SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS

This Annual Report on Form 10-K, particularly in Item 1 “Business” and Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). 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; 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 impact of the coronavirus (COVID-19) on the semiconductor industry and our business and our ability to obtain additional financing if needed. Our actual results could differ materially from those projected in the forward-looking statements as a result of a number of factors, risks and uncertainties discussed in this Form 10-K, especially those contained in Item 1A of this Form 10-K. The words “may,” “anticipate,” “plan,” “continue,” “could,” “projected,” “expect,” “believe,” “intend,” and “assume,” the negative of these terms and similar expressions are used to identify forward-looking statements. All forward-looking statements and information included herein is given as of the filing date of this Form 10-K with the Securities and Exchange Commission (“SEC”) and based on information available to us at the time of this report and future events or circumstances could differ significantly from these forward-looking statements. Unless required by law, we undertake no obligation to update publicly any such forward-looking statements.

      The following information should be read in conjunction with the Consolidated Financial Statements and notes thereto included in this Annual Report on Form 10-K. All references to fiscal year apply to our fiscal year that ends on December 31. All references to “we”, “us”, “our”, “PDF”, “PDF Solutions” or “the Company” refer to PDF Solutions, Inc.   

PART I

Item 1.  Business

Business Overview

PDF Solutions offers products and servicesprovides comprehensive data solutions designed to empower engineers and data scientistsorganizations across the semiconductor ecosystem to improve the yield quality, and profitabilityquality of their products.products and operational efficiency for increased profitability. Our products services, and solutionsservices include proprietary software, physical intellectual property (or IP) for integrated circuit (or IC) designs, electrical measurement hardware tools,equipment, proven methodologies, and professional services. We primarily monetize our offerings through time-based license fees, contract revenue for professional services, and increasingly recently, software as a service (or SaaS). In some cases, especially on our historical integrated yield ramp (or IYR) engagements, we also receive a value-based royalty that we call Gainshare. Our products services, and solutionsservices have been sold to integrated device manufacturers (or IDMs), fabless semiconductor companies, foundries, equipment manufacturers, electronics manufacturing suppliers (or EMS), original device manufacturers (or ODMs), out-sourced semiconductor assembly and test (or OSATs), and system houses.

The key benefits of our offerings are greatly improved product yieldsdata connectivity, collection and quality, faster time-to-market,management, equipment control, and – as a result of the prior two – increased profitability for our customers.analytics. For example, our foundry customers generate and analyze key manufacturing data using our solutions to shorten the time necessary for technology development and to provide their fabless customers with a higher yielding process with improved electrical performance, which are both critical metrics for market success. Higher yields in less time can also mean less total raw materials and process runs, which help lower customers’ total cost and minimize environmental impact. Also, for example, equipment manufacturers and factories use our connectivity products to implement evolving industry standards for their equipment or operations, respectively, with required quality and stability. By way of further example, our IDM and fabless customers use our solutions to generate unique, differentiated data that can be analyzed with our machine learning (or ML) and artificial intelligence (or AI) algorithms to predict downstream manufacturing issues, resulting in shorter time for designs to meet performance requirements with fewer iterations and faster time-to-market. For furtherfinal example, our foundry and OSAT customers use the AI and ML applications of our software to optimize for process control, assembly, and/or test.

Brief History

PDF Solutions was incorporated in Pennsylvania in November 1992, and we reincorporated in California in November 1995. In July 2000, we reincorporated in Delaware, and in July 2001, we completed an initial public offering. Our shares of common stock are currently traded on the Nasdaq Global Market as PDFS. 

From 2000 through 2009, we expanded our technology footprint and our operations in various countries through acquisitions. From 2009 to 2019, we primarily focused on the pervasive application of our technology to leading edge logic manufacturing and achieving yield targets with our clients that maximized Gainshare royalties. In 2013, we leveraged our extensive experience in yield simulation software and CV^® test chip development and started research and development on an e-beam solution for non-contact, inline electrical characterization and process control for wafer inspection. The first generationfirst-generation e-beam tool for DFI™ was completed in 2015, and the second generation was commercially deployed in 2019. In a parallel effort, starting in 2014, we re-architected our point-solution software tools into a new generation, highly-integrated data analytics Exensio platform, which resulted in accelerated growth in software through 2019. In 2020, we expanded into factory connectivity and began to focus on closer integration with equipment manufacturers. Headquartered in Santa Clara, California, we also operate worldwide with offices in Canada, China, France, Germany, Italy, Japan, Korea, and Taiwan.

Industry Background

Rapid technological innovation with increasingly shorter product life cycles has fueled the economic growth of the semiconductor industry since the days of the PC revolution. IC companies have historically ramped production slowly, produced at high volume once a product gained market acceptance, and slowly reduced production volume when price and demand started to decrease near the end of the product’s life cycle. Today there are many different business models across the semiconductor industry: products that follow the traditional life cycle just described, products targeted towards fast-moving market segments like Internet of Things (or IoT) – which utilize mature process nodes and requires a fast ramp to volume with a relatively short life cycle –, and products focused on long term market segments like automotive and industrial where product life cycles can last a decade or longer. There is a lot of variation across these business models depending on the level of design complexity and the maturity of the process node used for product implementation. Processors, memory and field-programmable gate arrays (FPGA) continue to leverage the most advanced process nodes and experience significant challenges to achieve competitive initial yields and optimized performance. Some products and market segments, however, are content to utilize older process nodes. Regardless of the process node used for implementation or how long the product will be sold in the market, success for every semiconductor company is predicated, among other things, on fast product yield ramp and the ability to optimize manufacturing and test metrics, such as yield reclamation, product quality, and test

efficiency, throughout a product’s life cycle. Thus, technologies or capabilities that can accelerate yield ramp, improve product quality, and optimize production efficiencies are highly sought after because they typically lead to cost reduction and revenue generation concurrently, causing a leveraged effect on profitability.

Technology and Intellectual Property Protection

ThroughOur success is largely dependent upon our proprietary software. We believe the creative skills and technological ability of our personnel, product enhancements, and new product development are necessary to maintaining our position as a leading provider. We rely primarily on trade secret rights, copyright and trademark laws, and nondisclosure and other contractual agreements to protect our technology. We seek to protect our IP under patent laws and as of December 31, 2020, we held 175 U.S. patents. Our issued patents have expiration dates from 2022 through 2039. We intend to prepare additional patent applications when we feel it is beneficial. We also employ protection of our trademarks, with registration of marks, including Characterization Vehicle, Cimetrix, CV, eProbe, Exensio, pdFasTest, PDF Solutions, and the PDF Solutions and Cimetrix logos. We have common law rights to additional trademarks, including ALPS, DFI, DirectProbe, DirectScan, FIRE, and VarScan. We also enter into confidentiality and inventions assignment agreements with our employees and confidentiality and license agreements with our customers and the various parties we partner with to resell, distribute, and, in some cases, integrate our products. Further, we limit access to and distribution of our software, documentation and other proprietary information. Third parties could in any case develop competing technologies that include similar functionality or features, or otherwise are substantially equivalent or superior to our technologies. In addition, effective patent, copyright, trademark and trade secret protection may be unavailable or limited in certain foreign countries where we operate. Our business could suffer significantly if we fail to protect our proprietary technology.

In addition, through yield, performance, and reliability improvement services over more than 20 years, we have accumulated a vast library of physical IP in the form of test structures. As part of our DFI™DFI and Characterization VehicleCV systems, our engineers create designs of experiments (or DOEs) and layouts for targeted fail modes. We have also developed electrical measurement hardware tools and proprietary extraction, design, and analysis software. In addition, our technology embodies many production-proven and patented algorithms.  Further, our IP includes proven methodologies that our implementation teams use as guidelines to drive our customers’ use of our technology. We strive to continually enhance our core technologies through the codification of knowledge that we gain in the use of our products and delivery of services.

Our future success and competitive position rely to some extent upon our ability to protect these proprietary technologies and IP, to generate revenue from the licensed sale and support of our software and hardware to customers, and to prevent competitors from using our systems, methods, and technologies in their products or solutions. To accomplish this, we rely primarily on a combination of contractual provisions, confidentiality procedures, trade secrets, and patent, copyright, mask work, and trademark laws. We license our products and technologies pursuant to non-exclusive license agreements that impose restrictions on customers’ use. In addition, we seek to avoid disclosure of our trade secrets, including requiring employees, customers, and others with access to our proprietary information to execute confidentiality agreements with us, and restricting access to our source code. We also seek to protect our software, documentation, and other written materials under trade secret and copyright laws. We seek to protect our IP under patent laws and as of December 31, 2019, we held 160 U.S. patents. Our issued patents have expiration dates from 2020 through 2038. We intend to prepare additional patent applications when we feel it is beneficial. We also employ protection of our trademarks, with registration of marks, including Characterization Vehicle, CV, eProbe, Exensio, pdFasTest, PDF Solutions, the PDF Solutions logo. We have common law rights to additional trademarks, including ALPS, DFI DirectProbe, and DirectScan.

Products and Services

Our primary software is typically sold with maintenance and support and other related services, which are described below, or provided as a service (known as “SaaS”), or combined with our proprietary hardware products to form systems that we then further combine with services, as described below. Our primary products and software and hardware systems include the following:

Exensio Software ProductsPlatform. Our separately-offered Exensio software products address the big data manufacturing challenge of today’s advanced process nodes and highly integrated products, by enabling links across fab, test floor, and other enterprise data types. Theseproviding a common environment throughout the supply chain for different data types, includeincluding inline and end-of-line metrology, yield, parametric, performance, manufacturing consumables, tool-level sensor data, test floor data, logistical data, as well as custom data types. By providing a common environment for all these different data types from many different points in the manufacturing and test process, our Exensio products are designed to enable customers to rapidly perform root cause diagnosis of yield, performance, and quality issues that impact manufacturing and test operations. These products are also designed to enable predictive and proactive optimization decisions for process control, process adjustments, PM scheduling, tool corrective actions, wafer dispatching, and wafer level and final test. Collectively, our Exensio products are designed to enable real-time rapid diagnosis and understanding of key manufacturing and test metrics during both inline and end-of-line wafer processing, helping

customers reduce product variability and cost simultaneously. Our Exensio products also address the problem of silos of data which without our software only allows local optimization.   By integrating these silos of data and applying AI and ML, our Exensio products are designed toresolve the limitation of local optimization and provide better foresight across the entire production process, reducing the time it takes to make critical decisions that can drive higher product yield, quality and reliability. Exensio products are available as either an on-premise license or SaaS. ThereSaaS and are offered in four main, separately-offered Exensio products targeting the needs of the customer’s business model: Exensio IDM, Exensio Fabless, Exensio Foundry, and many optionalExensio OSAT. Each of these products are comprised of two or more modules to provide specific capabilities to address a particular type of company’s needs and requirements, including primarily,requirements; however, there are common features, functionality, and purpose across some of the key modules as follows:

Design-for-Inspection (or DFI) System.  Our DFI System is a combination of on-chip measurement instruments, hardware to measure such instruments, software to insert the instruments into customer layouts and analyze the results, and related services. This system is designed to enable our customers to achieve non-contact, inline electrical characterization and more effective process control. The DFI system provides customers an ability to insert on-chip instruments with calibrated electrical responses directly in the product wafer without die area penalty. In addition, the DFI system is designed to be high-throughput, enabling inline use. The electrical measurements augment and enhance existing inline defect inspection and metrology methods. The DFI system leverages our production-proven design and analysis infrastructure. The primary software and hardware products included in the DFI system are as follows:

Characterization Vehicle (CV) System. Our CV Systemsystem is a combination of CV test chips, hardware to test such products, software to analyze the test results, and related services. This system is designed to accelerate the efficiency of yield learning by shortening the learning cycle, learning more per cycle, and reducing the number of silicon wafers required in manufacturing processes. This system includes physical IP in the form of test structures and DOEs that are tuned to our customers’ product and/or process specifics, tester hardware, data analysis, and training. The primary software and hardware products included in the CV system are as follows:

Cimetrix® Software Products.Our Cimetrix software products enable equipment manufacturers to provide industry standard interfaces on their products for efficient equipment communication, control, and collection of equipment data. There are numerous industry standards that have been established for equipment connectivity and control, including the SEMI defined SECS (SEMI Equipment Communication Standard), GEM (Generic Equipment Model), and PV2 (new photovoltaic equipment communication standard based on SECS/GEM) standards. By providing software products that fully support these industry standards, equipment manufacturers can implement robust, turnkey support for these connectivity and control standards without needing to invest engineering resources to develop their own interfaces to these standards. Factories that purchase manufacturing equipment enabled with Cimetrix-supported interfaces, benefit from consistent and robust implementations of industry standards, enabling faster and more efficient implementation of smart manufacturing initiatives that depend on the collection and analysis of manufacturing and product data. There are two separate Cimetrix product lines targeting the needs of factory equipment connectivity and control. The products are sold via perpetual licenses and runtime royalties.

