially offset by (i) a $0.4 milliondecrease in software maintenance expense and (ii) a $0.4 milliondecrease in various other expenses.
We anticipate our expenses in research and development will fluctuate in absolute dollars from period to period as a result of the size and the timing of product development projects.
Selling, General and Administrative
Year Ended December 31, $ Change % Change (Dollars in thousands) 2021 2020 2020 to 2021 Selling, general and administrative
$ 37,649 $ 32,677 $ 4,97215 % As a percentage of total revenues 34 % 37 % Selling, general and administrative expenses consist primarily of compensation, benefits and stock-based compensation expense for sales, marketing and general and administrative personnel, legal and accounting services, marketing communications expenses, third-party cloud-services related costs, travel and facilities cost allocations. Selling, general, and administrative expenses increased 15% for the year ended December 31, 2021, compared to the year-ago period, primarily due to (i) a $4.1 millionincrease in personnel-related costs due to higher headcount as a result of the Cimetrixacquisition, higher benefit costs, merit increases and higher stock-based compensation expense, (ii) a $1.5 millionincrease in facilities and information technology-related costs including rent and depreciation expense, (iii) a $0.9 millionincrease in legal fees related to the arbitration proceeding over a disputed customer contract, and (iv) a $0.5 millionincrease in third-party cloud-services related costs. These were partially offset by (i) a $1.5 milliondecrease in acquisition related costs, and (ii) a $0.6 milliondecrease in general legal expenses. We anticipate our selling, general and administrative expenses will fluctuate in absolute dollars from period to period as a result of cost control initiatives and to support increased selling efforts in the future. 41
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Amortization of acquired intangible assets
Year Ended December 31, $ Change % Change (Dollars in thousands) 2021 2020 2020 to 2021 Amortization of acquired intangible assets
$ 1,255 $ 741$
514 69 %
Amortization of acquired intangible assets consists of amortization of intangibles acquired as a result of certain business combinations. The increase in amortization of acquired intangible assets for the year ended
December 31, 2021, compared to the year ended December 31, 2020, was primarily related to amortization of acquired intangible assets in the acquisition of Cimetrix.
Write-down in value of property and equipment
Year Ended December 31, $ Change % Change (Dollars in thousands) 2021 2020 2020 to 2021 Write-down in value of property and equipment $ 3,183 $ -
In fiscal 2021, we wrote down the value of property and equipment aggregating
$3.2 millionpertaining to our first-generation of e-beam tools for DFI™ systems where carrying values may not be fully recoverable due to lack of market demand and future needs of our customers for these tools.
Interest and Other Expense (Income), Net
Year Ended December 31, $ Change % Change (Dollars in thousands) 2021 2020 2020 to 2021 Interest and other expense (income), net
$ (683) $ 1,269 $ (1,952)(154) % Interest and other expense (income), net primarily consists of interest income, gains, and losses from foreign currency forward contracts, and foreign currency transaction exchange gains and losses. Interest and other expense (income), net resulted in income for the year ended December 31, 2021, compared to a loss in the year-ago period, primarily due to higher net favorable fluctuations in foreign exchange rates, and a decrease in loss related to foreign currency forward contracts, partially offset by a decrease in interest income due to lower interest rates and a decrease in other income. Income Tax Expense Year Ended December 31, $ Change % Change (Dollars in thousands) 2021 2020 2020 to 2021 Income tax expense $ 3,171 $ 22,303 $ (19,132)(86) %
Income tax expense decreased for the year ended
December 31, 2021, compared to the year-ago period. Our income tax expense in fiscal 2020 was significantly higher due primarily to the recognition of a full valuation allowance against our U.S.net deferred tax assets due to the uncertainty of the ultimate realization of the future benefits of such deferred tax assets. Any significant change in our future effective tax rates could adversely impact our consolidated financial position, results of operations and cash flows. Our future tax rates may be adversely affected by a number of factors including increase in expenses not deductible for tax purposes, tax legislations in the United Statesand in foreign countries where we are subject to tax jurisdictions, the geographic composition of our pre-tax income, the amount of our pre-tax income as business activities fluctuate, our ability to use tax attributes such as research and development tax credits and net operation losses, the tax effects of employee stock activity, audit examinations with adverse outcomes, changes in general accepted accounting principles and the effectiveness of our tax planning strategies. 42
