Forward-looking statements

The following discussion of our financial condition and results of operations
contains forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
All statements other than statements of historical fact may be forward-looking
statements. In some cases, you can identify forward-looking statements by
terminology such as "may," "could," "projected," "should," "expect," "plan,"
"anticipate," "believe," "estimate," "predict," "potential", "target" or
"continue," the negative effect of terms like these or other similar
expressions. These statements include, but are not limited to, statements
concerning: expectations about the effectiveness of our business and technology
strategies; expectations regarding global economic trends; the impact of rising
inflation, expectations regarding recent and future acquisitions; current
semiconductor industry trends; expectations of the success and market acceptance
of our intellectual property and our solutions; the continuing impact of
COVID-19 on the semiconductor industry and our business and our ability to
obtain additional financing if needed. These forward-looking statements are only
predictions. Forward-looking statements are based on current expectations and
projections about future events and are inherently subject to a variety of risks
and uncertainties, many of which are beyond our control, which could cause
actual results to differ materially from those anticipated or projected. All
forward-looking statements included in this document are based on information
available to us on the date of filing and we further caution investors that our
business and financial performance are subject to substantial risks and
uncertainties. We assume no obligation to update any such forward-looking
statements. In evaluating these statements, you should specifically consider
various factors, including the risk factors set forth in Item 1. "Business" and
Item 7. "Management's Discussion and Analysis of Financial Condition and Results
of Operations" in our Annual Report on Form 10 K for the year ended December 31,
2021, filed with the Securities and Exchange Commission ("SEC") on March 1,
2022. All references to "we", "us", "our", "PDF", "PDF Solutions" or "the
Company" refer to PDF Solutions, Inc.

CimetrexCV, DFI, Exensio, PDF Solutions and the PDF Solutions logo are trademarks or registered trademarks of PDFSolutions, Inc. or its subsidiaries.

Insight

We provide comprehensive data solutions designed to empower organizations across
the semiconductor ecosystem to improve the yield and quality of their products
and operational efficiency for increased profitability. Our offerings include
proprietary software, professional services based on proven methodologies and
using third-party cloud-hosting platforms for software-as-a-service ("SaaS"),
electrical measurement hardware tools, and physical intellectual property ("IP")
for integrated circuit ("IC") designs. We derive revenues from two sources,
Analytics and Integrated Yield Ramp, by monetizing our offerings through
contract fees for on-premise licenses, SaaS, and other professional services and
a value-based, variable fee or royalty, which we call Gainshare, on some
Characterization services engagements. Our products and services have been sold
to integrated device manufacturers ("IDMs"), fabless semiconductor companies,
foundries, equipment manufacturers, electronics manufacturing suppliers ("EMS"),
original device manufacturers ("ODMs"), out-sourced semiconductor assembly and
test ("OSATs"), and system houses. We are headquartered in Santa Clara,
California and also operate worldwide with offices in Canada, China, France,
Germany, Italy, Japan, Korea, and Taiwan.

Industry trends

The ongoing 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 and its variants, including travel restrictions and
stay-at-home orders. We continue to closely monitor the COVID-19 situation and
expect to ask employees who were working in-office prior to COVID-19 and have
not yet returned to working in their offices at least a minimum number of days a
week, subject 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 2021 and to some degree the first
half of 2022 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

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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 its 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 in the 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
Cimetrix run-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 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 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 extreme ultraviolet lithography, as well as
new innovations in process control and variability management. We expect China's
investment 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

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IC product life cycle. For further instance, the ongoing Russo-Ukrainian war is
negatively impacting the global supply chain generally, e.g., reducing the
production of millions of new cars and trucks, which indirectly impacts the
global semiconductor market, and also affecting global energy markets and
causing shortages and rising prices of semiconductors directly. Ukraine and
Russia are both top suppliers of neon gas that is used in lasers and chip
manufacturing, and Russia is a major producer of palladium, a rare metal used in
computer components, sensors, and fuel cells. Limitations on the supply of these
two elements can severely affect the global supply chain, which is already
scarce in semiconductors. Russia also supplies much of the world's premium
nickel, which is used by electronics manufacturers to make batteries. If these
trends continue or worsen, we may face a shortage of critical components for our
own tools and our business may suffer if the business of our customers
decreases. Rising prices of semiconductors may mean increased royalties to us
and increased Integrated Yield Ramp revenue.

