PDF Solutions(PDFS) - 2021 Q3 - Quarterly Report

PART I FINANCIAL INFORMATION This section presents the unaudited condensed consolidated financial statements and management's discussion and analysis for the company Item 1. Financial Statements (Unaudited) This section presents the unaudited condensed consolidated financial statements, offering a snapshot of the company's financial position and performance Condensed Consolidated Balance Sheets This statement provides a summary of the company's assets, liabilities, and stockholders' equity at specific points in time Condensed Consolidated Balance Sheets (in thousands) | ASSETS (in thousands) | Sep 30, 2021 | Dec 31, 2020 | | :---------------------- | :----------- | :----------- | | Cash and cash equivalents | $71,238 | $30,315 | | Short-term investments | $69,992 | $114,981 | | Accounts receivable, net | $33,681 | $34,140 | | Total current assets | $185,209 | $193,380 | | Total assets | $275,224 | $287,580 | | LIABILITIES AND STOCKHOLDERS' EQUITY (in thousands) | Sep 30, 2021 | Dec 31, 2020 | | :-------------------------------------------------- | :----------- | :----------- | | Total current liabilities | $41,139 | $42,205 | | Total liabilities | $51,769 | $53,074 | | Total stockholders' equity | $223,455 | $234,506 | | Total liabilities and stockholders' equity | $275,224 | $287,580 | Condensed Consolidated Statements of Comprehensive Loss This statement details the company's revenues, expenses, and net loss over specific reporting periods Condensed Consolidated Statements of Comprehensive Loss (in thousands, except per share amounts) | Metric (in thousands) | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :-------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Analytics Revenues | $27,194 | $14,346 | $66,165 | $42,766 | | Integrated Yield Ramp Revenues | $2,361 | $8,766 | $15,009 | $22,912 | | Total Revenues | $29,555 | $23,112 | $81,174 | $65,678 | | Costs of Revenues | $11,070 | $9,493 | $32,518 | $26,926 | | Research and development | $10,657 | $8,328 | $32,562 | $24,672 | | Selling, general and administrative | $9,609 | $8,420 | $28,482 | $24,052 | | Net Loss | $(2,407) | $(2,734) | $(14,488) | $(6,914) | | Comprehensive Loss | $(2,632) | $(2,197) | $(15,031) | $(6,336) | | Net Loss Per Share (Basic and Diluted) | $(0.06) | $(0.08) | $(0.39) | $(0.21) | Condensed Consolidated Statements of Stockholders' Equity This statement outlines changes in the company's equity accounts, including net loss and stock transactions - Total stockholders' equity decreased from $234,506 thousand at December 31, 2020, to $223,455 thousand at September 30, 2021, primarily due to comprehensive loss and treasury stock repurchases, partially offset by additional paid-in capital from stock issuances and stock-based compensation[11][12] Condensed Consolidated Statements of Cash Flows This statement summarizes the cash inflows and outflows from operating, investing, and financing activities Condensed Consolidated Statements of Cash Flows (Nine Months Ended September 30, in thousands) | Cash Flow Activity (in thousands) | 2021 | 2020 | | :-------------------------------- | :---------- | :---------- | | Net cash provided by operating activities | $3,827 | $10,876 | | Net cash provided by (used in) investing activities | $42,302 | $(55,348) | | Net cash provided by (used in) financing activities | $(5,494) | $65,202 | | Net change in cash, cash equivalents, and restricted cash | $40,442 | $20,781 | | Cash, cash equivalents, and restricted cash at end of period | $74,257 | $118,386 | - Cash paid for taxes decreased from $2,188 thousand in 2020 to $1,543 thousand in 2021 for the nine months ended September 30[15] Notes to Condensed Consolidated Financial Statements These notes provide additional information and explanations for the figures presented in the financial statements 1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES This note outlines the basis for preparing interim financial statements, including accounting policies and the impact of new accounting standards - The Company adopted ASU No 2019-12 (Income Taxes) and ASU No 2020-01 (Investments-Equity Securities) on January 1, 2021, with no material impact on financial statements[22][23] - The Company, as a small reporting company (SRC), will adopt ASU No 2016-13 (Credit Losses) for fiscal years beginning after December 15, 2022 (fiscal 2023), and does not expect a material impact[25] - ASU No 2020-06 (Convertible Instruments) will be effective for SRCs for annual reporting periods beginning after December 15, 2023, and is not anticipated to have a significant impact[26] 2. REVENUE FROM CONTRACTS WITH CUSTOMERS This note details the company's revenue recognition policies, disaggregating revenue by source, timing, and geographical region - The Company derives revenue from two primary sources: Analytics (standalone software, SaaS, DFI/CV systems without yield incentives) and Integrated Yield Ramp (fixed-fee engagements with performance incentives like Gainshare royalties)[29][33][39] - Revenue recognition for project-based contracts (including Integrated Yield Ramp and some DFI/CV systems) uses a percentage-of-completion method based on costs or labor-hours, requiring significant judgment[38][40][45] - Gainshare royalty revenue is recognized in the period of usage, with estimates based on historical data and industry knowledge, leading to potential adjustments in subsequent quarters[41][47] Disaggregation of Revenue by Timing of Transfer | Timing of Revenue | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :---------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Over time | 72% | 55% | 60% | 56% | | Point-in-time | 28% | 45% | 40% | 44% | | Total | 100% | 100% | 100% | 100% | - International revenues accounted for approximately 53% and 57% of total revenues during the three and nine months ended September 30, 2021, respectively, a decrease from 67% and 60% in the prior year periods[43] - The aggregate amount of transaction price allocated to remaining performance obligations was approximately $180.9 million as of September 30, 2021, with the majority expected to be recognized over the next two years[52] 3. STRATEGIC PARTNERSHIP AGREEMENT WITH ADVANTEST AND RELATED PARTY TRANSACTIONS This note describes the strategic partnership with Advantest, including a stock purchase and exclusive commercial arrangements, and related revenue impacts - On July 29, 2020, PDF Solutions entered into a strategic partnership with Advantest, including a $65.2 million common stock purchase by Advantest and an exclusive commercial arrangement for an Advantest-specific cloud layer on the Exensio platform[56] Analytics Revenue from Advantest (in thousands) | Period | 2021 (in thousands) | 2020 (in thousands) | | :---------------------- | :------------------ | :------------------ | | Three Months Ended Sep 30 | $2,700 | $1,000 | | Nine Months Ended Sep 30 | $7,900 | $1,000 | - Deferred revenue from Advantest amounted to $9.6 million as of September 30, 2021, compared to nil at December 31, 2020[58] 4. BUSINESS COMBINATION This note details the acquisition of Cimetrix Incorporated, outlining the purchase price allocation and subsequent adjustments to goodwill - On December 1, 2020, PDF Solutions acquired Cimetrix Incorporated for $28.6 million, net of cash acquired[60] - A holdback amount of $3.5 million was initially retained, later reduced to $3.0 million due to a measurement period adjustment in Q1 2021, with a corresponding reduction in goodwill[60][62] Cimetrix Acquisition Purchase Price Allocation (as of Sep 30, 2021, in thousands) | Category (in thousands) | Amount | | :---------------------- | :----- | | Fair value of tangible assets | $8,403 | | Fair value of intangible assets | $19,799 | | Goodwill | $13,012 | | Total assets acquired | $41,214 | | Total liabilities assumed | $3,703 | | Total purchase price allocation | $37,511 | 5. BALANCE SHEET COMPONENTS This note provides detailed breakdowns of key balance sheet components, including accounts receivable, property, equipment, goodwill, and intangible assets Accounts Receivable (in thousands) | Category (in thousands) | Sep 30, 2021 | Dec 31, 2020 | | :---------------------- | :----------- | :----------- | | Unbilled accounts receivable (current) | $8,600 | $7,200 | | Unbilled accounts receivable (non-current) | $1,600 | $2,000 | Property and Equipment, Net (in thousands) | Category (in thousands) | Sep 30, 2021 | Dec 31, 2020 | | :---------------------- | :----------- | :----------- | | Computer equipment | $11,715 | $11,585 | | Test equipment | $24,865 | $26,010 | | Construction-in-progress | $23,432 | $20,278 | | Total | $77,870 | $75,537 | | Less: accumulated depreciation and amortization | $(40,049) | $(36,295) | | Total, net | $37,821 | $39,242 | - Goodwill decreased from $15,774 thousand at January 1, 2021, to $15,305 thousand at September 30, 2021, due to a $469 thousand measurement period acquisition adjustment[69] Intangible Assets, Net (in thousands) | Category (in thousands) | Sep 30, 2021 Net | Dec 31, 2020 Net | | :---------------------- | :--------------- | :--------------- | | Customer relationships | $3,527 | $4,009 | | Developed technology | $13,348 | $15,013 | | In-process R&D | $3,635 | $3,635 | | Total Intangible Assets, Net | $22,106 | $24,573 | Expected Annual Amortization of Acquired Identifiable Intangible Assets (in thousands) | Year Ending December 31, | Amount (in thousands) | | :----------------------- | :-------------------- | | 2021 (remaining) | $754 | | 2022 | $3,013 | | 2023 | $2,990 | | 2024 | $2,592 | | 2025 | $2,427 | | 2026 and thereafter | $6,695 | | Total | $18,471 | 6. LEASES This note details the company's operating leases, including lease expense, weighted-average terms, discount rates, and future payment schedules Total Lease Expense (in thousands) | Period | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :---------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Operating lease expense | $448 | $455 | $1,417 | $1,362 | | Short-term and variable lease expense | $196 | $127 | $602 | $401 | | Total lease expense | $644 | $582 | $2,019 | $1,763 | - The weighted average remaining lease term for operating ROU leases was 6.0 years as of September 30, 2021, with a weighted average discount rate of 5.25%[75] Maturities of Operating Lease Liabilities (as of Sep 30, 2021, in thousands) | Year Ending December 31, | Amount (in thousands) | | :----------------------- | :-------------------- | | 2021 (remaining) | $477 | | 2022 | $1,707 | | 2023 | $1,389 | | 2024 | $1,073 | | 2025 | $1,088 | | 2026 and thereafter | $2,703 | | Total future minimum lease payments | $8,437 | | Present value of future minimum lease payments | $7,241 | 7. STOCKHOLDERS' EQUITY This note details changes in stockholders' equity, including common stock issuances and the company's stock repurchase programs - On July 30, 2020, the Company issued 3,306,924 shares of common stock to Advantest for $65.2 million[78] - The Company's 2020 stock repurchase program authorized up to $25.0 million in repurchases over two years. During the nine months ended September 30, 2021, 251,212 shares were repurchased for $4.5 million at an average price of $18.01 per share[80] 8. EMPLOYEE BENEFIT PLANS This note describes the company's employee benefit plans, including ESPP and Stock Incentive Plans, detailing stock-based compensation expense and activity - The 2021 Employee Stock Purchase Plan was approved on June 15, 2021, with terms similar to the expired 2010 Purchase Plan. Unrecognized compensation cost for the 2021 Purchase Plan was $2.0 million as of September 30, 2021[82][83] Stock-Based Compensation Expense (in thousands) | Expense Category (in thousands) | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :------------------------------ | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Costs of revenues | $670 | $790 | $1,860 | $2,582 | | Research and development | $1,299 | $1,148 | $4,013 | $3,613 | | Selling, general and administrative | $1,394 | $1,192 | $3,601 | $3,281 | | Total Stock-based compensation expenses | $3,363 | $3,130 | $9,474 | $9,476 | - As of September 30, 2021, there was $0.2 million of unrecognized compensation expense related to unvested stock options, expected to be recognized over 2.0 years[94] - As of September 30, 2021, there was $27.1 million of unrecognized compensation cost related to non-vested restricted stock units, expected to be recognized over 2.7 years[94] 9. INCOME TAXES This note discusses income tax expense, effective tax rate, unrecognized tax benefits, and the impact of valuation allowances and tax legislation - Income tax expense increased by $5.7 million for the nine months ended September 30, 2021, resulting in a $1.5 million expense compared to a $4.1 million benefit in 2020[95] - The effective tax rate was (12%) for the nine months ended September 30, 2021, compared to 37% in 2020, primarily