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Discussion of Financial Data for the years ended
For a discussion of our results of operations for the years ended
Liquidity and Capital Resources
December 31, 2021, our working capital, defined as total current assets less total current liabilities, was $144.7 million, compared to $151.2 millionas of December 31, 2020. Cash, cash equivalents and short-term investments, on a consolidated basis, were $140.2 millionas of December 31, 2021, compared to $145.3 millionas of December 31, 2020. As of December 31, 2021and 2020, cash and cash equivalents held by our foreign subsidiaries were $5.3 millionand $4.0 million, respectively. We believe that our existing cash resources and anticipated funds from operations will satisfy our cash requirements to fund our operating activities, capital expenditures, and other obligations, for at least the next twelve months. There has been no significant impact to our liquidity and capital resources from the global COVID-19 pandemic. For risk discussion about the continuing impact of global COVID-19 pandemic on our operations or demand for our products, refer to Item 1A, Risk Factors on Part I of this Annual Report.
In 2020, the Company held back
$3.5 millionof 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. The Holdback Amount was recorded under accrued and other current liabilities account and the corresponding restricted cash was included in the "Prepaid expenses and other current assets" account in the 2020 Consolidated Balance Sheet. During 2021, the Company recorded a measurement period adjustment that reduced the Holdback Amount to $3.1 million. The measurement period adjustment did not have an impact on the Company's Consolidated Statement of Comprehensive Loss during the year ended December 31, 2021. The Holdback Amount, as adjusted, was paid to the participating equity holders in December 2021. See Note 4 of "Notes to Consolidated Financial Statements" (Item 8 of Part II of this Annual Report) for further discussion.
Repurchase of Company’s Common Stock
June 4, 2020, the Company's Board of Directors adopted a stock repurchase program (the "2020 Program") to repurchase up to $25.0 millionof the Company's common stock both on the open market and in privately negotiated transactions, including through Rule 10b5-1 plans, over the next two years. During the year ended December 31, 2021, 251,212 shares were repurchased under the 2020 Program at an average price of $18.01per share, for a total price of $4.5 million
under the 2020 Program. 43 Table of Contents
Consolidated Statements of Cash Flows Data
Year Ended December 31, $ Change 2021 2020 2020 to 2021 (In thousands) Net cash flows provided by (used in): Operating activities
$ 4,243 $ 21,783 $ (17,540)Investing activities (4,667) (150,502) 145,835 Financing activities (5,525) 64,798 (70,323) Effect of exchange rate changes on cash and cash equivalents (182) 131 (313) Net decrease in cash, cash equivalents, and restricted cash $ (6,131)$
Net Cash Provided by Operating Activities
Cash flow from operating activities during 2021 mostly consisted of net loss from operations, adjusted for certain non-cash items, which primarily consisted of depreciation and amortization, share-based compensation expense, write-down in value of property and equipment, changes in deferred tax assets, and changes in operating assets and liabilities. Cash generated from operating activities decreased by
$17.5 millionfor the year ended December 31, 2021, compared to the year ended December 31, 2020, driven primarily by (i) a $21.6 millionincrease in net change in operating assets and liabilities, (ii) a $14.8 milliondecrease in non-cash adjustments to net loss, primarily due to a decrease in changes of deferred taxes of $19.6 million, an increase in write-down in value of property and equipment of $2.7 million, and an increase in amortization of acquired intangible assets of $1.9 million. These increases were partially offset by an $18.9 milliondecrease in net loss.