The U.S. government continues to expand and intensify export controls and
sanctions, including the addition of many People's Republic of China ("P.R.C.")
and Russian 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 in the P.R.C., in particular, 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. and/or Russian 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 China sales (with respect to
U.S.-P.R.C. tensions) and financial results in general (with respect to global
tensions).

Financial Highlights

Financial Highlights for the Three Months Ended June 30, 2022are the following:

Total revenue was $34.7 millionan augmentation of $7.2 millioni.e. 26%,

compared to the three months ended June 30, 2021. Analytics revenue was $31.1

million, an increase of $11.5 millioni.e. 59%, compared to the three months

ended June 30, 2021. The increase in Analytics revenue was driven by increases

? revenue from CV systems and DFI systems across multiple contracts and

customers, and increased revenue from Cimetrex and Exensio software

licenses. Integrated Yield Ramp Revenue Decreased $4.3 millioni.e. 55%,

compared to the three months ended June 30, 2021mainly due to the end of

Earnings-sharing periods, partially offset by an increase in hours worked on

fee commitments.

Revenue costs increased $1.3 millioncompared to the three months ended

June 30, 2021mainly due to the increase in personnel costs,

? contractor costs and cloud delivery costs. These increases were partly

offset by lower software royalties and license fees, installations and

information technology costs, including depreciation charges.

The net loss was $1.1 millioncompared to $4.5 million for the three months ended

June 30, 2021. The decrease in net loss is mainly attributable to a

increase in total income and other income from net foreign exchange transactions

? gain, partially offset by increases in revenue costs and operating expenses

primarily related to our research and development, sales and marketing

general and administrative activities and expenses, all of which were

mainly related to the increase in personnel costs, subcontracting costs,

and costs related to cloud services, and an increase in income tax expense.

Financial highlights for the six months ended June 30, 2022are the following:

Total revenue was $68.2 millionan augmentation of $16.5 millioni.e. 32%,

compared to the half-year ended June 30, 2021. Analytics revenue was $61.5

million, an increase of $22.6 millionor 58%, compared to the half-year ended

? June 30, 2021. The increase in Analytics revenues is explained by the increase in

   revenue from CV systems and DFI systems across multiple contracts and
   customers, and increases in revenues from Cimetrix and Exensio software
   licenses. Integrated Yield Ramp revenue decreased $6.0 million, or 48%,
   compared to the six months


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ended June 30, 2021 mainly due to the end of the Gainshare periods, partly

offset by an increase in hours worked on fixed-price assignments.

Revenue costs increased $2.1 millioncompared to the half-year ended in June

30 2021, mainly due to increased personnel costs, cloud delivery

? costs and costs of subcontractors. These increases were partly offset by

reduced costs related to facilities and information technology, including

depreciation charges, software royalties and license fees.

The net loss was $5.3 millioncompared to $12.1 million for the six months ended

June 30, 2021. The decrease in net loss is mainly attributable to a

increase in total income and other income from net foreign exchange transactions

? gain, partially offset by increases in revenue costs and operating expenses

primarily related to our research and development, sales and marketing

activities, and general and administrative expenses, which were primarily

related to the increase in personnel costs, subcontracting costs and

   cloud-services related costs, and an increase in income tax expense.

Cash, cash equivalents and short-term investments decreased $23.0 million at

$117.2 million at June 30, 2022of $140.2 million at December 31, 2021,

primarily due to cash used to repurchase common shares and payment

? taxes related to the net settlement in shares of share grants and the purchase of

property, plant and equipment, partially offset by the proceeds from the exercise of shares

options, proceeds from purchases under our employee share ownership plans and

cash from operating activities.

Significant Accounting Policies and Estimates

See Note 1, Basis of Presentation And Summary of Significant Accounting
Policies, to our condensed consolidated financial statements in this Quarterly
Report on Form 10-Q, for a description of recent accounting pronouncements and
accounting changes, including the expected dates of adoption and estimated
effects, if any, on our condensed consolidated financial statements, and to
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" contained in Part II, Item 7 of our Annual Report on Form 10-K for
the year ended December 31, 2021, filed with the SEC on March 1, 2022.

There were no material changes during the six months ended June 30, 2022, to the
items that we disclosed as our critical accounting policies and estimates in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in Part II, Item 7 of our Annual Report on Form 10-K for the year
ended December 31, 2021.

The following is a brief discussion of the major accounting policies and methods we use.