due to a full valuation allowance against U.S net deferred tax assets in Q4 2020 and the absence of CARES Act benefits[95] - The total amount of unrecognized tax benefits was $14.7 million as of September 30, 2021, with $1.9 million potentially affecting the effective tax rate if recognized[96] - A valuation allowance of approximately $41.9 million was maintained against U.S net federal and state deferred tax assets as of September 30, 2021[97] 10. NET LOSS PER SHARE This note provides the calculation of basic and diluted net loss per share, which are identical due to the company's net loss position Net Loss Per Share (in thousands, except per share amount) | Metric (in thousands) | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :-------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Net loss | $(2,407) | $(2,734) | $(14,488) | $(6,914) | | Basic weighted-average shares outstanding | 37,221 | 35,479 | 37,067 | 33,696 | | Net loss per share, basic and diluted | $(0.06) | $(0.08) | $(0.39) | $(0.21) | - For both the three and nine months ended September 30, 2021 and 2020, basic and diluted net loss per share were the same because the Company was in a loss position, making the inclusion of potential common shares anti-dilutive[102] Anti-Dilutive Potential Common Shares (in thousands) | Potential Shares (in thousands) | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :------------------------------ | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Outstanding options | 128 | 310 | 182 | 362 | | Non-vested restricted stock units | 915 | 1,084 | 997 | 820 | | Employee Stock Purchase Plan | 30 | 190 | 14 | 146 | | Total | 1,073 | 1,584 | 1,193 | 1,328 | 11. CUSTOMER AND GEOGRAPHIC INFORMATION This note clarifies the company's single operating segment and disaggregates revenue and long-lived assets by customer and geographic region - The Company operates as a single operating and reporting segment, focusing on differentiated data and analytics solutions for the semiconductor and electronics industries[104] Revenues by Geographic Area (in thousands) | Geographic Area (in thousands) | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :----------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | United States | $13,983 (47%) | $7,710 (33%) | $34,634 (43%) | $26,242 (40%) | | China | $4,038 (14%) | $6,747 (29%) | $10,065 (12%) | $10,200 (16%) | | Rest of the world | $11,534 (39%) | $8,655 (38%) | $22,521 (28%) | $17,784 (27%) | | Total revenue | $29,555 (100%) | $23,112 (100%) | $81,174 (100%) | $65,678 (100%) | Long-Lived Assets, Net by Geographic Area (in thousands) | Geographic Area (in thousands) | Sep 30, 2021 | Dec 31, 2020 | | :----------------------------- | :----------- | :----------- | | United States | $41,811 | $43,663 | | Rest of the world | $1,624 | $2,251 | | Total long-lived assets, net | $43,435 | $45,914 | 12. FAIR VALUE MEASUREMENTS This note outlines fair value measurements for financial assets and the use of foreign currency forward contracts to mitigate exchange rate risk Assets Measured at Fair Value (in thousands) | Assets (in thousands) | Sep 30, 2021 Total | Sep 30, 2021 Level 1 | Dec 31, 2020 Total | Dec 31, 2020 Level 1 | | :-------------------- | :----------------- | :------------------- | :----------------- | :------------------- | | Money market mutual funds | $55,039 | $55,039 | $18,012 | $18,012 | | U.S. Treasury bills | $69,992 | $69,992 | $114,981 | $114,981 | | Total | $125,031 | $125,031 | $132,993 | $132,993 | - The Company uses foreign currency forward contracts to reduce exposure to foreign currency exchange rate fluctuations, primarily on third-party accounts payables and intercompany balances. These contracts are not designated for hedge accounting[111] - There was no realized gain or loss from foreign currency forward contracts during the three and nine months ended September 30, 2021, and no outstanding contracts as of September 30, 2021[112][115] 13. COMMITMENTS AND CONTINGENCIES This note outlines the company's commitments and contingencies, including strategic partnerships, operating leases, indemnifications, and ongoing legal proceedings - The Company provides warranties for software performance and indemnifies customers against third-party intellectual property infringement claims, with historically