Services

Our services are virtuallyalmost always sold together with, or to support, our products and systems and include the following:

Software-as-a-Service (SaaS) – We provide services to make our Exensio software available to our customers via the Internet, generally hosted by third-party providers. SaaS is considered part of cloud computing since the software is hosted on the Internet, or the “cloud.” Since our SaaS applications are accessed from a remote server rather than installed on individual machines, it is easier to maintain. For example, when the remote software is updated, the customer’s interface is also updated for all users. Cloud computing is designed to eliminate incompatibilities between different software versions and allow us to make incremental updates without requiring software downloads. Additionally, our customers can save data to a central online location, which is designed to allow increased project collaboration. As part of these services, we also typically provide hosted management services for the licensed software and the customer’s data stored in our cloud. These services include environment set-up and configuration, system health monitoring, data integration maintenance, integration monitoring, system updates, security, and data upload/download, and license administration.

Software Related Services –– We provide software maintenance and support (or M&S), data management services, various value-added services (or VAS) to install, configure, or create analysis templates, and other professional services to achieve customers’ specific outcomes using our software. We call this last type of services our AIM solutions offering and, in these cases, we tailor the user flowsuse of one or more Exensio products to achieve a desired result. For example, our AIM YieldAware™ FDC solution offering is designed to identify the process control variables that have the greatest impact on product yield through professional services that analyze the data from both Exensio Process Control and elements of Exensio YieldManufacturing Analytics and make recommendations for the customer to implement. VAS are provided by our professional service personnel with expertise that enhances and complements the engineering teams at our customers. For example, VAS includes our data cleaning and monitoring services. One requirement of big data analytics is to have clean, harmonized data to analyze. This service offering outsources the data wrangling and management effort to free the customer to focus their efforts on analysis, which has a greater ROI to the company than data management.

IYR Services – These services are designed to characterize key product and/or process elements, primarily into CV test structures or DFI on-chip measurement instruments, and typically include performance incentives based on the customers’ yield achievement. We provide these services, together with all of the elements of our CV system, to foundry customers as an Integrated Yield Ramp project in connection with new process technology development and yield ramp. In IYR engagements, we generally provide the analysis of our CV test chips and provide summary findings and recommendations to the customer. IYR engagements can include DFI systems for use during the implementation period. As electrical scaling has slowed down significantly over the past few years, we have chosen to focus our resources and investment in analytics,analytics; however, these IYR services are still offered from time to time.

Customers

Our existing customers include foundries, IDMs, fabless semiconductor design companies, OSATs, as well as some equipment manufacturers, EMS, and ODMs, including those that embed and distribute our Exensio ALPS productsAssembly Operations modules in their equipment. Our semiconductor customers’ targeted product segments vary significantly, including microprocessors, memory, graphics, image sensor solutions, and communications. We believe that the adoption of our solutions by such companies for usage in a wide range of products validates the application of our solutions to the broader semiconductor market. We often have multiple contracts with a single customer or customer group, with no interdependent performance obligations. In general, our customer contracts are non-cancellable.

GLOBALFOUNDRIES Inc., which, together with its subsidiaries, we collectively call GlobalFoundries, represented 23% of our revenues for 2020 and 31% of our revenues for 2019 and 37% of our revenues for 2018.2019. No other customer accounted for 10% or more of our revenues in 20192020 and 2018.2019. See the discussion in “Risk Factors” under Item 1A for more information about risks associated with customer concentration and contractual provisions.

International revenues accounted for approximately 58% of our total revenues for 2019 compared to 60% for 2018.2020 and 2019. We base these calculations on the geographic location of where the work is performed or where the customer is located. Revenues from customers by geographic area based on the location of the customers’ work sites for our last two fiscal years can be found in Note 13,14, “Customer and Geographic Information” to the consolidated financial statements. Additional discussion regarding the risks associated with international operations can be found under Item 1A, “Risk Factors”.

See our “Notes to Consolidated Financial Statements”, included under Part II, Item 8. “Financial Statements and Supplementary Data” for additional geographic information.

Sales and Marketing

Our sales strategy is to pursue targeted accounts through a combination of our direct sales force, our service teams, and strategic alliances. After we are engaged by a customer and early in the services process, our engineers seek to establish relationships in the organization and gain an understanding of our customers’ business issues. Our direct sales and service teams combine their efforts to deepen our customer relationships by expanding our penetration across customers’ products, processes, and technologies. This close working relationship with each customer has the added benefit of helping us to identify new product areas and technologies in which we should next focus our research and development efforts. From time-to-time, we use sales representatives/agents in various locations to augment direct sales in certain territories. We expect to continue to establish strategic alliances with process licensors, vendors in the electronic design automation software, capital equipment for IC production, and test silicon IP and mask-making software segments to create and take advantage of sales channel and co-marketing opportunities. Additionally, we expect to form relationships with key value chain participants, including foundries and OSATs, to provide services and value across the manufacturing supply chain.

Research and Development

Our research and development focuses on developing and introducing new proprietary technologies, including our Exensio platform, Cimetrix connectivity and control products, and DFI and CV systems, as well as other software products and enhancements to our existing solutions, such as field applications for DFI and CV. We use a rapid-prototyping paradigm in the context of the customer engagement to achieve these goals. We have made, and expect to continue to make, substantial investments in research and development. The complexity of our technologies requires expertise in standards, physical IC design and layout, transistor design and semiconductor physics, semiconductor process integration, numerical algorithms, e-beam technology, hardware, statistics and software development. We believe that our team of engineers will continue to advance our market and technological leadership. We conduct in-house training for our engineers in certain technical areas. Our training also extends to focusing on ways to enhance client service skills. Although it fluctuates, we can have up to one quarter of our research and development engineers operating in the field, partnered with solution services engineers, in a deliberate strategy to provide direct feedback between technology development and customer needs. We also utilize a variety of skilled independent contractors for specialized development.

Competition

The semiconductor industry is highly competitive and driven by rapidly changing design and process technologies, evolving standards, short product life cycles, and decreasing prices. We expect market competition to continue to develop and increase as the market for data and analytics continues to evolve. We believe IC companies benefit from a combination of big data management infrastructure, AI/ML-based analytics engines, and products that generate and collect differentiated data that enrich the analytics process. Currently, we are a leading provider of comprehensive commercial hardware, software and IP solutions for optimizing and improving design, manufacturing and test operations processes through the application of differentiated data and advanced analytics. We face indirect competition from internal groups at IC companies that offer tools with varying degrees of optimization to accelerate process-design integration or test operations. Some providers of semiconductor manufacturing software, inspection equipment, electronic design automation, or design IP may seek to broaden their product offerings and compete with us. In each of the market segments we compete in, we face competition from established and potential competitors, some of whom may have greater financial, research, engineering, manufacturing and marketing resources than we have. 

We currently face indirect competition for some of the point applications of our products, including some of those used byfrom the internal groups at IC companies. Specifically there are several supplierscompanies and direct competition from providers of (i) yield management and/or prediction systems, such as KLA-Tencor, Siemens AG (Siemens)(or Siemens), Rudolph Technologies,Onto Innovation, Inc. (Rudolph)(or Onto), and Synopsys, Inc., and Qualtera,; (ii) semiconductor manufacturing software, such as Applied Materials, Inc. (Applied Materials), BISTel Inc., Invantest, Inc., Optimal+NI, Inc., Rudolph,Onto, and Siemens and,Siemens; (iii) inline inspection, metrology and electrical test equipment providers, such as Applied Materials and Keysight Technologies, Inc. Further,; and, (iv) connectivity software or integration products/services supporting factory equipment connectivity or control needs of customers, such as PEER Group, Inc., Kontron AIS, GmbH, Yokogawa Electric Corp., and Kornic Automation Co. Ltd. There may be other providers of competitive commercial solutions of which we are not aware, and we may compete with the products or offerings of the samethese named companies or additional companies if we expand our offerings or they expand their offerings, through acquisition or development. For example, through our acquisition of Cimetrix in late 2020, we now face competition in the connectivity and integration products/services supporting factory equipment connectivity or control. The demand for solutions that address the need for better integration between the silicon design and manufacturing processes may encourage direct competitors to enter into our market. For example, in 2020, two of our competitors were acquired by larger entities, Synopsys, Inc. acquired Qualtera and NI, Inc. acquired Optimal+, which may enable greater investment or marketing of these competitive applications. This competition in our market may intensify in the future, which could lead to increased pricing pressure, negatively impacting our revenues, and slow our ability to grow or execute our strategy. Also, our current and potential customers may choose to develop their own solutions internally, particularly if we are slow in deploying our solutions or improving them to meet market needs. These and other competitors may be able to operate with a lower cost structure than our engineering organization, which would give any such competitor’s products a competitive advantage over our solutions.

We believe that our solutions compare favorably with respect to competition because we have demonstrated results and reputation, strong core technology, ability to create innovative technology, and ability to implement solutions for new technology and product generations. See the discussions in “Risk Factors” under Item 1A for more information about risks associated with our competition.

Employees

Information Security and Risk Oversight

We are heavily reliant on our technology and infrastructure, as well as the public cloud to an increasing degree, to provide our products and services to our customers. As a result, we have developed an information security program (referred to as our InfoSec Program) to enhance our network security measures, identify and mitigate information security risk, and protect and preserve the confidentiality, integrity, and continued availability of critical information owned by us and that of our customers and suppliers that is in our care. Our InfoSec Program includes development, implementation, and continual improvement of policies and procedures to safeguard information and ensure availability of critical data and systems. The program also includes annual information security awareness training for employees involved in our systems and processes that handle customer data and audits of our systems and enhanced training for specialized personnel. Our InfoSec Program further includes review and assessment by external, independent third-parties, who certify and report on our weaknesses and internal response preparedness with respect to the entire company. Accordingly, we have instituted periodic network access penetration (or PEN) testing on a regular basis after having completed, in September 2020, an initial, limited PEN test with no critical or high threats identified, and initiated an enterprise-wide PEN test beginning in November 2020. Also, in October 2020, we completed a Type 1 System and Organization Control (SOC 2) audit of our cloud-based offerings under the framework put forth by the American Institute of Certified Public Accountants (AICPA) in which independent, third-party auditors assess and test controls relating to the Trust Services Criteria (TSC) of Security, Availability, Processing Integrity, Confidentiality or Privacy, and in February 2021, we initiated a Type 2 SOC 2 audit of our cloud-based offerings. To date, we have not managed ITAR-designated data, technology, or information. In accordance with our InfoSec Program, we also actively monitor known threats that could affect our products and services and work with our suppliers to provide us with real-time reports of threats or vulnerabilities that may affect our enterprise-wide systems. Our InfoSec Program also includes a cyber incident response plan that provides controls and procedures for timely and accurate reporting of any material cybersecurity incident.

As described in the Audit and Corporate Governance Committee Charter, the Audit and Corporate Governance Committee is tasked with oversight of certain risk issues, including cybersecurity. This Committee is comprised entirely of independent directors, two of whom have significant work experience related to information security issues or oversight. Management reports security instances to the Committee as they occur, if material, and provides a summary multiple times per year to the Committee as well as the full Board about periodic assessment of our information security program, our internal response preparedness, and assessments led by outside advisors. We carry insurance that provides some protection against the potential losses arising from a cybersecurity incident. In the last three years, the expenses we have incurred from information security breach incidences, including penalties and settlements, of which there were none, were immaterial.

Environmental, Social & Governance (ESG) Initiatives

The Audit and Corporate Governance Committee of our Board of Directors is sponsoring an effort to improve our ESG strategy. This includes work by a cross-functional ESG team of leaders representing operations, human resources, supply chain, regulatory compliance, finance, marketing communications, investor relations, facilities, and the legal department. As a preliminary result of the ESG team’s work, we have integrated the values of Cimetrix with ours and are in the process of company-wide communication of the formalized values as follows:

As a further preliminary result of the ESG team’s initial assessment of our practices and policies and although we are not a member of the Responsible Business Alliance (or RBA) (formerly, the Electronics Industry Citizenship Coalition or EICC), our Board of Directors, on the recommendation of the Audit and Corporate Governance Committee, recently adopted the RBA Code of Conduct to supplement our Code of Ethics, including the specific policies of the  RBA Code relating to the five critical areas of corporate social responsibility: labor, health and safety, environment, management systems, and ethics. Guided by our above values and the following initial priorities, we believe we can achieve our business objectives and long-term stockholder value while doing our part in each of these areas. For additional information, see “Human Capital Management” in this Report below.