General

Our discussion and analysis of our financial conditions, results of operations
and cash flows are based on our condensed consolidated financial statements,
which have been prepared in conformity with accounting principles generally
accepted in the United States of America. Our preparation of these condensed
consolidated financial statements requires us to make estimates and assumptions
that affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the dates of the financial statements and
the reported amounts of revenues and expenses during the reporting periods. We
base our estimates on historical experience and on various other assumptions
that we believe to be reasonable under the circumstances. The most 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. Actual amounts may differ from such estimates under different
assumptions or conditions.

Revenue recognition

We derive our revenue from two sources: Analytics and Integrated Yield Ramp.

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Analytics Revenue
Analytics revenue is derived from the following primary offerings: licenses and
services for standalone Software (which consists primarily of Exensio and
Cimetrix products), 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.

Income from the integrated yield ramp

Embedded yield ramp revenues are derived from our embedded yield ramp engagements that include Gainshare royalties or other performance incentives based on the achievement of client yield.

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 the Integrated 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 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.

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Income Taxes
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 June 30, 2022, and the likelihood
that we may not utilize tax attributes before they expire. The valuation
allowance was approximately $51.6 million as of June 30, 2022, and December 31,
2021. 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 Condensed 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 Condensed Consolidated Statements of
Comprehensive Loss. At June 30, 2022, 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 June 30, 2022. 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.

Valuation of long-lived assets, including Good will and intangible assets

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 three and six months ended June 30, 2022.

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 long-lived assets for the three and six months ended June 30,
2022.

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Recent accounting pronouncements and accounting changes

See Note 1, Basis of Presentation and Summary of Significant Accounting
Policies, to our condensed consolidated financial statements in this Quarterly
Report on Form 10-Q, for a description of recent accounting pronouncements and
accounting changes, including the expected dates of adoption and estimated
effects, if any, on our condensed consolidated financial statements.

Operating results

Discussion of financial data for the three and six months ended June 30, 2022

Revenues, Revenue Costs and Gross Margin

                      Three Months Ended                               Six Months Ended
                          June 30,                 Change                 June 30,                Change
(Dollars in
thousands)             2022         2021          $         %          2022        2021          $         %
Revenues:
Analytics           $   31,117    $ 19,578    $  11,539      59 %    $ 61,543    $ 38,971    $  22,572      58 %
Integrated Yield
Ramp                     3,551       7,841      (4,290)    (55) %       6,623      12,648      (6,025)    (48) %
Total revenues          34,668      27,419        7,249      26 %      68,166      51,619       16,547      32 %
Costs of revenues       12,042      10,785        1,257      12 %      23,571      21,448        2,123      10 %
Gross profit        $   22,626    $ 16,634    $   5,992      36 %    $ 44,595    $ 30,171    $  14,424      48 %
Gross margin                65 %        61 %                               65 %        58 %

Analytics revenue
as a percentage of
total revenues              90 %        71 %                               90 %        75 %
Integrated Yield
Ramp revenue as a
percentage of total
revenues                    10 %        29 %                               10 %        25 %


Analytics Revenue

Analytics revenue increased $11.5 million for the three months ended June 30,
2022, compared to the three months ended June 30, 2021. The increase in
Analytics revenue was primarily driven by increases in revenue from CV systems
and DFI systems across multiple contracts and customers, and increases in
revenues from Cimetrix and Exensio software licenses.

Analytics revenue increased $22.6 million for the six months ended June 30,
2022, compared to the six months ended June 30, 2021. The increase in Analytics
revenue was primarily driven by increases in revenue from CV systems and DFI
systems across multiple contracts and customers, and increases in revenues from
Cimetrix and Exensio software licenses.

Income from the integrated yield ramp

Integrated Yield Ramp revenue decreased $4.3 million for the three months ended
June 30, 2022, compared to the prior year period, due to the end of Gainshare
periods, partially offset by an increase in hours worked on fixed fees
engagements. Integrated Yield Ramp revenue decreased $6.0 million for the six
months ended June 30, 2022, compared to the prior year period, due to the end of
Gainshare periods, partially offset by an increase in hours worked on fixed
fees
engagements.

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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 our ability to
enter into new contracts containing Gainshare.

Our Analytics and Integrated Yield Ramp revenues may fluctuate in the future
and are dependent on a number of 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,
and our ability to attract new customers and penetrate new markets, 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.