insignificant related costs[117] - Total outstanding purchase obligations were $11.3 million as of September 30, 2021, with the majority due within the next 24 months[118] - The Company is engaged in an ongoing arbitration proceeding against SMIC New Technology Research & Development (Shanghai) Corporation since May 2020, seeking recovery of unpaid fees and future payments[122] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial condition, results of operations, and cash flows for the reported periods Overview This section provides an overview of the company's business, offerings, and revenue generation models - PDF Solutions provides comprehensive data solutions to the semiconductor ecosystem to improve yield, quality, and operational efficiency, deriving revenue from Analytics and Integrated Yield Ramp offerings[126] - Offerings include proprietary software (Exensio®, Cimetrix®), physical IP, electrical measurement hardware, and professional services, monetized through license fees, contract revenue, SaaS fees, and Gainshare royalties[126] Industry Trends This section discusses the impact of the COVID-19 pandemic, Industry 4.0 trends, shifts in the logic foundry market, and U.S.-China trade tensions - The COVID-19 pandemic has limited in-person meetings, making it harder to sell complex technologies, though the Company has maintained uninterrupted access to products/services due to its distributed workforce[127][128] - Industry 4.0 and cloud computing trends are increasing demand for cloud-based analytics programs that manage large datasets securely, creating opportunities for PDF Solutions' advanced analytics capabilities[130] - The Company is shifting resources and investments towards analytics products and services due to changes in the logic foundry market, particularly at leading-edge nodes, and expects continued investment in derivatives of older process nodes[131] - U.S.-China trade tensions and export controls, despite PDF Solutions' software not being primarily U.S origin, could disrupt international trade, deter customer purchasing, and negatively impact China sales[135] Cimetrix Acquisition This section reiterates the Cimetrix acquisition and its strategic importance in enhancing intelligence extraction from manufacturing tools - The acquisition of Cimetrix Incorporated on December 1, 2020, aims to combine its connectivity products with the Exensio platform to enable IC, assembly, and equipment manufacturers to extract more intelligence from their tools[136] Financial Highlights This section summarizes key financial performance indicators, including revenues, net loss, and changes in cash and investments Financial Highlights (Three Months Ended September 30, in millions) | Metric (in millions) | 2021 | 2020 | Change ($) | Change (%) | | :------------------- | :---- | :---- | :--------- | :--------- | | Total Revenues | $29.6 | $23.1 | $6.4 | 28% | | Analytics Revenue | $27.2 | $14.3 | $12.8 | 90% |\ | Integrated Yield Ramp Revenue | $2.4 | $8.8 | $(6.4) | (73)% | | Net Loss | $(2.4)| $(2.7)| $0.3 | (11)% | Financial Highlights (Nine Months Ended September 30, in millions) | Metric (in millions) | 2021 | 2020 | Change ($) | Change (%) | | :------------------- | :---- | :---- | :--------- | :--------- | | Total Revenues | $81.2 | $65.7 | $15.5 | 24% | | Analytics Revenue | $66.2 | $42.8 | $23.4 | 55% | | Integrated Yield Ramp Revenue | $15.0 | $22.9 | $(7.9) | (34)% | | Net Loss | $(14.5)| $(6.9)| $(7.6) | 110% | - Cash, cash equivalents, and short-term investments decreased by $4.1 million to $141.2 million at September 30, 2021, from $145.3 million at December 31, 2020, primarily due to cash used for property and equipment, stock repurchases, and tax payments related to equity awards[139] Critical Accounting Policies and Estimates This section discusses critical accounting policies and estimates, including revenue recognition, income taxes, and asset valuation, noting no material changes - No material changes occurred in critical accounting policies and estimates during the nine months ended September 30, 2021[141] - Significant estimates and assumptions relate to revenue recognition, valuation of long-lived assets (including goodwill and intangible assets), and the realization of deferred tax assets[145] - A full valuation allowance was deemed appropriate