The major contributors to the net change in operating assets and liabilities for the year ended
Accounts receivable increased by
? sales and higher contractual invoicing activity during the fourth quarter of
Prepaid expense and other current assets decreased by
due to the timing of billing of contract assets related to fixed-price service
? contracts, and a decrease in income tax receivables, partially offset by an
increase in prepaid expenses related to third party software licenses and
cloud-subscription related costs;
Other non-current assets increased by
? increase in capitalized direct sales commission costs and prepaid expenses
related to third party software licenses and cloud-subscription related costs;
Accrued compensation and related benefits increased by
? due to the timing of payments of accrued bonuses, accrued sales commissions and
accrued payroll taxes, and an increase in contributions to employee stock
purchase plans, partially offset by a decreased in accrued vacation;
? Deferred revenues increased by
and revenue recognition, and
? Billings in excess of recognized revenues decreased by
due to the timing of billing and revenue recognition. 44 Table of Contents
Net cash used in investing activities in the year ended
For the year ended
December 31, 2021, cash used in investing activities primarily related to (i) purchases of $168.6 millionshort-term investments, (ii) a $3.1 millionpayment of the Holdback Amount related to the acquisition of Cimetrix, (refer to above discussion on Cimetrix Acquisition for further details), and (iii) a $4.1 millionequipment purchased and prepayment property and equipment, primarily related to our DFI systems, including construction of additional second-generation eProbe tools, partially offset by $171.0 millionproceeds from maturities of short-term investments. For the year ended December 31, 2020, cash used in investing activities primarily related to (i) purchases of $131.5 millionshort-term investments, (ii) a $28.6 millionpayment for the acquisition of Cimetrix, and (iii) a $7.0 millionfor equipment purchased and prepayment property and equipment, primarily related to our DFI systems, including construction of additional second-generation eProbe tools, partially offset by $16.5 millionproceeds from maturities of short-term investments.
Net Cash Provided by (Used in) Financing Activities
Net cash used in financing activities was
For the year ended
December 31, 2021, net cash used in financing activities primarily consisted of $4.5 millionfor the repurchase of shares of our common stock and $4.0 millionin cash payments for taxes related to net share settlement of equity awards, partially offset by $3.0 millionof proceeds from purchases under our employee stock purchase plans and the exercise of stock options. For the year ended December 31, 2020, net cash provided by financing activities primarily consisted of $65.1 millionnet proceeds from the issuance of common stock in connection with the Securities Purchase Agreement with Advantest, and $4.2 millionof proceeds from purchases under our employee stock purchase plan and the exercise of stock options, partially offset by $4.5 millionin cash payments for taxes related to net share settlement of equity awards. Related Party Transactions
Refer to Note 3, Strategic Partnership Agreement with Advantest and Related Party Transactions of the Notes to Consolidated Financial Statements (Item 8 of Part II of this Annual Report) for a discussion on related party transactions between the Company and Advantest.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements, investments in special purpose entities or undisclosed borrowings or debt.
45 Table of Contents Contractual Obligations
The following table summarizes our known contractual obligations as of
Payments Due by Period 2027 and Contractual Obligations 2022 2023 2024 2025 2026 thereafter Total Operating lease obligations (1)
$ 1,825 $ 1,217 $ 807 $ 823 $ 789 $ 1,365 $ 6,826Purchase obligations (2) 7,448 824 320 321 - - 8,913 Total (3) $ 9,273 $ 2,041 $ 1,127 $ 1,144 $ 789 $ 1,365 $ 15,739
(1) Refer to Note 7 of “Notes to Consolidated Financial Statements” (Item 8 of
Part II of this Annual Report) for further discussion.
(2) Purchase obligations consist of agreements to purchase goods and services
entered in the ordinary course of business.
The contractual obligation table above excludes liabilities for uncertain tax
(3) particular years due to the inherent uncertainty of the tax positions. See
Note 11 of “Notes to Consolidated Financial Statements” (Item 8 of Part II of
this Annual Report) for further discussion.
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