Care for Our People

Environmental Responsibility

Ethics & Corporate Responsibility

Supply Chain Responsibility

Human Capital Management

We believe we have a responsibility to foster a healthy, balanced, and ethical work environment for everyone in our organization through sound ethical and organizational governance, by promoting business ethics and integrity, and by embracing equality, diversity, and inclusion throughout our organization and even extending to the board room. For additional information, see “Environmental, Social & Governance (ESG) Initiatives—Ethics & Corporate Responsibility,” in Part I, Item 1 of this Report.

From the onset of the COVID-19 pandemic, a cross-functional advisory team of company leaders has met almost daily to ensure that promoting the health and safety of our employees in accordance with the World Health Organization (WHO) and the U.S. Centers for Disease Control and Prevention (CDC) guidelines remains a constant focal point. Early in the pandemic, we closed offices and restricted travel in compliance with local, State, and National requirements and also proactively asked employees around the world to work from home until further notice. While employees are working remotely, we have encouraged them to tell us what home office equipment and IT support they needed to set up a home office for healthy and productive work. For a small number of people that needed to be on-site at our clean room facility to support certain customers themselves providing essential services, we set up a strict COVID safety protocol that included a schedule to minimize contact, one-way traffic flows, dedicated personal protective equipment, virtual back-up safety monitoring, and regular, comprehensive cleaning of the facility. To stay connected while working remotely, beginning in April 2020, our Chief Executive Officer and other members of the executive team have led virtual, meetings twice a month with the various sales, research and development, engineering, and administrative teams to discuss developments and business updates and answer questions. For our offices in California, in anticipation of gradual reopening, we have implemented the new social distancing protocols for employee safety, such as attendance capacity, temperature checking requirements, 6-feet distancing, managed traffic flows, accessible hand sanitation stations throughout the office, and visitor prescreening. Other safety protocols have been put in place in worldwide offices when local regulations have allowed employees to be in the office, including eliminating eating in common areas, temperature taking upon arrival, limiting attendance in conference rooms, and providing and requiring appropriate masks to be worn while in the office.

We support employee action to protect the natural environment and the communities in which we operate through pollution prevention, conservation, responsible use, charitable giving, and sustainable practices. For example, we organize and engage employees in an annual charitable giving campaign. We work to ensure that our business practices support diversity and inclusion to build an innovative workforce and to strive toward having our organization reflect the complexion of our customers and suppliers. We are strengthening our diversity and inclusion programs with a planned set of actions around organizational training, formalized company values, and a revitalized recruitment strategy.

As of December 31, 2019,2020, we had 353423 employees worldwide, including 196 on client service teams, 100206 field application engineers and consultants, 132 in research and development, 2341 in sales and marketing, and 3444 in general and administrative functions. Of these employees, 157224 are located in the United States and Canada, 161163 in Asia, and 3536 in Europe.

None of our employees are represented by a labor union. Our employees in France and Italy are subject to collective bargaining agreements in those countries. We believe our relationship with our employees is good. Competition is intense in the recruiting of personnel in our industry. We believe that our future success will depend, in part, on our continued ability to hire and retain qualified management, marketingsales, and technical employees.

Information about our Executive Officers

The following table and notes set forth information about our current executive officers as of the date of this Form 10-K.

John K. Kibarian, Ph.D., one of our founders, has served as President since November 1991 and has served as our Chief Executive Officer since July 2000. Dr. Kibarian has served as a director since December 1992. Dr. Kibarian received a B.S. in Electrical Engineering, an M.S. E.C.E. and a Ph.D. E.C.E. from Carnegie Mellon University.

Christine A. Russell, joined in July 2018 as Vice President, Finance, and was appointed Chief Financial Officer effective August 10, 2018 and ceased to be the Chief Financial Officer as of the filing of this Form 10-K. Ms. Russell was designated as an Executive VP in February 2019. Prior to joining the Company, Ms. Russell served as Chief Financial Officer, UniPixel, Inc. (Nasdaq:UNXL), a touch sensor company, from May 2015 to August 2017. Prior to UniPixel, she was Chief Financial Officer of Vendavo, Inc. from May 2014 to March 2015, a SaaS based pricing and margin optimization software company. She also served as Chief Financial Officer of Evans Analytical Group (EAG) from May 2009 to September 2013, a global provider of analytical testing for technology companies including major semiconductor, chemicals and pharmaceuticals firms. Prior to EAG, she served in the roles of both Chief Financial Officer and EVP Business Development at Virage Logic (Nasdaq:VIRL), a semiconductor intellectual property company. Prior positions include Chief Financial Officer for OuterBay Technologies, a database archiving software company and Chief Financial Officer of Ceva, Inc. (Nasdaq: CEVA), a DSP IP company. She currently serves as Audit Committee Chair and Director for both QuickLogic Corporation and eGain Corporation, and as Audit Committee Member and Director for AXT, Inc. Ms. Russell holds a B.A. and M.B.A. from the University of Santa Clara.

Adnan Raza, joined in January 2020 as Executive Vice President, Finance, and was appointed Chief Financial Officer effective as of the filing of this Form 10-K.in March 2020.  Prior to joining the Company, Mr. Raza served as an independent strategy consultant for private and public companies from July 2019 to January 2020.  Prior to that, Mr. Raza served in various roles at Synaptics Inc., a developer of human interface technologies, including as Senior Vice President of Corporate Development from August 2017 to June 2019 and Vice President of Corporate Development from February 2015 to August 2017. Prior roles include technology investment banking at Goldman, Sachs & Co. and UBS Investment Bank, strategic advising at Blackreef Capital, engineering and marketing at Azanda Network Devices, and engineering at Lucent Technologies.  Mr. Raza also served as a Board Member at FIDO Alliance, an alliance of leading technology companies to enhance user security and authentication. Mr. Raza holds a Master of Business Administration (MBA)M.B.A. from The Wharton School at the University of Pennsylvania, a Master of Engineering (M.M. Eng.) in Electrical Engineering from Cornell University, and a Bachelor of Science (B.S.)B.S. in Electrical Engineering from Valparaiso University.

Kimon Michaels, Ph.D., one of our founders, has served as Vice President, Products and Solutions since July 2010 and was designated as an Executive VP in February 2019. Dr. Michaels served as Vice President, Design for Manufacturability from June 2007 through June 2010. Prior to that, Dr. Michaels served as Vice President, Field Operations for Manufacturing Process Solutions from January 2006 through May 2007, and has been a Director since November 1995. From March 1993 through December 2005, he served in various vice presidential capacities. He also served as Chief Financial Officer from November 1995 to July 1998. Dr. Michaels received a B.S. in Electrical Engineering, and M.S. E.C.E. and a Ph.D. E.C.E. from Carnegie Mellon University.

Available Information

We file or furnish various reports, such as registration statements, periodic and current reports, proxy statements and other materials with the SEC. Our Internet website address is www.pdf.com. You may obtain, free of charge on our website, copies of our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.  The Company's website address provided is not intended to function as a hyperlink, and the information on the Company's website is not, and should not be considered, part of this Annual Report on Form 10-K and is not incorporated by reference herein.

The SEC maintains a Web site (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding issuers, such as us, that file electronically with the SEC. 

Item 1A. Risk Factors

Risks Associated with Our Business

We invest significant resources into research and development to pursue new product and technology initiatives, including our DFI system and Exensio platform, and if we invest more resources in research and development than anticipated or fail to successfully carry out these initiatives on the expected timeline or at all, our business, financial condition, or results of operations could be adversely impacted.

Our sales cycle is lengthy and customers may delay entering into contracts or decide not to adopt our products or solutions after we have performed services or providedsupported evaluation licenses,by them of our technology, which could result in delays in recognizing revenue and negatively impact our results of operations in a quarter or result in lower revenue than we expected if a contract is not consummated at all.

On-going negotiations and evaluation projects for new products, with new customers or in new markets may not result in significant revenues for us if we are unable to close new engagements on terms favorable to us, in a timely manner, or at all. Unexpected delays in our sales cycle could cause our revenues to fall short of expectations. Further, the timing and length of negotiations required to enter into agreements with our customers and the ultimate enforcement of complex negotiated contractual provisions as we intended is difficult to predict. If we do not successfully negotiate certain key complex contractual provisions, there are disputes regarding such provisions, or they are not enforceable as we intended, our revenues and results of operations would suffer. Further, our customers sometimes delay starting negotiations until they begin developing a new process, need to insert a new product, or experience specific yield issues. This means that on occasion we have, and may continue to provide technology and services under preliminary documentation before executing the final contract. In these cases, we would not recognize revenue and may defer associated costs until execution of the final contract, which, if significant, could negatively impact our results of operations in the periods before we execute the final contract. Further, if we were to incur significant effort and then fail to enter into a final contract, we would have to write-off such deferred costs in the period in which the negotiations ended, which would decrease our costs and expenses and could result in significant operating losses.

Our fixed-fee services or product or system installation/configurations may take longer than budgeted, which could slow our revenue recognition and may also result in a loss contract or a claim of breach by our customers, which would negatively affect our operating results.

Our fixed-fee services, including in particular IYR, require a team of engineers to collaborate with our customers to address complex issues by using our software and other technologies, and the installation and configuration of our software into our customers’ fabrication and test/assembly facilities requires experienced engineers working with our customers on active foundry and test/assembly equipment. 

We must estimate the amount of resources needed to complete both of these types of services in order to estimate when the engineers will be able to commence the next engagement. In addition, our accounting for contracts with such services, which generate fixed fees, sometimes requires adjustments to profit (loss) based on revised estimates during the performance of the contract. These adjustments may have a material effect on our results of operations in the period in which they are made. The estimates giving rise to these risks, which are inherent in fixed-price contracts, include the forecasting of costs and schedules, and contract revenues related to contract performance. If we significantly fail to meet a customer’s expectations in either case, the customer could claim that we breached our obligations, which could result in lost revenue and increased expenses.

Our ability to sell our products, systems, and solutions depends in part on the quality of our support and services offerings, and the failure to offer high-quality support and services could negatively affect our sales and results of operations.

Once our software products are integrated within our customers’ hardware and software systems, our customers may depend on our support organization to resolve any issues relating to our products. Further, in connection with delivering our software as a service,SaaS, which requires us to maintain adequate server hardware and internet infrastructure, including system redundancies, we will needare required to meet contractual uptime obligations. A high level of system and support is critical for the successful marketing and sale of our products. If we do not effectively provide subscription access to our SaaS customers, assist our customers in deploying our products, succeed in helping our customers quickly resolve post-deployment issues, and provide effective ongoing support and data security, we may face contractual penalties or customers may not renew subscriptions or services in the future, which would negatively impact our results of operations. In addition, due to our international operations, our system and support organization faces challenges associated with delivering support, hours that support is available, training, and documentation where the user’s native language may not be English. If we fail to maintain high-quality support and services and adequately address our customers’ support needs, our customers may choose our competitors’ products instead of ours in the future, which would negatively affect our revenues and results of operations.

Defects in our proprietary technologies, hardware and software tools, and failure to effectively remedy any such defects could decrease our revenue and our competitive market share.

If the software, hardware, or proprietary technologies we provide to customers contain defects that negatively impact customers' ability to use our systems or software, increase our customers’ cost of goods sold and time-to-market, or damage our customers’ property, these defects could significantly decrease the market acceptance of our solutionsproducts and services or results in warranty or other claims. We must adequately train our new personnel, especially our clientcustomer service and technical support personnel, to effectively and accurately, respond to and support our customers. If we fail to do this, it could lead to dissatisfaction among our customers, which could slow our growth. Further, the cost of support resources required to remedy any defects in our technologies, hardware, or software tools could exceed our expectations. Any actual or perceived defects with our software, hardware, or proprietary technologies may also hinder our ability to attract or retain industry partners or customers, leading to a decrease in our revenue. These defects are frequently found during the period following introduction of new software, hardware, or proprietary technologies or enhancements to existing software, hardware, or proprietary technologies. Our software, hardware, and proprietary technologies, which means that we may containnot discover the errors not discoveredor defects until after customer implementation of the silicon design and manufacturing process recommended by us. If our software, hardware, or proprietary technologies contain errors or defects, it could require us to expend significant resources to remedy these problems or defend/indemnify claims, which could reduce margins and result in the diversion of technical and other resources from our other customer implementations and development efforts.

Inadvertent disclosure of our customers’ confidential information or our failure to comply with our customers’ security rules, including for cloud-based solutions or on-site access could result in costly litigation, cause us to lose existing and potential customers, or negatively impact on-going business with existing customers.