for federal and state net deferred tax assets in Q4 2020 due to cumulative losses and the likelihood of not utilizing tax attributes before expiration[155] - Goodwill impairment assessments are performed annually in the fourth quarter or more frequently if circumstances indicate a potential reduction in fair value below carrying amount; no impairment was recorded for the periods presented[158] Results of Operations This section provides a detailed analysis of the company's revenues, costs, gross margin, and operating expenses for the reported periods Revenues, Costs of Revenues, and Gross Margin (in thousands) | Metric (in thousands) | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | Change ($) | Change (%) | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | Change ($) | Change (%) | | :-------------------- | :------------------------------ | :------------------------------ | :--------- | :--------- | :----------------------------- | :----------------------------- | :--------- | :--------- | | Analytics Revenues | $27,194 | $14,346 | $12,848 | 90% | $66,165 | $42,766 | $23,399 | 55% | | Integrated Yield Ramp Revenues | $2,361 | $8,766 | $(6,405) | (73)% | $15,009 | $22,912 | $(7,903) | (34)% | | Total Revenues | $29,555 | $23,112 | $6,443 | 28% | $81,174 | $65,678 | $15,496 | 24% | | Costs of Revenues | $11,070 | $9,493 | $1,577 | 17% | $32,518 | $26,926 | $5,592 | 21% | | Gross Profit | $18,485 | $13,619 | $4,866 | 36% | $48,656 | $38,752 | $9,904 | 26% | | Gross Margin | 63% | 59% | | | 60% | 59% | | | - Analytics revenue increased significantly due to higher demand for Cimetrix and Exensio software licenses and increased hours worked on CV and DFI systems[163][164] - Integrated Yield Ramp revenue decreased due to lower Gainshare royalties from the end of certain periods and reduced hours on fixed-fee engagements[165] - Costs of revenues increased primarily due to higher personnel-related costs from the Cimetrix acquisition, cloud-delivery costs, software royalties, and amortization of acquired intangibles[168][169] Operating Expenses (in thousands) | Expense Category (in thousands) | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | Change ($) | Change (%) | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | Change ($) | Change (%) | | :------------------------------ | :------------------------------ | :------------------------------ | :--------- | :--------- | :----------------------------- | :----------------------------- | :--------- | :--------- | | Research and Development | $10,657 | $8,328 | $2,329 | 28% | $32,562 | $24,672 | $7,890 | 32% | | Selling, General, and Administrative | $9,609 | $8,420 | $1,189 | 14% | $28,482 | $24,052 | $4,430 | 18% | | Amortization of Other Acquired Intangible Assets | $314 | $174 | $140 | 80% | $942 | $521 | $421 | 81% | | Interest and Other Expense (Income), Net | $(194) | $361 | $(555) | (154)% | $(391) | $530 | $(921) | (174)% | | Income Tax Expense (Benefit) | $506 | $(930) | $1,436 | (154)% | $1,549 | $(4,109) | $5,658 | (138)% | - R&D expenses increased due to higher personnel costs from the Cimetrix acquisition, subcontractor expenses, and cloud-services costs[172][173] - SG&A expenses rose due to increased personnel costs from the Cimetrix acquisition, facilities and IT costs, and legal fees for arbitration, partially offset by a decrease in general legal expenses[176][178] - Interest and other expense (income), net, decreased significantly due to favorable foreign exchange rate fluctuations and a decrease in loss from foreign currency forward contracts[182][183] - Income tax expense increased due to the full valuation allowance against U.S deferred tax assets and the absence of one-time CARES Act benefits from the prior year[184][185] Liquidity and Capital Resources This section discusses the company's working capital, cash position, and cash flow activities from operating, investing, and financing - Working capital was $144.1 million as of September 30, 2021, down from $151.2 million at December 31, 2020[186] - Total cash, cash equivalents, and short-term investments were $141.2 million as of September 30, 2021, a decrease from $145.3 million at December 31, 2020[186] - The Company believes existing cash resources and anticipated funds from operations will satisfy cash requirements for at least