Revenue costs

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. Service 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 $1.3 million for the three months ended
June 30, 2022, compared to the three months ended June 30, 2021, was primarily
due to (i) a $1.2 million increase in personnel-related costs due to worldwide
merit increases, increases in benefit costs, stock-based compensation expense,
and bonus expense, (ii) a $0.3 million increase in subcontractor costs, and
(iii) a $0.3 million increase in cloud-delivery costs. These were partially
offset by a $0.3 million decrease in software royalty and licenses expense, and
a $0.3 million decrease in facilities and information technology-related costs
including depreciation expense.

The increase in costs of revenues of $2.1 million for the six months ended June
30, 2022, compared to the six months ended June 30, 2021, was primarily due to
(i) a $1.7 million increase in personnel-related costs due to worldwide merit
increases, increases in benefit costs, stock-based compensation expense, and
bonus expense, (ii) a $0.8 million increase in cloud-delivery costs, and (iii) a
$0.4 million increase in subcontractor costs. These were partially offset by a
$0.5 million decrease in facilities and information technology-related costs
including depreciation expense and a $0.2 million decrease in software royalty
and licenses expense.

Gross Margin
Gross margin increased 4 percentage points for the three months ended June 30,
2022, to 65%, compared to 61% for the three months ended June 30, 2021. The
higher gross margin during the three months ended June 30, 2022 was primarily
due to higher total revenue 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.

Gross margin increased 7 percentage points for the six months ended June 30,
2022, to 65%, compared to 58% for the six months ended June 30, 2021. The higher
gross margin during the six months ended June 30, 2022 was primarily due to
higher total revenue 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.

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Operating Expenses:

Research and Development
                       Three Months Ended                            Six Months Ended
                           June 30,                Change               June 30,               Change
(Dollars in
thousands)              2022         2021         $       %          2022        2021         $       %
Research and
development          $   13,374    $ 11,064    $ 2,310     21 %    $ 27,463    $ 21,905    $ 5,558     25 %
As a percentage
of total revenues            39 %        40 %                            40 %        42 %


Research and development expenses consist primarily of personnel-related costs
including compensation, benefits and stock-based compensation expense, outside
development services, third-party cloud-services related cost, travel, and
facilities cost allocations, to support product development activities.

Research and development expenses increased for the three months ended June 30,
2022, compared to the three months ended June 30, 2021, primarily due to (i) a
$1.9 million increase in personnel-related costs primarily resulting from
increases in stock-based compensation expense, headcount, bonus expense, benefit
costs, and worldwide merit increases, (ii) a $0.2 million increase in
subcontractor expenses primarily related to DFI systems and Cimetrix software,
and (iii) a $0.2 million increase in facilities and information
technology-related costs.

Research and development expenses increased for the six months ended June 30,
2022, compared to the six months ended June 30, 2021, primarily due to (i) a
$4.6 million increase in personnel-related costs primarily resulting from
increases in stock-based compensation expense, headcount, bonus expense, benefit
costs, and worldwide merit increases, (ii) a $0.5 million increase in
subcontractor expenses primarily related to CV systems and Exensio and Cimetrix
software, and (iii) a $0.5 million increase in facilities and information
technology-related costs, and a $0.2 million increase in travel expense.

We anticipate that our research and development expenditures will fluctuate in absolute dollars from period to period due to the size and timing of product development projects.

Selling, general and administrative expenses

                       Three Months Ended                           Six Months Ended
                           June 30,               Change               June 30,               Change
(Dollars in
thousands)              2022         2021        $       %          2022        2021         $       %
Selling, general
and
administrative       $    9,770     $ 9,410    $  360      4 %    $ 20,609    $ 18,874    $ 1,735      9 %
As a percentage
of total revenues            28 %        34 %                           30 %        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 for the three months
ended June 30, 2022, compared to the three months ended June 30, 2021, primarily
due to (i) a $0.6 million increase in personnel-related costs mainly resulting
from increases in stock-based compensation expense, headcount, bonus and
commission expenses, benefit costs, and worldwide merit increases, (ii) a $0.2
million increase in facilities and information technology-related costs,
including third-party cloud-services related costs, and (iii) a $0.3 million
increase in various other expenses. These were partially offset by (i) a $0.5
million decrease in legal fees related to the arbitration proceeding over a
disputed customer contract and (ii) a $0.3 million decrease in general legal
expenses.

