PDF Solutions(PDFS) - 2022 Q4 - Annual Report

Part I Business PDF Solutions provides comprehensive data solutions to the semiconductor industry, aiming to improve product yield, quality, and operational efficiency - The company derives revenues from two sources: Analytics (software licenses, SaaS, professional services) and Integrated Yield Ramp (contract fees and value-based royalties called Gainshare)[12] - The company's strategy focuses on providing the Exensio® common platform, driving tool-level software installations (enhanced by the Cimetrix acquisition), creating differentiated data sources (CV® test chips, DFI™ system), and collaborating with industry leaders like Siemens and SAP[14][16][20] - Key product offerings include the Exensio® Platform for data analytics, the Design-for-Inspection™ (DFI™) System for inline electrical inspection, the Characterization Vehicle® (CV®) System for yield learning, and Cimetrix® software for equipment connectivity and control[25][28][32][36] - As of December 31, 2022, the company held 185 U.S. patents with expiration dates from 2023 through 2041[23] Customer Concentration and International Revenue (FY 2022) | Metric | Value | Source | | :--- | :--- | :--- | | Customer Concentration | | | | Revenue from top two customers | 41% | FY 2022 | | International Revenue | | | | Percentage of total revenue | 50% | FY 2022 | - The company faces competition from internal groups at IC companies and direct competitors such as KLA, Siemens, Synopsys, and Applied Materials[50] - As of December 31, 2022, PDF Solutions had 458 employees worldwide, with 258 in North America, 166 in Asia, and 34 in Europe[61] Risk Factors The company identifies several significant risks to its business, including substantial investment risks, customer concentration, and geopolitical and operational challenges - Substantial investments in the DFI system and Exensio platform may not be recouped if the initiatives are not successful, potentially making products obsolete and adversely affecting financial results[73] - A significant portion of revenue comes from a limited number of customers; in 2022, two customers accounted for 41% of total revenues, and the loss or default of a key customer could significantly reduce revenues[83] - The company is required to comply with complex and changing governmental export regulations, such as the U.S. Bureau of Industry and Security (BIS) rules related to China, which could restrict sales and create business uncertainty[88][89] - Integrated Yield Ramp revenue is dependent on wafer volumes at customer sites, which are outside the company's control and have seen a significant reduction in recent years, a trend expected to continue[91] - The business is exposed to cybersecurity threats, including ransomware attacks; a security breach could lead to unauthorized access to sensitive customer data, resulting in significant legal costs, reputational damage, and loss of business[102][105][106] - Competition in the data analytics and semiconductor manufacturing software market is intense and may increase, potentially leading to pricing pressure and impacting the company's ability to grow[116][118] - The ongoing COVID-19 pandemic continues to affect operations, potentially impacting employee productivity, customer purchasing decisions, and the ability to provide on-site services[121][123][124] - Acquisitions, such as the 2020 purchase of Cimetrix, create special risks including integration challenges, unanticipated costs, and potential disruption to the ongoing business[141] Unresolved Staff Comments The company reports that it has no unresolved staff comments - None[149] Properties The company's principal executive offices are located in Santa Clara, California, under a lease for approximately 20,800 square feet expiring in August 2028, with additional leased facilities globally - The principal executive office is a leased space of approximately 20,800 square feet in Santa Clara, California, with the lease expiring in August 2028[150] - Additional facilities are leased in various locations including California, Pennsylvania, Texas, Utah, Illinois, China, Canada, France, Germany, Italy, Japan, Korea, and Taiwan[150] Legal Proceedings The company is involved in an arbitration proceeding initiated on May 6, 2020, against SMIC New Technology Research & Development (Shanghai) Corporation for unpaid fees - On May 6, 2020, PDF Solutions initiated an arbitration proceeding against SMIC New Technology Research & Development (Shanghai) Corporation for failure to pay fees[153] - The company seeks to recover unpaid fees and costs associated with the proceeding; an arbitration hearing was held in February 2023, with a decision pending[153] Mine Safety Disclosures This item is not applicable to the company - Not applicable[154] Part II Market For Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on the Nasdaq Global Market under "PDFS", and it has not paid cash dividends, instead focusing on stock repurchases, including a new $35.0 million program initiated in 2022 - The company's common stock is traded on the Nasdaq Global Market under the symbol "PDFS"[156] - No cash dividends were paid in 2020, 2021, or 2022, and the company does not anticipate paying any in the foreseeable future[157] - On April 11, 2022, the Board adopted a new stock repurchase program (the "2022 Program") authorizing up to $35.0 million in repurchases over two years, terminating the prior 2020 Program[161] Stock Repurchases in FY 2022 | Program | Shares Repurchased | Average Price | Total Cost | | :--- | :--- | :--- | :--- | | 2020 Program | 218,858 | $26.40 | $5.8 million | | 2022 Program | 714,600 | $23.36 | $16.7 million | Selected Financial Data The selected financial data shows consistent revenue growth to $148.5 million in 2022, a narrowing net loss to $3.4 million, and steady asset growth to $278.7 million Selected Consolidated Financial Data (in thousands, except per share amounts) | Metric | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Total revenues | $148,549 | $111,060 | $88,046 | | Net loss | $(3,429) | $(21,488) | $(40,363) | | Net loss per share, basic and diluted | $(0.09) | $(0.58) | $(1.17) | | Total assets | $278,671 | $273,768 | $287,580 | | Total stockholders' equity | $210,012 | $219,585 | $234,506 | - The financial data for 2020, 2021, and 2022 includes the results of Cimetrix Incorporated, which was acquired in December 2020[166] Management's Discussion and Analysis of Financial Condition and Results of Operations In FY 2022, total revenues increased by 34% to $148.5 million, driven by 40% growth in Analytics revenue, leading to a significant reduction in net loss to $3.4 million, while maintaining strong liquidity Financial Highlights for FY 2022 vs. FY 2021 | Metric | 2022 | 2021 | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Total Revenues | $148.5M | $111.1M | +$37.5M | +34% | | Analytics Revenue | $130.5M | $93.4M | +$37.1M | +40% | | Integrated Yield Ramp Revenue | $18.1M | $17.6M | +$0.4M | +2% | | Net Loss | $(3.4M) | $(21.5M) | +$18.1M | -84% | | Cash, cash equivalents & short-term investments | $139.2M | $140.2M | -$1.0M | -0.7% | - The increase in Analytics revenue was driven by higher revenues from CV and DFI systems, as well as Exensio and Cimetrix software licenses[176][210] - Gross margin increased to 68% in 2022 from 60% in 2021, primarily due to higher total revenue[217] - Operating expenses increased, with R&D up 28% and SG&A up 20%, mainly due to higher personnel-related costs including stock-based compensation, headcount, and salary increases[219][225] - The company is monitoring the impact of the CHIPS Act and Inflation Reduction Act, but does not expect the latter to have a material impact on its financial statements[194][195] - Cash from operating activities increased significantly to $32.3 million in 2022, compared to $4.2 million in 2021, driven by a lower net loss and changes in operating assets and liabilities[240][243] - The company repurchased $22.5 million of its common stock in 2022 and paid $6.5 million for taxes related to net share settlement of equity awards[248] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk exposures are interest rates and foreign currency exchange rates, with interest rate risk considered not significant and foreign currency risk periodically mitigated by hedging - The company's exposure to interest rate risk is not expected to be significant, as its investment portfolio consists of cash, money market funds, and U.S. Government securities[257] - A hypothetical 100 basis point increase in market interest rates would not have a significant impact on the fair value of the company's investments[258] - The company is exposed to foreign currency exchange risk from operations in various countries, with certain receivables and payables denominated in Euro, Yen, and RMB[261] - While the company sometimes uses foreign currency forward contracts to hedge against exchange rate fluctuations, there were no outstanding forward contracts as of December 31, 2022[261] Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements for 2022 and 2021, along with the independent auditor's unqualified opinion and identification of Revenue Recognition as a Critical Audit Matter Report of Independent Registered Public Accounting Firm BPM LLP issued an unqualified opinion on PDF Solutions' financial statements and internal controls, identifying Revenue Recognition as a Critical Audit Matter due to significant management judgment - The auditor, BPM LLP, issued an unqualified opinion, stating the financial statements are presented fairly in all material respects[263] - An unqualified opinion was also issued on the effectiveness of the company's internal control over financial reporting as of December 31, 2022[276] - Revenue Recognition was identified as a Critical Audit Matter due to the significant judgment involved in determining standalone selling prices (SSP), estimating costs for fixed-price contracts using the percentage-of-completion method, and estimating Gainshare royalty accruals[268][270][272] Consolidated Balance Sheets The Consolidated Balance Sheet as of December 31, 2022, shows total assets of $278.7 million, driven by increased cash and cash equivalents, while total liabilities and stockholders' equity experienced slight changes Consolidated Balance Sheet Data (in thousands) | Account | Dec 31, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Cash and cash equivalents | $119,624 | $27,684 | | Short-term investments | $19,557 | $112,542 | | Accounts receivable, net | $42,164 | $40,087 | | Total current assets | $193,408 | $188,507 | | Total assets | $278,671 | $273,768 | | Total current liabilities | $58,200 | $43,826 | | Total liabilities | $68,659 | $54,183 | | Total stockholders' equity | $210,012 | $219,585 | Consolidated Statements of Comprehensive Loss For the year ended December 31, 2022, total revenues increased by 34% to $148.5 million, resulting in a significant improvement in net loss to $3.4 million from $21.5 million in 2021 Consolidated Loss Statement Data (in thousands, except per share amounts) | Metric | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Total revenues | $148,549 | $111,060 | $88,046 | | Costs of revenues | $47,907 | $44,193 | $36,765 | | Research and development | $56,126 | $43,780 | $34,654 | | Selling, general and