the next twelve months[186] Summary of Cash Flows (Nine Months Ended September 30, in thousands) | Cash Flow Activity (in thousands) | 2021 | 2020 | Change ($) | | :-------------------------------- | :---------- | :---------- | :--------- | | Net cash provided by operating activities | $3,827 | $10,876 | $(7,049) | | Net cash provided by (used in) investing activities | $42,302 | $(55,348) | $97,650 | | Net cash provided by (used in) financing activities | $(5,495) | $65,202 | $(70,697) | | Net increase in cash and cash equivalents | $40,442 | $20,781 | $19,661 | - Net cash from operating activities decreased by $7.0 million, primarily due to a $6.1 million decrease in net change from operating assets and liabilities and a $7.6 million increase in net loss, partially offset by a $6.7 million increase in non-cash adjustments[191] - Net cash provided by investing activities increased by $97.7 million, driven by proceeds from maturities of short-term investments ($136.0 million) offset by purchases of short-term investments ($91.0 million) and property and equipment ($2.7 million)[192][193] - Net cash used in financing activities increased by $70.7 million, primarily due to $4.5 million in common stock repurchases and $3.3 million in tax payments for equity awards, contrasting with $65.0 million in proceeds from common stock issuance in the prior year[195][196][197] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section identifies the company's primary market risks, including credit, counterparty, foreign currency, and interest rate risks - The Company is exposed to credit risk, counterparty risk, foreign currency exchange rate risk, and interest rate risk[200] - A hypothetical 100 basis point increase in market interest rates would have an immaterial impact on the fair value of the Company's cash, cash equivalents, and short-term investments[201] - The Company uses foreign currency forward contracts to reduce exposure to foreign currency exchange rate fluctuations on certain foreign currency denominated monetary assets and liabilities, but had no outstanding contracts as of September 30, 2021[203] Item 4. Controls and Procedures This section confirms the effectiveness of disclosure controls and procedures and reports no material changes in internal control over financial reporting - The Company's disclosure controls and procedures were evaluated as effective as of September 30, 2021[205] - No material changes in internal control over financial reporting occurred during the nine months ended September 30, 2021[206] PART II OTHER INFORMATION This section provides additional information not covered in the financial statements, including legal proceedings and risk factors Item 1. Legal Proceedings This section confirms no material legal proceedings with probable loss, noting an ongoing arbitration against SMIC for unpaid fees - The Company was not a party to any material legal proceedings with a probable and estimable loss as of September 30, 2021[207] - An arbitration proceeding against SMIC New Technology Research & Development (Shanghai) Corporation, initiated in May 2020, is ongoing to recover unpaid fees[208] Item 1A. Risk Factors This section states no material changes to previously disclosed risk factors, which could still significantly impact operations - No material changes to risk factors have occurred since the Annual Report on Form 10-K for the year ended December 31, 2020[209] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section reports no stock repurchases during the third quarter of 2021 - No stock repurchases were made during the third quarter of 2021[210] Item 3. Defaults Upon Senior Securities This section confirms no defaults upon senior securities - There were no defaults upon senior securities[211] Item 4. Mine Safety Disclosures This section indicates no applicable mine safety disclosures - No mine safety disclosures are applicable[213] Item 5. Other Information This section reports no other information to disclose - No other information is reported in this section[214] Item 6. Exhibits This section lists the exhibits filed with the Quarterly Report on Form 10-Q, including certifications and financial statements - Exhibits include certifications (31.01, 31.02, 32.01, 32.02) and financial statements formatted in Inline XBRL (101, 104)[216]