Our customers consider their product yield information and other confidential information, which we must collect in the course of our engagement with the customer or through our software tools, to be extremely competitively sensitive or subject to strict protection frameworks, including data and personal data about our customers’ employees necessary to administer the licenses. Many of our customers have strict security rules for on-site access to, or hosting, to their confidential information. If we suffered an unauthorized intrusion or we inadvertently disclosed or were required to disclose this information, or if we fail to adequately comply with customers’ security protocols for accessing or hosting confidential information, we would likelycould lose existing and potential customers couldor be subject to costly penalties or litigation, or our on-going business could be negatively impacted. Insuranceimpacted and insurance to cover such situations is costly and will increase our costs and may not fully cover our exposure. In addition, to avoid potential disclosure of confidential information to competitors, some of our customers may, in the future, ask us not to work with key products or processes, which could limit our revenue opportunities.

We generate a significant portion of our revenues from a limited number of customers, and a large percentage of our revenues from a single customer, so decreased business with, ouror the loss of, any one of these customers, or pricing pressure, or customer consolidation could significantly reduce our revenues or margins and negatively impact results of operations.

Historically, we have had a small number of large customers for our IYR solutions and that contribute significant Gainshare royalties. In the year ended December 31, 2019,2020, one customer, GlobalFoundries, accounted for 31%23% of our revenues. We have in the past and could in the future lose a customer due to its decision not to develop or produce its own future process node. Customers

could also choose to not engage us on future process nodes, its negotiation or decision to reduce the scope of our services or technology under contract (which is permitted in one of our customer contracts if the customer’s business materially adversely changes), its decision not to develop its own future process node, or.We could also lose customers as a result of industry factors, including but not limited to reduced manufacturing volume or consolidation. During 2018, a major customer announced that it was suspending indefinitely the development and production of its 7nm technology node. This customer’s decision has negatively impacted our Integrated Yield Ramp revenues, and future Integrated Yield Ramp revenues will be negatively affected in the long-term as such revenues would have included the Gainshare from this contract but now will not since Gainshare is based on the customer’s future production, which will not occur. Consolidation among our customers could also lead to increased customer bargaining power, or reduced customer spending on software and services. Further, new business may be delayed if a key customer uses its leverage to push for terms that are worse for us and we delay entering into the contract to negotiate for better terms, in which case revenue in any particular quarter or year may fail to meet expectations. Also, the loss of any of these customers or the failure to secure new contracts with these customers could further increase our reliance on our remaining customers. Further, if any of our key customers default, declare bankruptcy or otherwise delay or fail to pay amounts owed, or we otherwise have a dispute with any of these customers, our results of operations would be negatively affected in the short term and possibly the long term. For example, in 2020, we incurred expenses in the amount of $1.1 million related to the arbitration with SMIC New Technology Research & Development (Shanghai) Corporation due to SMIC’s failure to pay fees due to us under a series of contracts. If we are not able to resolve this matter amicably in the near future, we will incur substantial additional expenses related to resolution of this matter through arbitration. These events could cause significant fluctuations in results of operations because our expenses are fixed in the short term and it takes us a long time to replace customers or reassign resources.

If we do not continuously meet our development milestones of key research and development projects or if we cannot qualify our e-beam measurement tool at customers for inline wafer inspection on schedule or at all, or successfully commercialize our Design-for-Inspection system, our future market opportunity and revenues will suffer and our costs may not be recouped.

Certain use cases of our DFI system remain to be proven and the inline version is pending qualification by the first commercial customer.proven. To date, we have invested significantly in the design and development of our eProbe tool and related intellectual property. If our key customer failsKey customers failing to purchase, renew, or expand the number or use of thesuch systems it is using,on our expected timeline or new foundry customers fail to adopt our DFI system,at all will cause our results will suffer.to miss expectations. For example, in 2018 an early adopter2020, a key DFI customer decided not to continue with contractual milestones or to renew the eProbe for our standard DFI application at the expiration of our DFI system at 7nm elected to exercise an early exit under the contract, which resulted in connection with its decision to suspend indefinitely further development and production at 7nm, which negatively impacted the long-termlower DFI-related revenue we expected under this contract and possibility for renewal or expansion.in 2020. Also, if the results of our DFI system, including new applications, are not as we expect, we may not be able to successfully commercialize these technologiesthis system or such applications on schedule, or at all, and we may miss the market opportunity and not recoup our investment. Further, our eProbe tool maycould cause unexpected damage to wafers or delay processing wafers, which we could be liable for, or which maycould make customers unwilling to use it. If we are not able to create significant interest and show reliable and useful results without significant damage to wafers, our investment may not be recouped and our future results may suffer.

Decreases in wafer volumes at our customers’ manufacturing sites or the volume of ICs that some of our customers are able to sell to their customers would cause our Gainshare royalty and, thus, Integrated Yield Ramp revenue to suffer.

Our Gainshare royalty isIntegrated Yield Ramp revenue includes amounts largely determined by wafer volumes at manufacturing sites covered by our contracts and, in some cases, the volume of an IC product that our customer is able to sell to its customers. Both of these factors are outside of our control. Further, some of our manufacturing customers’ business is largely dependent on customers that use our manufacturing customer as a second or third source. If those customers consolidate and/or otherwise move the orders to manufacturing facilities not covered by our contracts, or suspend their manufacturing at covered facilities for any reason, including consolidation, our Gainshare royaltyIntegrated Yield Ramp revenue will decrease, which could cause Integrated Yield Ramp revenuesus to fail to meet expectations. ReducedFurther, reduced demand for semiconductor products decreasesor protectionist policies has from time to time decreased and may continue to decrease the volume of wafers and, in some cases, products our customers are able to make or sell, which would also directly decrease our Gainshare royalty. For example, 28nm volumes were lower in 2019 than expected, which negatively impacted our results.Integrated Yield Ramp revenue. Also, our customers may unilaterally decide to implement changes to their manufacturing processes during the period that volume is covered by Gainshare,royalty contracts, which could negatively affect yield results and, thus, our Integrated Yield Ramp revenue.

Since we currently work on a small number of large projects at specified manufacturing sites and, in some cases, on specific IC products, our results of operations arehave been and may continue to be adversely affected by negative changes at those sites or in those products, including slowdowns in manufacturing due to external factors, such as U.S. trade restrictions and the spreadimpact of the coronavirusCOVID-19 pandemic in China. Also, if wafer orders from sites covered by our contracts are not secured by our customers, if an end product does not achieve commercial viability, if a process line or, in some cases, a specific product, does not achieve significant increases in yield or sustain significant volume manufacturing during the time we receive Gainshare,royalties, revenues associated with such volumes or products would be negatively impacted. This could significantly reduce our Integrated Yield Ramp revenue and results of operations could fail to meet expectations. In addition, if we work with two directly competitive manufacturing facilities or products, volume in one may offset volume, and thus any of our related Gainshare,revenue, in the other facility or product.

We face operational and financial risks associated with international operations thatcould negatively impact our revenues.

We derive over half of our revenues from sales outside of the United States and we expect our international business to continue to grow, in particular in China. We have in the past expanded and reorganized, at different times, our operations, including international operations, and may in the future continue such expansion or reorganization by establishing or restructuring international subsidiaries, offices, or contractor relationships in locations, if and when, deemed appropriate by our management. Thus, the success of our business is subject to risks inherent in doing business internationally, including in particular:  

Further, our employees and contractors include professionals located in various international locations, including Shanghai, China, who provide primarily CV test chip-related services, and Ramallah, Palestine, who provide software-related development, quality assurance, maintenance, and other technical support services for certain of our software products. Political changes, including policies regarding export control, that affect these or other international operations could disrupt or limit the work our employees and contractors are able to perform, and thus negatively affect the range of services we are able to provide our customers or our cost for such services.

The spread of COVID-19 coronavirus from China has affected the manufacturing and shipment of goods. In January 2020, the Chinese government imposed certain restrictions on the movement of people and goods to limit the spread of the coronavirus in and around Wuhan. While our China operations are not located in Wuhan, our Shanghai office was temporarily shut down, and the restrictions have limited the ability of our local employees to travel to customer sites or visit our other offices.  An extended closure of our customers' plants as a result of efforts to limit the spread of COVID-19 in China could adversely impact our business

In addition, our global operations are subject to numerous U.S. and foreign laws and regulations, including those related to anti-corruption, tax, corporate governance, imports and exports, financial and other disclosures, privacy and labor relations. These laws and regulations are complex and may have differing or conflicting legal standards, making compliance difficult and costly. In addition, there is uncertainty regarding how proposed, contemplated or future changes to these complex laws and regulations could affect our business. We may incur substantial expense in complying with the new obligations to be imposed by these laws and regulations, and we may be required to make significant changes in our business operations, all of which may adversely affect our revenues and our business overall. If we violate these laws and regulations we could be subject to fines, penalties or criminal sanctions, and may be prohibited from conducting business in one or more countries. There can be no assurance that our policies and procedures will ensure compliance with these laws and regulations, or that employees, contractors, agents or partners will not violate such laws and regulations. A significant violation could have a significantly negatively impact our sales opportunities, operations, and financial results.

Our success depends upon our ability to effectively plan and manage our resources and restructure our business through rapidly fluctuating economic and market conditions, which actions may have an adverse effect on our financial and operating results.

Our ability to successfully offer our products and services in a rapidly evolving market requires an effective planning, forecasting, and management process to enable us to effectively scale and adjust our business and business models in response to fluctuating market opportunities and conditions.conditions, which has and could continue to require us to increase headcount, acquire new companies or engage in restructurings from time to time. For example, while we have increased investment in our business by, for example, increasing headcount, acquiring companies, and increasing our investment in R&D, sales and marketing, and other parts of our business from time to time, including 2018, we initiated a restructuring plan to reduce expenses and align our operations with evolving business needs. Some of our expenses related to such efforts are fixed costs that cannot be rapidly or easily adjusted in response to fluctuations in our business or numbers of employees. Rapid changes in the size, alignment or organization of our workforce, including sales account coverage, could adversely affect our ability to develop and deliver products and services as planned or impair our ability to realize our current or future business and financial objectives. Our ability to achieve the anticipated cost savings and other benefits from our restructuring initiatives within the expected time frame is subject to many estimates and assumptions, which are subject to significant economic, competitive and other uncertainties, some of which are beyond our control. If these estimates and assumptions are incorrect, if we are unsuccessful at implementing changes, or if other unforeseen events occur, our business and results of operations could be adversely affected.

Global economic conditions or semiconductor market conditions could materially adversely impact demand for our products and services, decrease our sales, or delay our sales cycle.

Our customers are global semiconductor companies, which means that our operations and performance depend significantly on worldwide economic conditions as well as semiconductor market specific changes. Uncertainty about global economic conditions could result in customers postponing purchases of our products and services, including in response to tighter credit, unemployment, negative financial news and/or declines in income or asset values and other macroeconomic factors, which could have a material negative effect on demand for our products and services and, accordingly, on our business, results of operations or financial condition. For example, the timing of the build-out of the semiconductor market in China depends significantly on governmental funding on both local and national levels and a delay in this funding could negatively affect our revenues. For further example, any economic and political uncertainty caused by the United States tariffs imposed on goods from China, among other potential countries, and any corresponding tariffs from China or such other countries in response, may negatively impact demand and/or increase the cost for our products.  Similarly, the spread of the COVID-19 coronaviruspandemic in China or in other nations couldhas and may continue to cause a slowdown in the global

economy and demand for our products and services. Further, the semiconductor industry historically has been volatile with up cycles and down cycles, due to sudden changes in customers’ manufacturing capacity requirements and spending, which depend in part on capacity utilization, demand for customers’ IC products by consumers, inventory levels relative to demand, and access to affordable capital. As a result of the various factors that affect this volatility, the timing and length of any cycles can be difficult to predict and could be longer than anticipated. Any of these events could negatively affect our revenues and make it challenging for us to forecast our operating results, make business decisions, and identify the risks that may affect our business, financial condition and results of operations. Customers with liquidity issues may also lead to additional bad debt expense.

 Risks Related to Our Technology

If we fail to protect our intellectual property rights, customers or potential competitors may be able to use our technologies to develop their own solutions, which could weaken our competitive position, reduce our revenues, or increase our costs.

Our success depends largely on the proprietary nature of our technologies. Our contractual, patent, copyright, trademark, and trade secret protection may not be effective against any particular threat or in any particular location. Our pending patent applications may not result in issued patents, and even if issued, they may not be sufficiently broad to protect our proprietary technologies. Some foreign countries do not currently provide effective legal protection for intellectual property and our ability to prevent the unauthorized use of our products in those countries is therefore limited. Our trade secrets may also be stolen, otherwise become known, or be independently developed by competitors. Litigation may be necessary from time to time to enforce our IP rights or to determine the validity and scope of the proprietary rights of others.rights. As a result of any such litigation, we could lose our proprietary rights and incur substantial unexpected operating costs. Litigation could also divert our resources, including our managerial and engineering resources. If we are unable to exclude others from using our proprietary technologies and methods without compensation to us, through litigation or otherwise, it could impede our ability to grow our business and our revenues may suffer.