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Selling, general, and administrative expenses increased for the six months ended
June 30, 2022, compared to the six months ended June 30, 2021, primarily due to
(i) a $1.8 million increase in personnel-related costs mainly resulting from
increases in stock-based compensation expense, headcount, bonus and commission
 expense, benefit costs, and worldwide merit increases, (ii) a $0.2 million
increase in facilities and information technology-related costs, and (iii) a
$0.3 million increase in cloud-services related costs. These were partially
offset by a (i) a $0.4 million decrease in legal fees related to the arbitration
proceeding over a disputed customer contract and (ii) a$0.2 million decrease in
subcontractor expenses.

We expect our selling, general and administrative expenses to fluctuate in absolute dollars from period to period due to cost control initiatives and to support increased sales efforts in the future.

Amortization of other intangible assets acquired

                             Three Months Ended                             

Semester completed

                                 June 30,                 Change                June 30,              Change
(Dollars in thousands)      2022           2021          $       %         
2022         2021        $       %
Amortization of
acquired intangible
assets                    $     314      $     313    $     1      0 %    $    628      $   627    $    1      0 %

Amortization of other intangible assets acquired includes the amortization of intangible assets acquired as a result of certain business combinations.

Interest and other expenses (income), net

                            Three Months Ended                                Six Months Ended
                                June 30,                  Change                 June 30,               Change
(Dollars in
thousands)                  2022           2021          $         %          2022        2021          $        %
Interest and other
expense (income), net    $     (991)     $    243    $ (1,234)   (508) %    $ (1,301)    $ (198)    $ (1,103)   557 %

Interest and other expense (income), net, primarily includes interest income and foreign exchange gains and losses on foreign currency transactions.

We had an interest and net other income of $1.0 million and $1.3 million during
the three and six months ended June 30, 2022, respectively, compared to an
interest and net other expense of $0.2 million and an interest and net other
income of $0.2 million during the three and six months ended June 30, 2021,
respectively. Our net other income increased in both periods primarily due to a
higher foreign currency exchange gain resulting from net favorable fluctuation
in foreign exchange rates. Our interest income increased in both periods due to
higher interest rates for our money market and short-term investments. We
anticipate interest and other income (expense) will fluctuate in future periods
as a result of our projected use of cash, cash equivalents and short-term
investments and fluctuations of foreign exchange rates.

Income Tax Expense

                              Three Months Ended                               Six Months Ended
                                  June 30,                  Change                June 30,               Change
(Dollars in thousands)        2022            2021         $        %          2022        2021         $        %
Income tax expense        $      1,306      $     88    $ 1,218   1,384 %    $   2,493    $ 1,044    $ 1,449     139 %

Income tax expense increased for the quarters and six months ended June 30, 2022compared to the three and six months ended June 30, 2021primarily due to increased foreign withholding taxes and changes in the geographic distribution of worldwide income, which is subject to different statutory tax rates.

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

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expenses not deductible for tax purposes, tax legislations in the United States
and 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.

Cash and capital resources

As of June 30, 2022, our working capital, defined as total current assets less
total current liabilities, was $122.0 million, compared to $144.7 million as of
December 31, 2021. Total cash and cash equivalents, and short-term
investments were $117.2 million as of June 30, 2022, compared to cash and cash
equivalents of $140.2 million as of December 31, 2021. As of June 30, 2022, and
December 31, 2021, cash and cash equivalents held by our foreign subsidiaries
were $7.0 million and $5.3 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, other
obligations for at least the next twelve months.

There has been no significant impact in respect to 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 Part I, Item 1A, "Risk Factors" of our Annual Report for
the year ended December 31, 2021, filed with the SEC on March 1, 2022.

Redemption of common shares of the company

On June 4, 2020, the Company's Board of Directors adopted a stock repurchase
program (the "2020 Program") to repurchase up to $25.0 million of 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 six
months ended June 30, 2022, 218,858 shares were repurchased under the 2020
Program at an average price of $26.40 per share, for a total price of $5.8
million under the 2020 Program. Through April 10, 2022, 470,070 shares had been
repurchased under the 2020 Program at an average price of $21.91 per share, for
a total price of $10.3 million. On April 11, 2022, the Board of Directors
terminated the 2020 stock repurchase program, and adopted a new program (the
"2022 Program") to repurchase up to $35.0 million of the Company's common stock
both on the open market and in privately negotiated transactions, from time to
time, over the next two years. During the three and six months ended June 30,
2022, 714,600 shares were repurchased under the 2022 Program at an average price
of $23.36 per share for an aggregate total price of $16.7 million.

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