administrative | $45,338 | $37,649 | $32,677 | | Net loss | $(3,429) | $(21,488) | $(40,363) | | Net loss per share, basic and diluted | $(0.09) | $(0.58) | $(1.17) | Consolidated Statements of Cash Flows In 2022, net cash provided by operating activities significantly increased to $32.3 million, while investing activities provided $84.6 million, and financing activities used $24.3 million, leading to a $91.9 million increase in cash and cash equivalents Consolidated Cash Flow Data (in thousands) | Cash Flow Activity | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $32,298 | $4,243 | $21,783 | | Net cash provided by (used in) investing activities | $84,599 | $(4,667) | $(150,502) | | Net cash provided by (used in) financing activities | $(24,307) | $(5,525) | $64,798 | | Net change in cash, cash equivalents, and restricted cash | $91,940 | $(6,131) | $(63,790) | Notes to Consolidated Financial Statements The notes detail accounting policies, including significant judgment in revenue recognition for contracts with multiple obligations and variable considerations like Gainshare, and provide specifics on the 2020 Cimetrix acquisition, goodwill, intangible assets, income taxes, and customer/geographic revenue distribution - Revenue Recognition (Note 2): Significant judgment is required for contracts with multiple performance obligations, determining standalone selling prices (SSP), and estimating variable consideration like Gainshare royalties[335][345][347] - Revenue is disaggregated by timing, with 69% recognized over time and 31% at a point-in-time in 2022[347] - Business Combination (Note 4): The company acquired Cimetrix on December 1, 2020, for a gross purchase price of approximately $37.5 million ($31.6 million net of cash acquired)[364][370] - The acquisition resulted in $11.8 million of goodwill and $19.8 million of identifiable intangible assets[370] - Goodwill and Intangible Assets (Note 6): As of Dec 31, 2022, the company had goodwill of $14.1 million and net intangible assets of $18.1 million[376][377] - Future amortization expense for these intangibles is expected to be approximately $3.5 million in 2023[378] - Income Taxes (Note 11): The company maintains a full valuation allowance of $59.2 million against its U.S. federal and state net deferred tax assets due to a history of cumulative losses[420][421] - Total unrecognized tax benefits were $15.1 million as of Dec 31, 2022[423] - Customer and Geographic Information (Note 13): In 2022, Customer A accounted for 31% and Customer B for 10% of total revenues[432] - Geographically, the United States accounted for 50% of 2022 revenues, followed by China at 16%[432] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None[440] Controls and Procedures Management concluded that the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2022, a conclusion supported by the independent auditor's unqualified opinion - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2022[441] - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2022, based on the COSO framework[442] - There were no changes in internal control over financial reporting during the fourth quarter of 2022 that materially affected, or are reasonably likely to materially affect, internal controls[444] Other Information The company reports no other information for this item - None[445] Disclosure Regarding Foreign Jurisdictions that Prevent Inspections The company reports no disclosures are required under this item - None[446] Part III Directors, Executive Officers and Corporate Governance Information regarding directors, executive officers, and corporate governance is incorporated by reference from the company's definitive Proxy Statement - Information regarding directors and corporate governance is incorporated by reference from the company's Proxy Statement[449] Executive Compensation Information regarding executive compensation is incorporated by reference from the company's definitive Proxy Statement - Information is incorporated by reference from the company's Proxy Statement[452] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information regarding security ownership of certain beneficial owners, management, and related stockholder matters is incorporated by reference from the company's definitive Proxy Statement - Information is incorporated by reference from the company's Proxy Statement[453] Certain Relationships and Related Transactions, and Director Independence Information regarding certain relationships, related transactions, and director independence is incorporated by reference from the company's definitive Proxy Statement - Information is incorporated by reference from the company's Proxy Statement[454] Principal Accountant Fees and Services Information regarding principal accountant fees and services is incorporated by reference from the company's definitive Proxy Statement - Information is incorporated by reference from the company's Proxy Statement[455] Part IV Exhibits and Financial Statement Schedules This section lists the documents filed as part of the Form 10-K, including consolidated financial statements and the independent auditor's report, with all financial statement schedules omitted as the information is included elsewhere - All financial statement schedules have been omitted as the required information is not applicable or is included in the consolidated financial statements and notes[457] - The report includes a list of exhibits filed, such as the company's bylaws, stock incentive plans, material contracts (e.g., agreements with Advantest), and certifications from the CEO and CFO[462][467] Form 10-K Summary This item is not applicable to the company - Not applicable[466]