If we do not effectively manage, support,We are exposed to risks related to information technology infrastructure, information management and safeguard our worldwide information systems,protection, cybersecurity threats, and integrate recent andplanned growth, our business strategy may fail.cyber incidents.

We are heavily reliant on our technology and infrastructure, as well as the public cloud to an increasing degree, to provide our products and services to our customers. We have experienced in the past, and may experience in the future, interruptions in our information systems on which our global operations depend ordepend. We may in the future experience unplanned downtime of the infrastructure that delivers our SaaS products. Further, we may face attempts by others to gain unauthorized access through the Internet to our information technology systems whether hosted by us or service providers, to intentionally hack, interfere with, or cause physical or digital damage to or failure of such systems (such as significant viruses or worms), which attempts we or they may be unable to prevent. Our security measures may also be breached due to employee errors, malfeasance, or otherwise. Despite our ongoing efforts to enhance our network security measures, our information systems are susceptible to computer viruses, cyber-related security breaches and similar disruptions from unauthorized intrusions, tampering, misuse, criminal acts, including phishing, or other events or developments that we may be unable to anticipate or fail to mitigate and are subject to the inherent vulnerabilities of network security measures. For example, in the first quarter of 2020, one of our cloud installations suffered an intrusion due to a vulnerability discovered and published by the provider of the Citrix ADC that was part of our installation. Third parties may also attempt to influence employees, users, suppliers or customers to disclose sensitive information in order to gain access to our, our customers’ or business partners’ data. Additionally, third parties with whom we work, such as vendors or developers, may violate applicable laws or our policies and such violations can place personal information of our customers at risk.

We or our service providers could be unaware of an incident or its magnitude and effects until after it is too late to prevent it and the damage it may cause. Further, because the techniques used to obtain unauthorized access to the information systems change frequently, and may not be recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures.

The theft, unauthorized use, or a cybersecurity attack that results in the publication of our trade secrets and other confidential business information as a result of such an incident could negatively affect our competitive position, the value of our investment in product or research and development, and third parties might assert against us or our customers claims related to resulting losses of confidential or proprietary information or end-user data and/or system reliability. We carry insurance that provides some protection against the potential losses arising from a cybersecurity incident, but it will not likely cover all such losses, and the losses that it does not cover may be significant. In any such event, our business could be subject to significant disruption, which could impact our revenues or cause customers to cease doing business with us, and we could suffer monetary and other losses, including reputational harm, which costs we may not be able to recover from our service providers. Our operations are dependent upon our ability to protect our technology infrastructure against damage from business continuity events that could have a significant disruptive effect on our operations.

Our technologies could infringe the intellectual property rights of others, causingcostly litigation and the loss of significant rights.

Significant litigation regarding intellectual property rights exists in the semiconductor industry. It is possible that a third party may claim that our technologies infringe their intellectual property rights or misappropriate their trade secrets. For example, in late 2020, Ocean Semiconductor LLP (“Ocean”) filed complaints against a number of semiconductor companies in the United States, including a number of our customers, alleging that the importation of IC devices made overseas on a process that, in some cases, included our software, infringed U.S. patents owned by Ocean. By way of further example, in 2019, one of our Exensio customers notified us that they had been named in a lawsuit alleging, among other things, that their use of Exensio Control Distributed infringed the patent of a third party. Any claim, even if without merit, could be time consuming to defend, result in costly litigation, or require us to enter into royalty or licensing agreements, which may not be available to us on acceptable terms, or at all and could adversely affect our sales opportunities, expenses, and revenues.

In addition, we collect, use, store or disclose (collectively, “process”) an increasingly large amount of personal information, including from employees and customers, in connection with the operation of our business. The personal information we process is subject to an increasing number of federal, state, local and foreign laws regarding privacy and data security, as well as contractual commitments. Any failure or perceived failure by us to comply with such obligations may result in governmental enforcement actions, fines, litigation, or public statements against us by consumer advocacy groups or others and could cause our customers to lose trust in us, which could have an adverse effect on our reputation and business. Additionally, changes to applicable privacy or

data security laws could impact how we process personal information, and therefore limit the effectiveness of our solutions or our ability to develop or deliver new products or services. For example, the European Union General Data Protection Regulation, which became fully effective on May 25, 2018, imposes stringent data protection requirements and provides for significant penalties for noncompliance of up to the greater of €20 million or four percent of worldwide annual revenues. Regulation is also increasingly occurring at the U.S. state level to supplement federal legislative action or inaction, as indicated by the California Consumer Privacy Act (CCPA), which becomesfirst became enforceable in 2020 and may apply to our products, services, and data.2020.

Additionally, we must frequently expand our internal information system to meet increasing demand in storage, computing and communication, which may result in increased costs. Our internal information system is expensive to expand and must be highly secure due to the sensitive nature of our customers’ information that we transmit. Building and managing the support necessary for our growth places significant demands on our management and resources. These demands may divert these resources from the continued growth of our business and implementation of our business strategy.

If we are not able to retain, attract, motivate, and strategically locate talented employees, including some key executives, our business may suffer.

Our success and competitiveness depend on our ability to retain, attract, motivate, and strategically locate in our offices around the globe, talented employees, including some of our key executives. Achieving this objective may be difficult due to many factors, including fluctuations in global economic and industry conditions, changes in our management or leadership, the hiring practices at our competitors or customers, cost reduction activities, and the effectiveness of our compensation programs, including equity-based programs. Further, we have had, and expect to continue to have, difficulty in obtaining visas permitting entry for some of our employees that are foreign nationals into the United States, and delays in obtaining visas permitting entry into other key countries, for several of our key personnel, which disrupts our ability to strategically locate our personnel. In recent years, the United State has increased the level of scrutiny in granting H-1(b), L-1 and other business visas. The Trump administration has indicated that immigration reform is a priority. Compliance with United States immigration and labor laws could require us to incur additional unexpected labor costs and expenses or could restrain our ability to retain skilled professionals.  If we lose the services of certain of our key executives or a significant number of our engineers, it could disrupt our ability to implement our business strategy. If we do not successfully attract, retain, and motivate key employees, including key executives, we may be unable to realize our business objectives and our operating results may suffer.

Our earnings per share and other operating results may vary quarter to quarter, which could result in not meeting investors’ expectations and cause our stock price todrop.

Our stock price has fluctuated widely during the last few years, from a low closing price of $7.73 per share in October 2018 to a high closing price of $24.16 per share in December 2016. A factor in the volatility may be that our historical quarterly operating results have fluctuated. Our future quarterly operating results will likely fluctuate from time to time and may not meet the expectations of securities analysts and investors in some future period, which could cause our stock price to decrease again. A significant reduction in our stock price negatively impacts our ability to raise equity capital in the public markets and increases the cost to us, as measured by dilution to our existing shareholders, of equity financing. In addition, the reduced stock price also increases the cost to us, in terms of dilution, of using our equity for employee compensation or for acquisitions of other businesses. A greatly reduced stock price could also have other negative results, including the potential loss of confidence by employees, the loss of institutional investor interest, a hostile take-over bid, and fewer business development opportunities. Also, significant volatility in the stock price could be followed by a securities class action lawsuit, which could result in substantial costs and a diversion of our management’s attention and resources.

Competition in the market for data analytics and related systems and services may intensify in the future, which could impede our ability to grow or execute our strategy.

CompetitionWe currently face indirect competition from the internal groups at IC companies and direct competition from providers of (i) yield management and/or prediction systems, such as KLA-Tencor, Siemens AG (“Siemens”), Onto Innovation, Inc. (“Onto”), and Synopsys, Inc.; (ii) semiconductor manufacturing software, such as Applied Materials, Inc., BISTel Inc., Invantest, Inc., NI, Inc., Onto, and Siemens; (iii) inline inspection, metrology and electrical test equipment providers, such as Applied Materials and Keysight Technologies, Inc.; and, (iv) connectivity software or integration products/services supporting factory connectivity or control needs of customers, such as PEER Group, Inc., Kontron AIS, GmbH, Yokogawa Electric Corp., and Kornic Automation Co. Ltd. There may be other providers of competitive commercial solutions of which we are not aware and we may compete with the products or offerings of these named companies or additional companies if we expand our offerings through acquisition or development. For example, since our acquisition of Cimetrix Incorporated in late 2020, we now face competition in the connectivity and integration products/services supporting factory equipment connectivity and control. The demand for solutions that address the need for better integration between the silicon design and manufacturing processes may encourage direct competitors to enter into our market. For example, in 2020, two of our competitors were acquired by larger entities, Synopsys, Inc. acquired Qualtera and NI, Inc. acquired Optimal+, which may enable greater investment or marketing of these competitive applications. This competition in our market may intensify in the future, which could lead to increased pricing pressure, negatively impacting our revenues, and slow our ability to grow or execute our strategy and could lead to increased pricing pressure, negatively impactingstrategy. Also, our revenues. Our current and potential customers may choose to develop their own solutions internally, particularly if we are slow in deploying our solutions or improving them to meet market needs. These and other competitors may be able to operate with a lower cost structure than our engineering organization, which would give any such competitor’s products a competitive advantage over our solutions. We currently face indirect competition from the internal groups at IC companies and some direct competition from providers of (i) yield management and/or prediction systems, such as KLA-Tencor, Siemens AG (“Siemens”), Rudolph Technologies, Inc. (“Rudolph”), Synopsys, Inc., and Qualtera, (ii) semiconductor manufacturing software, such as Applied Materials, Inc., BISTel Inc., Invantest, Inc., Optimal+, Rudolph, and Siemens and, (iii) inline inspection, metrology and electrical test equipment providers, such as Applied Materials and Keysight Technologies, Inc.

Further, we may compete with the products or offerings of these named companies or additional companies if we expand our offerings through acquisition or development. There may be other providers of commercial solutions for systematic IC yield and performance enhancement of which we are not aware. Further, some providers of yield management software or inspection equipment may seekRisks Related to broaden their product offerings and compete with us. In addition, we believe that the demand for solutions that address the need for better integration between the silicon design and manufacturing processes may encourage direct competitors to enter into our market. For example, large integrated organizations, such as IDMs, electronic design automation software providers, IC design service companies or semiconductor equipment vendors, may expand their product offerings or decide to spin-off a business unit to compete with us. Other potential competitors include fabrication facilities that may decide to offer solutions competitive with ours as part of their value proposition to their customers. If these potential competitors change the pricing environment or are able to attract industry partners or customers faster than we can, we may not be able to grow and execute our strategy as quickly or at all.Our Operations

Measurement of our Gainshare royalties and other variable consideration requires data collection and customers’ use of estimates in some cases and is subject to customers' agreement and is later offset if actual data differ from customers’ estimates, which can result in uncertainty and cause quarterly results to fluctuate.

We can only recognize Gainshare royaltyvolume- or average selling price- based royalties once we have reached agreement with our customers on their level of yield performance improvements or average selling prices (also called “ASP”) and quarterly agreements are sometimes based on estimates of volume results or ASP each quarter. Measuring the amount of yield improvement is inherently complicated and dependent on our customers’ internal processes and certain non-public information, thus, there may be uncertainty as to some components of measurement.measurement or calculation. Also, some variable considerationsconsideration can be highly susceptible to delays in the customer measurement of key factors such as reporting volumes results and level of yield.yield or ASP. Therefore, we may have to estimate revenue related to contingent variable fees or usage-based or sales-based royalties prior to the receipt of performance reports, such as Gainshareroyalty acknowledgements, or other related information from customers. These estimates are subject to judgment to evaluate whether it is probable that a significant revenue reversal will not occur in future periods, which could result in our recognition of less Integrated Yield Ramp revenue than expected in any particular period and later offset when actual results become available.

If weour customers fail to collectpay receivable balances when due, our cash will decrease and we may have to incur additional expenses in an attempt to collect it, write-off a portion or all of such receivables, or increase our bad debt allowance. Our accounts receivable balance, net of allowances,reserves, was $40.7$34.1 million and $51.6$40.7 million as of December 31, 2020, and 2019, respectively. Unbilled accounts receivable, included in accounts receivable, totaled $7.2 million and 2018,$7.4 million as of December 31, 2020 and 2019, respectively. Three Unbilled accounts receivable that are not expected to be billed and collected during the succeeding 12-month period are recorded in other non-current assets and totaled $2.0 million and $4.1 million as of December 31, 2020 and 2019, respectively. Two customers accounted for 53%27% of our gross accounts receivable as of December 31, 20192020 and twothree customers accounted for 56%53% our gross accounts receivable as of December 31, 2018, and one customer accounted for 31%, and 37% of our revenues for 2019, and 2018, respectively.2019.  The allowance for doubtfultotal accounts receivable reserves was $0.2$1.0 million and $0.3$0.2 million as of December 31, 20192020 and 2018,2019, respectively. We generally do not require collateral or other security to support

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accounts receivable. Despite the financial ability of these customers to pay for on-going services by PDF under valid contracts, customers may delay payments. Our allowances for potential credit losses, if any, could be insufficient, and we may need to adjust our allowance for doubtful accounts from current estimates or write-off receivables depending on such claims in the future.  If we are forced to pursue legal remedies to collect receivables, our expenses could rise significantly and our business relationship and future business with these customers could suffer.

We have experienced losses in the past and we may incur losses again in the future.

We have experienced losses in the past, and we may incur losses again in the future if we are not able to adequately control our costs or if total revenues fail to exceed costs. In addition, virtually all of our quarterly operating expenses are fixed, so any shortfall in anticipated quarterly revenues could significantly reduce our operating results below expectations. Our accumulated deficit was $35.9$76.2 million as of December 31, 2019.2020. We expect to continue tohave in the past and may in the future incur significant expenses in connection with:

 

	•	funding for research and development;
	•	restructuring costs related to our cost control and management efforts;
	•	expansion of our sales and marketing efforts; and
	•	additional non-cash charges relating to amortization and stock-based compensation.

We face operational and financial risks associated with international operations thatcould negatively impact our revenues.

We derive over half of our revenues from sales outside of the United States and we expect our international business to continue to grow. We have in the past expanded and reorganized, at different times, our operations, including international operations, and may in the future continue such expansion or reorganization by establishing or restructuring international subsidiaries, offices, or contractor relationships in locations, if and when, deemed appropriate by our management. Thus, the success of our business is subject to risks inherent in doing business internationally, including in particular:  

	•	our potential growth in China is dependent upon continued investments in the semiconductor industry by both private and public entities within China. Should circumstances change such that the level of investments is substantially reduced, our future growth potential may be limited;
	•	some of our key engineers and other personnel are foreign nationals and they may not be permitted access to certain technical information under U.S. export laws or by certain of our customers and may have difficulty gaining access to the United States and other countries in which our customers or our offices may be located and it may be difficult for us to recruit and retain qualified technical and managerial employees in foreign offices;
	•	ineffective or inadequate protection or enforcement of our intellectual property in foreign jurisdictions;
	•	greater difficulty in collecting account receivables resulting in longer collection periods, bad debt, and increased cost to collect;
	•	language and other cultural differences may inhibit our sales and marketing efforts and create internal communication problems among our U.S. and foreign teams, increasing the difficulty of managing multiple, remote locations and negatively impacting sales and revenue;
	•	compliance with, inconsistencies among, and unexpected changes in, a wide variety of foreign laws and regulatory environments with which we are not familiar, including, among other issues, with respect to employees, personal data, tax, protection of our IP, and a wide variety of operational regulations and trade and export controls under domestic, foreign, and international law;

•

currency risk due to the fact that certain of our payables and for our international offices are denominated in the foreign currency, including the Euro, Yen, and RMB, while virtually all of our revenues is denominated in U.S. dollars, or in the event a larger portion of our revenues becomes denominated in foreign currencies, we would be subject to a potentially significant exchange rate risk;

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	•	inadequate local infrastructure that could result in business disruptions;
	•	additional non-cash charges relatingtaxes, interest, and potential penalties, and uncertainty around changes in tax laws of various countries;
	•	geopolitical instability or changes in government could disrupt our operations or our customers’ purchases or operations or those of related supply chain participants;

	•	quarantine, private travel limitation, or business disruption in regions affecting our operations, stemming from actual, imminent or perceived outbreak of human pandemic or contagious disease, including the COVID-19; or
	•	economic or political instability, including but not limited to amortizationarmed conflict, terrorism, interference with information or communication of networks or systems, as well as strained or worsening relations between the United States and stock-based compensation.China, and the resulting disruption to economic activity and business operations.

Further, our employees and contractors include professionals located in various international locations, including Shanghai, China, and Ramallah, Palestine, who provide software-related development, quality assurance, maintenance, and other technical support services for certain of our software products. Political changes, including policies regarding export control, that affect these or other international operations could disrupt or limit the work our employees and contractors are able to perform, and thus negatively affect the range of services we are able to provide our customers or our cost for such services.

The COVID-19 pandemic has affected the manufacturing and shipment of goods. From January to April 2020, our Shanghai office was temporarily shut down and the restrictions limited the ability of our local employees to travel to customer sites or visit our other offices.  An extended closure of our customers' plants due to a resurgence of COVID-19 or variants thereof in China could adversely impact our business.

In addition, our global operations are subject to numerous U.S. and foreign laws and regulations, including those related to anti-corruption, tax, corporate governance, imports and exports, financial and other disclosures, privacy, and labor relations. These laws and regulations are complex and may have differing or conflicting legal standards, making compliance difficult and costly. In addition, there is uncertainty regarding how proposed, contemplated, or future changes to these complex laws and regulations could affect our business. We may incur substantial expense in complying with the new obligations to be imposed by these laws and regulations, and we may be required to make significant changes in our business operations, all of which may adversely affect our revenues and our business overall. Given the high level of complexity of these laws, there is a risk that some provisions may be inadvertently or intentionally breached, for example through fraudulent or negligent behavior of individual employees, our failure to comply with certain formal documentation requirements or otherwise. If we violate these laws and regulations, we could be subject to fines, penalties, or criminal sanctions, and may be prohibited from conducting business in one or more countries. Additionally, we may be held liable for actions taken by our local dealers and partners. A significant violation could additionally have a significantly negatively impact our sales opportunities, operations, and financial results. Even if our operations and ability to deliver products and services to customers in China and elsewhere are not significantly negatively impacted by such changing regulations, our customers in China and elsewhere may decide to use only local vendors as a precaution. In such case, our expected international business may be slower than expected or not materialize at all, in which case, our sales opportunities, operations, and financial results would suffer.

Further, early decisions by the Biden U.S. Presidential Administration confirm continuity of a bipartisan consensus in the U.S. government favoring increased confrontation of China in trade practices and economic matters, national security, and human rights.  The Biden Administration views technology as a domain of strategic competition in which the U.S. and allies must stay ahead of China and has reaffirmed the U.S. government consensus identifying semiconductor, artificial intelligence, and 5G technologies, and protection of U.S. supply chains as priority efforts.  If the Administration continues to augment ongoing U.S. efforts by enlisting the cooperation of allied countries in both advanced development and protection against P.R.C. use of U.S. and allied advances, or expands or intensifies export controls and sanctions, including by adding more P.R.C. companies to the U.S. Export Administration Regulations (EAR) Entity List, our ability to sell to these companies could be negatively impacted.  Our standard operations include development, distribution processes, software download sites, and professional service centers and processes located in various geographies around the world.  Some customers have expressed concerns to us that continued action by the U.S. government could potentially interrupt their ability to make use of our products or services.  The continuing tension between the U.S. and P.R.C. governments in trade and security matters or the perception of that tension could lead to disruptions or reductions in international trade, deter or prevent purchasing activity of customers, and negatively impact us in our China sales and financial results.

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Our technologies could infringe the intellectual property rights of others, causingcostly litigation and the loss of significant rights.

Significant litigation regarding intellectual property rights exists in the semiconductor industry. It is possible that a third party may claim that our technologies infringe their intellectual property rights or misappropriate their trade secrets. For example, in 2019, one of our Exensio customers notified us that they had been named in a lawsuit alleging, among other things, that their use of Exensio Control Distributed infringed the patent of a third party. Any claim, even if without merit, could be time consuming to defend, result in costly litigation, or require us to enter into royalty or licensing agreements, which may not be available to us on acceptable terms, or at all. A successful claim of infringement against us in connection with the use of our technologies could adversely affect our business.Tax Risks

 

Changes in effective tax rates could positively affect our earnings, thereby raising investors’ expectations, while the final tax rates that are determined could be significantly higher, thereby lowering our earnings and causing us to miss investors’ expectations, which could cause our stock price to drop.

 

We conduct our business globally and, as a result, are subject to taxation in the United States and foreign countries. Our future tax rates could be affected by numerous factors, including recent changes in tax laws or the interpretation of such tax laws, insufficient taxable income to realize deferred tax assets, and changes in accounting policies. Our filings are subject to reviews or audit by the Internal Revenue Service and state, local and foreign taxing authorities. We cannot be sure that any final determination in an audit would not be materially different than the treatment reflected in our historical income tax provisions and accruals. If additional taxes are assessed as a result of an audit, there could be a significant negative effect on our income tax provision and our operating results in the period or periods for which that determination is made. Any changes in our geographical earnings mix in various tax jurisdictions, including those resulting from transfer pricing adjustments, could materially increase our effective tax rate.

 

Future events may impact our deferred tax asset position, including the utilization of net operating loss and tax credit carryforwards.

 

IfRealization of our judgment and assumptions about our ability to utilize deferred tax assets is dependent primarily upon future taxable income in the applicable jurisdiction. As of December 31, 2020, we recorded a full valuation allowance against all of our U.S. federal and our needstate deferred tax assets due to the uncertainty surrounding the future realization of these deferred tax assets. Therefore, no benefit has been recognized for valuation allowances based on available evidence fails to change to reflect changes inthe net operating loss carryforwards, tax laws or variances between future projected operating performancecredit carryforwards, and actual results, we may not be able to utilizeother deferred tax assets. The net operating loss and tax credit carryforwards as we expect. If thecredits could expire unused and be unavailable to reduce future income tax liabilities. We intend to continue maintaining a full valuation allowance foron these deferred tax assets until there is sufficient evidence to support the reversal of all or some portion of these allowances. We evaluate our deferred tax assets for realizability each reporting period. The impact of releasing some or all of such valuation allowance in a future period could be a material benefit in the period in which such release occurs.

Risks Related to Our Strategic Transactions

We may not realize the benefits of our strategic partnership with Advantest, which could have an adverse effect on our business and results of operations

On July 29, 2020, we entered into a strategic partnership with Advantest Corporation through its wholly-owned subsidiary, Advantest America, Inc. (collectively, “Advantest”), that includes: (i) a significant agreement for our assistance in development of cloud-based applications for Advantest tools that leverage our Exensio software analytics platform; (ii) a commercial agreement providing for the license to third parties of solutions that result from the development work that combine Advantest’s testing applications and our Exensio platform; (iii) a 5-year cloud-based subscription for our Exensio analytics platform and related services; and (iv) the purchase of 3,306,924 shares of our common stock, for aggregate gross proceeds of $65.2 million. This strategic partnership is in the early stages of development, and the full extent of its future impact on our financial condition and results of operations is currently unknown and the failure to reap the anticipated benefits of Advantest’s financial resources, technology, customer relationships, and global footprint and/or develop successful joint solutions could have an adverse effect on our business and results of operations.

Our acquisitions and divestitures create special risks and challenges that could adversely affect our financial results.

We have made, and may continue to make, acquisitions in order to enhance our business. For example, we recently acquired Cimetrix Incorporated (“Cimetrix”) in December 2020 for $35.0 million in cash consideration, net of cash on Cimetrix’s balance sheet as of closing, and subject to other closing adjustments. Acquisitions involve numerous risks, including, but not limited to, problems combining the purchased operations, technologies or products, unanticipated costs, liabilities, litigation, and diversion of management’s attention from our core businesses, adverse effects on existing business relationships with suppliers and customers, risks associated with entering markets in which we have no or limited prior experience, and where competitors in such markets have stronger market positions, initial dependence on unfamiliar supply chains or relatively small supply partners, failure of our due diligence processes to identify significant problems, liabilities or other challenges of an acquired company or technology, and the potential loss of key employees, customers, distributors, vendors, and other business partners of the companies we acquire.

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There can be no assurance that we determine, based on available evidence atwill be able to successfully integrate any businesses, products, technologies, or personnel that we might acquire or that the timetransaction will advance our business strategy. The integration of businesses that we may acquire is likely to be a complex, time-consuming, and expensive process and we may not realize the determination is made, is later adjusted (either by an increaseanticipated revenues or other benefits associated with our acquisitions. If we fail to successfully manage, operate, or integrate any acquired business or if we are unable to efficiently operate as a decrease),combined organization, including through the deferred tax asset valuation allowance may changeuse of common information and communication systems, operating procedures, financial controls, and human resources practices, we could be required to write-down investments and our business, financial condition, and results of operations may be adversely affected. We may also be unable to protect or enforce the intellectual property rights of any target business that we acquire, or such target businesses may become subject to claims of intellectual property infringement. Further, if we become subject to liabilities as a result of an acquisition, the liabilities we incur may be substantial and the amounts of such liabilities may not be covered by and/or may exceed any liability protections.

In connection with certain acquisitions, we may agree to issue common stock, or assume equity awards, that dilute the ownership of our current stockholders, use a substantial portion of our cash resources, assume liabilities (both known and unknown), record goodwill and amortizable intangible assets that will be subject to impairment testing on a regular basis and potential periodic impairment charges, incur amortization expenses related to certain intangible assets, and incur large and immediate write-offs and restructuring and other related expenses, all of which could harm our financial condition and results of operations.

COVID-19 Risks

The COVID-19 pandemic has significantly affected how we and our customers are operating our business and the duration and extent to which this will impact our future results of operations and overall financial performance remains uncertain.

The COVID-19 pandemic has significantly a ffected how we and our customers are operating our business. For example, most U.S. states and countries worldwide have imposed and may continue to impose from time-to-time for the foreseeable future, restrictions on the physical movement of our employees, partners, and customers to limit the spread of COVID-19, including travel restrictions and shelter-in-place orders. As a result, our Shanghai office was temporarily shut down and the restrictions limited the ability of our local employees to travel to customer sites or visit our other offices from January to April 2020. Our US R&D facility and offices in Canada, France, Japan and Korea were temporarily closed on various periods during the first to third quarter of 2020, and our corporate headquarters in the United States and several other impacted locations are temporarily closed as well. In addition, our personnel worldwide are subject to various country to country travel restrictions, which limit our ability to provide services to customers at their facilities. These impacts have disrupted our normal operations. If the COVID-19 pandemic has a substantial impact on our employees’ productivity, our results of operations and overall financial performance may be harmed.

Moreover, the conditions caused by the COVID-19 pandemic could adversely affect our customers’ ability or willingness to purchase our products or services, delay prospective customers’ purchasing decisions, adversely impact our ability to provide or deliver products and on-site services to our customers, delay the provisioning of our offerings, lengthen payment terms, reduce the value or duration of their subscriptions, or affect attrition rates, all of which could adversely affect our future sales, operating results and overall financial performance.  For example, we believe the lack of an ability to meet face-to-face during most of 2020 may have made it harder for us to sell complex or new technologies to such customers during 2020.

While the potential economic impact brought by the COVID-19 pandemic may be difficult to assess or predict, the pandemic has resulted in significant disruption of global financial markets and on June 8, 2020, the National Bureau of Economic Research announced that the U.S. was in a recession. A long-term recession or long-term market downturn resulting from the spread of COVID-19 could materially impact the value of our common stock, impact our access to capital and affect our business in the near and long-term.

The duration and extent of the impact from the COVID-19 pandemic depends on future developments that cannot be accurately predicted at this time, such as the severity and transmission rate of the virus and variants thereof, the extent and effectiveness of containment actions, including the availability and effective distribution of vaccines, and the impact of these and other factors on our employees, customers, partners and vendors. If we are not able to respond to and manage the impact of such events effectively, or if the macroeconomic conditions of the general economy continue to worsen or the industries in which we operate are negatively impacted.impacted over the long-term, our business, operating results, financial condition and cash flows could be adversely affected.

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General Risk Factors

If we are not able to retain, attract, motivate, and strategically locate talented employees, including some key executives, our business may suffer.

Our success and competitiveness depend on our ability to retain, attract, motivate, and strategically locate in our offices around the globe, talented employees, including some of our key executives. Achieving this objective may be difficult due to many factors, including fluctuations in global economic and industry conditions, changes in our management or leadership, the hiring practices at our competitors or customers, cost reduction activities, and the effectiveness of our compensation programs, including equity-based programs. Further, we have had, and expect to continue to have, difficulty in obtaining visas permitting entry for some of our employees that are foreign nationals into the United States, and delays in obtaining visas permitting entry into other key countries, for several of our key personnel, which disrupts our ability to strategically locate our personnel. In recent years, the United States increased the level of scrutiny in granting H-1(b), L-1 and other business visas. Compliance with United States immigration and labor laws could require us to incur additional unexpected labor costs and expenses or could restrain our ability to retain skilled professionals.  If we lose the services of certain of our key executives or a significant number of our engineers, it could disrupt our ability to implement our business strategy. If we do not successfully attract, retain, and motivate key employees, including key executives, we may be unable to realize our business objectives and our operating results may suffer.

Our earnings per share and other operating results may vary quarter to quarter, which could result in not meeting investors’ expectations and cause our stock price to drop.

Our stock price has fluctuated widely during the last few years, from a low closing price of $7.73 per share in October 2018 to a high closing price of $26.18 per share in August 2020. A factor in the volatility may be that our historical quarterly operating results have fluctuated. Our future quarterly operating results will likely fluctuate from time to time and may not meet the expectations of securities analysts and investors in some future period, which could cause our stock price to decrease again. A significant reduction in our stock price negatively impacts our ability to raise equity capital in the public markets and increases the cost to us, as measured by dilution to our existing shareholders, of equity financing. In addition, the reduced stock price also increases the cost to us, in terms of dilution, of using our equity for employee compensation or for acquisitions of other businesses. A greatly reduced stock price could also have other negative results, including the potential loss of confidence by employees, the loss of institutional investor interest, a hostile take-over bid, and fewer business development opportunities. Also, significant volatility in the stock price could be followed by a securities class action lawsuit, which could result in substantial costs and a diversion of our management’s attention and resources.

 

Our business could be negatively affected as a result of actions of activist shareholders, and such activism could impact the trading value of our securities.

 

In recent years, shareholder activists have become involved in numerous public companies, including our company. Shareholder activists frequently propose to involve themselves in the governance, strategic direction, and operations of a company. Such proposals may disrupt our business, increase our expenses, and divert the attention of our Board of Directors and our management and employees, and any perceived uncertainties as to our future direction resulting from such a situation could result in the loss of potential business opportunities, interfere with our ability to execute our strategic plan be exploited by our competitors, cause concern to our current or potential customers, and make it more difficult to attract and retain qualified personnel and business partners, all of which could adversely affect our business. A proxy contest for the election of directors at our annual meeting could also require us to incur significant legal fees and proxy solicitation expenses. In addition, actions of activist shareholders may cause significant fluctuations in our stock price based on temporary or speculative market perceptions or other factors that do not necessarily reflect the underlying fundamentals and prospects of our business.

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Item 1B.  Unresolved Staff Comments

 

None.   

 

Item 2.  Properties

 

Our principal executive offices are located in Santa Clara, California, where we lease approximately 20,800 square feet of office space expiring in August 2028. We also have facilities or offices in Milpitas, California; La Jolla, California; Pittsburgh, Pennsylvania; Richardson, Texas; Shanghai, China; Canada; France; Germany; Italy; Japan; Korea; and, Taiwan.None.

 

We believe our existing and planned facilities are adequate to meet our current needs and are being utilized consistently with our past practice. We consistently look for opportunities to minimize costs related to office space through improved efficiencies and intend to make changes to leased facilities in the future as appropriate to reflect changes in worldwide operations and headcount.

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Item 3.  Legal Proceedings

 

From time to time, we are subject to various claims and legal proceedings that arise in the ordinary course of business. We accrue for losses related to litigation when a potential loss is probable and the loss can be reasonably estimated in accordance with FASBFinancial Accounting Standards Board (FASB) requirements. As of December 31, 20192020, we were not party to any material legal proceedings, thus no loss was probable, and no amount was accrued.

 

On May 6, 2020, the Company initiated an arbitration proceeding with the Hong Kong International Arbitration Center against SMIC New Technology Research & Development (Shanghai) Corporation (“SMIC”) due to SMIC’s failure to pay fees due to PDF under a series of contracts. We seek to recover the unpaid fees, a declaration requiring SMIC to pay fees under the contracts in the future, and costs associated with bringing the arbitration proceeding. The arbitration is on-going.

 

Item 4.  Mine Safety Disclosures

 

None.

 

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PART II

 

Item 5.  Market For Registrant’s Common Equity, and Related Stockholder Matters and Issuer Purchases of Equity Securities

 

Our common stock trades on the Nasdaq Global Market under the symbol “PDFS.” As of March 6, 2020,3, 2021, we had approximately 31 stockholders of record. The number of stockholders of record does not include individuals whose stock is in nominee or “street name” accounts through brokers. 

 

Dividend Policy

 

No cash dividends were declared or paid in 20192020 and 2018.2019. We currently intend to retain all available funds to finance future internal growth, and product development, and stock repurchases and, therefore, do not anticipate paying any cash dividends on our common stock for the foreseeable future.

 

Stock Performance GraphUnregistered Sales of Equity Securities

 

The following graphinformation required to be disclosed by paragraph (a) of Item 5 to Form 10-K has been included in a current report on Form 8-K and, tables compare the cumulative total stockholder return data for our stock since December 31, 2014,therefore, is not furnished herein, pursuant to the cumulative return over such period of (i) The Nasdaq Composite Index and (ii) the RDG Technology Composite Index. The graph assumeslast sentence in that $100 was invested on December 31, 2014. The graph and tables further assume that such amount was initially invested in the Common Stock of the Company at a per share price of $14.86 (closing price on December 31, 2014) and that any dividends were reinvested. This performance graph and the corresponding tables are not “soliciting material,” are not deemed filed with the SEC and are not to be incorporated by reference in any filing by us under the Securities Act or the Exchange Act whether made before or after the date hereof and irrespective of any general incorporation language in any such filing. The stock price performance on the following graph and tables is not necessarily indicative of future stock price performance.

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		12/14				12/15				12/16				12/17				12/18				12/19
PDF Solutions, Inc.			100.00				72.95				151.75				105.65				56.73				113.66
Nasdaq Composite Index			100.00				106.96				116.45				150.96				146.67				200.49
RDG Technology Composite Index			100.00				103.42				118.01				161.58				162.31				238.96

paragraph.

 

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

 

On May 28, 2020, the Company’s 2018 stock repurchase program (the “2018 Program”) that was originally adopted on May 29, 2018, expired. On June 4, 2020, the Company’s Board of Directors adopted a new stock repurchase program (“2018(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. DuringNo shares were repurchased under the 2018 Program or 2020 Program during the year ended and as of December 31, 2019, the Company repurchased approximately 785,000 shares at an average price of $12.43 per share, for a total price of $9.8 million, under the 2018 Program. Under the 2018 program, as of December 31, 2019, $15.2 million remained available for future repurchases million of the Company’s common stock.2020.

 

There were no purchases made by or on behalf of the Company or any “affiliated purchaser” (as the term is defined in Rule 10b-18(a)(3) under the Exchange Act) of our common stock during the fourth quarter ended December 31, 20192020.   

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Item 6.  Selected Financial Data

 

The following selected consolidated financial information has been derived from the audited consolidated financial statements. The information set forth below is not necessarily indicative of results of future operations and should be read in conjunction with Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and notes to those statements included therein and in Part II of this Form 10-K.

 

		Year Ended December 31,
		2019				2018				2017				2016				2015				Year Ended December 31,
		(In thousands, except per share amounts)																				2020				2019				2018				2017				2016
																						(In thousands, except per share amounts)
Consolidated Statements of Comprehensive Income (Loss) Data:
Total revenues		$	85,585			$	85,794			$	101,871			$	107,461			$	97,977			$	88,046			$	85,585			$	85,794			$	101,871			$	107,461
Costs and Expenses:
Costs of revenues			33,474				42,803				47,521				44,448				39,023				36,765				33,474				42,803				47,521				44,448
Research and development			32,747				27,998				30,078				27,559				19,096				34,654				32,747				27,998				30,078				27,559
Selling, general and administrative			26,299				23,934				23,684				22,056				20,421				32,677				26,299				23,934				23,684				22,056
Amortization of other acquired intangible assets			609				435				398				432				196				741				609				435				398				432
Restructuring charges			92				576				—				—		��		—				—				92				576				—				—
Interest and other expense (income), net			(276	)			(493	)			264				10				(181	)			1,269				(276	)			(493	)			264				10
Income (loss) before taxes			(7,360	)			(9,459	)			(74	)			12,956				19,422				(18,060	)			(7,360	)			(9,459	)			(74	)			12,956
Income tax provision (benefit)			(1,942	)			(1,743	)			1,263				3,853				7,015				22,303				(1,942	)			(1,743	)			1,263				3,853
Net income (loss)		$	(5,418	)		$	(7,716	)		$	(1,337	)		$	9,103			$	12,407			$	(40,363	)		$	(5,418	)		$	(7,716	)		$	(1,337	)		$	9,103
Net income (loss) per share:
Basic		$	(0.17	)		$	(0.24	)		$	(0.04	)		$	0.29			$	0.39			$	(1.17	)		$	(0.17	)		$	(0.24	)		$	(0.04	)		$	0.29
Diluted		$	(0.17	)		$	(0.24	)		$	(0.04	)		$	0.28			$	0.39			$	(1.17	)		$	(0.17	)		$	(0.24	)		$	(0.04	)		$	0.28
Weighted average common shares:
Basic			32,411				32,169				32,038				31,373				31,424				34,458				32,411				32,169				32,038				31,373
Diluted			32,411				32,169				32,038				32,431				32,164				34,458				32,411				32,169				32,038				32,431

		December 31,
		2020 (1) (2)				2019				2018				2017				2016
		(In thousands)
Consolidated Balance Sheets Data:
Cash, cash equivalents and short-term investments		$	145,296			$	97,605			$	96,089			$	101,267			$	116,787
Working capital			151,175				119,580				137,693				144,263				151,757
Total assets			287,580				239,544				225,905				224,176				222,329
Long-term obligations			10,869				15,391				6,582				6,171				5,004
Total stockholders’ equity			234,506				196,157				199,795				198,368				198,803

________________________

	(1)	On July 29, 2020,we entered into a strategic partnership with Advantest, which includes, among others, a Securities Purchase Agreement wherein we issued and sold to Advantest America, Inc., an aggregate of 3,306,924 shares of our common stock, at a purchase price of $19.7085 per share, for aggregate gross proceeds of $65.2 million, on July 30, 2020.
	(2)	In December 2020, we completed the acquisition of Cimetrix for approximately $35.0 million in cash consideration, net of cash on Cimetrix Incorporated (“Cimetrix”) balance sheet as of closing, for all of the outstanding equity of Cimetrix. As of December 31, 2020, payment made for this acquisition, net of cash acquired, amounted to $28.6 million, with the final amounts to be paid on the 12 month anniversary of closing. For further information about this acquisition, see Note 4 of “Notes to Consolidated Financial Statements” (Item 8 of Part II of this Report).

 

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		December 31,
		2019				2018				2017				2016				2015
		(In thousands)
Consolidated Balance Sheets Data:
Cash and cash equivalents		$	97,605			$	96,089			$	101,267			$	116,787			$	126,158
Working capital			119,580				137,693				144,263				151,757				148,795
Total assets			239,544				225,905				224,176				222,329				191,769
Long-term obligations			15,391				6,582				6,171				5,004				3,006
Total stockholders’ equity			196,157				199,795				198,368				198,803				174,307

 

 

Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Overview

 

We offer products and services designed to empower engineers and data scientists across the semiconductor ecosystem to connect, collect, manage, and analyze data about design, equipment, manufacturing, and test to improve the yield quality, and profitabilityquality of their products. We derive revenues from two sources: Analytics and Integrated Yield Ramp. Our offerings combine proprietary software, professional services using proven methodologies, electrical measurement hardware tools, and physical IP for IC designs, electrical measurement hardware tools, proven methodologies, and professional services.designs. We primarily monetize our offerings through time-based license fees, contract revenue for professional services, and increasingly recently, time-based fees for software as a service (or SaaS). In some cases, especially on our historical IYR engagements, we also receive a value-based royalty that we call Gainshare. Our products, services, and solutions have been sold to IDMs, fabless semiconductor companies, foundries, OSATs, capital equipment manufacturers, and system houses.

 

 

Industry Trend

 

The COVID-19 pandemic has significantly affected how we and our customers are operating our businesses. For example, most U.S. states and countries worldwide imposed in 2020, and may continue to impose from time-to-time for the foreseeable future, restrictions on the physical movement of people to limit the spread of COVID-19, including travel restrictions and stay-at-home orders. As a result, from January to April 2020, our Shanghai office was temporarily shut down and our local employees were restricted from traveling to customer sites or visiting our other offices. Several other impacted locations were temporarily closed partially or fully in 2020, with minimal staffing only for essential activities including, for example, supporting essential businesses with our U.S. clean room facility. By the third quarter of 2020, our offices in Canada, France, Korea, and Japan had generally reopened with some restrictions returning temporarily at the end of the year. We are closely monitoring the COVID-19 situation and are currently planning to reopen our corporate headquarters in the United States and other offices 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 face-to-face during most of 2020 may have made it harder for us to sell complex or new technologies to such customers during 2020. If we can again begin to meet with customers face-to-face, we may improve traction with these customers. To date, we have been able to provide uninterrupted access to our products and services due to our globally distributed workforce, many of whom were working remotely prior to the pandemic, and our pre-existing infrastructure, which supports secure access to our internal systems. The total duration and full extent of the impact from the COVID-19 pandemic depends on future developments that cannot be accurately predicted at this time, such as the ultimate severity and transmission rate of the virus and variants, the extent and effectiveness of containment actions and vaccinations, and the impact of these and other factors on our employees, customers, partners, and suppliers.

Certain other trends may affect our Analytics revenue.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 those same companies.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. SemiconductorFurther, 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 companies that have aour combination of advanced analytics capabilities, proven and established data infrastructures,supporting infrastructure, and professional services to optimize their environmentconfigure our products to meet customers’ specialized needs.

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Other trends may continue to affect our Integrated Yield Ramp revenue.revenue specifically. The logic foundry market at the leading edge nodes, such as 10nm and 7nm, has undergoneunderwent significant change over the past few years. The leading foundry continues to increasedominate market share as other foundries havefoundries either suspended 7nm development, forecasted a later start of mass production, or started later than originally forecast in some cases. This trend will likely continue to negatively impact our Integrated Yield Ramp business on these nodes. Further, for many foundries, utilization rates for 28nm fabs remain suppressed. We expect most logic foundries to invest in derivatives of older process nodes, such as 28nm and 20nm,14nm, to extract additional value as many of their customers will not move to advanced nodes due to either technological barriers or restrictive economics. Foundries that participate at leading edge nodes are expected to continue to invest in new technologies such as memory, packaging, and multi-patterned and EUV lithography, as well as new innovations in process control and variability management. We expect China’s investment in semiconductors to continue. In order for these trends to provide opportunities for us to increase our business in process control andleveraging electrical characterization, Chinese semiconductors manufacturers will need to increase their production volumes on advanced technology nodes and continue to engage foreign suppliers.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.

 

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There are other business trends that may affect our business opportunities in general.generally. For instance, the demand for consumer electronics, communications devices, and high performancehigh-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 have fueledcontinue 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 all types ofour products and services that address yield loss across the IC product life cycle.

Early decisions by the Biden U.S. Presidential Administration confirm continuity of a bipartisan consensus in the U.S. government favoring increased confrontation of China in trade practices and economic matters, national security, and human rights.  The Biden Administration views technology as a domain of strategic competition in which the U.S. and allies must stay ahead of China.  The Administration has reaffirmed the U.S. government consensus identifying semiconductor, artificial intelligence, and 5G technologies, and protection of U.S. supply chains, as priority efforts.  It appears that the Administration may now augment ongoing U.S. efforts by enlisting the cooperation of allied countries in both advanced development and protection against P.R.C. use of U.S. and allied advances.  The prior U.S. presidential administration expanded and intensified export controls and sanctions, including addition of many P.R.C. companies to the U.S. Export Administration Regulations (EAR) Entity List. These listings restrict supply to designees of items that are subject to the EAR.  After an internal evaluation, we determined that a large percentage of our software products are not of U.S. origin and are, thus, not subject to the EAR.  Our standard operations include development, distribution processes, software download sites, and professional service centers and processes located in various geographies around the world to better serve our customers. Some customers have nonetheless expressed concerns to us that continued action by the U.S. government could potentially interrupt their ability to make use of our products or services.  The continuing tension between the U.S. and P.R.C. governments in trade and security matters or the perception of that tension could lead to disruptions or reductions in international trade, deter or prevent purchasing activity of customers, and negatively impact us in our China sales and financial results.

Our Strategic Partnership with Advantest

On July 29, 2020, we entered into a strategic partnership with Advantest Corporation through its wholly-owned subsidiary, Advantest America, Inc., (collectively, “Advantest”) that includes: (i) a significant agreement for our assistance in development of cloud-based applications for Advantest tools that leverage our Exensio software analytics platform; (ii) a commercial agreement providing for the license to third parties of solutions that result from the development work that combine Advantest’s testing applications and our Exensio platform; (iii) a 5-year cloud-based subscription for our Exensio analytics platform and related services; and (iv) the purchase of 3,306,924 shares of our common stock, for aggregate gross proceeds of $65.2 million. Concurrent with the share purchase, Advantest Corporation also entered into multi-year voting and lock-up agreements.

We entered into this partnership to expand test and measurement solutions throughout the semiconductor value chain. We believe that the combination of our Exensio platform with Advantest’s advanced testing equipment will provide Advantest tool users with the ability to connect, test, measure, and analyze manufacturing data generated by the tools at any point in the semiconductor value chain, helping customers increase yield and reduce testing costs. Further, we believe collaboration with Advantest’s technology, direction connection to its customer relationships, and the breadth of its global footprint will enable us to both accelerate our technology roadmap and customer adoption of our AI-driven data analytics solutions across the supply chain.

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Cimetrix Acquisition

On December 1, 2020, we completed the acquisition of Cimetrix for approximately $35.0 million in cash consideration, net of cash on Cimetrix’s balance sheet as of closing, and subject to other closing adjustments, for all of the outstanding equity of Cimetrix. The combination of Cimetrix connectivity products with our Exensio platform, which leverages machine learning, is intended to enable IC, assembly, and equipment manufacturer customers to extract more intelligence from their tools, not just data, to build more reliable chips and systems at lower manufacturing costs. We accounted for this acquisition as a business combination in accordance with FASB ASC Topic 805, Business Combinations. This method requires that assets acquired and liabilities assumed in a business combination be recognized at their respective estimated fair values as of the Acquisition Date. The excess of purchase consideration over the fair value of net tangible and identifiable intangible assets acquired was recorded as goodwill. The goodwill recorded from this acquisition represents business benefits we anticipates from the acquired workforce and expectation for expanded sales opportunities to foster further business growth. Identifiable definite-lived intangible assets comprised of developed technology, customer relationships, non-competition agreements, trademark and trade names, and in-process research and development (“IP R&D”). For further information about this acquisition, see Note 4 of “Notes to Consolidated Financial Statements” (Item 8 of Part II of this Report).

 

Financial Highlights

 

The following are our financial highlights for the year ended December 31, 2019:2020:

 

	•	Total revenues were $85.6 million, which was relatively flat compared to the year ended December 31, 2018. Analytics revenue was $49.6$88.0 million, which was an increase of $11.1$2.5 million, or 29%3%, compared to the year ended December 31, 2018. The increase in2019. Analytics revenue was driven by higher business activity in licenses and services for Exensio Software, Exensio SaaS, DFI systems, and Characterization Vehicle systems and services.  Integrated Yield Ramp revenue decreased $11.3$57.2 million for the year ended December 31, 2019,2020, which was an increase of $7.6 million, compared to the year ended December 31, 2018, resulting2019. The increase in Analytics revenue was driven by a $10.2 million increase, primarily due to an increase in fees from lowerExensio licenses, higher hours for characterization services worked across multiple contracts and customers, and revenue from Cimetrix, partially offset by a $2.6 million decrease in revenue from DFI systems. Integrated Yield Ramp revenue decreased $5.1 million for the year ended December 31, 2020, compared to the year ended December 31, 2019, due primarily to a $1.7 million decrease in revenue from lower Gainshare royalties duehours worked across multiple contracts and customers and $3.3 million less in revenue for the period when compared to declinethe non-recurring revenue from a customer contract amendment, which was recognized in customers’ revenues at qualifying nodes.2019.
	•	ACosts of Revenues reductionrevenues increased $3.3 million for the year ended December 31, 2020, compared to the year ended December 31, 2019, primarily due to (i) a $2.9 million increase in cloud-delivery related costs and depreciation expense of $9.3test equipment,(ii) a $1.4 million was primarily driven by a reduction of $9.0 million lessincrease in personnel-related costs, (iii) a $0.8 million increase in direct costs related to third-party software royalty and licenses expense, equipment and hardware expense, and the timing of deferral of contract costs, and (iv) a $0.1 million increase in amortization intangible assets related to our acquisition of Cimetrix, all partially offset by a $1.8 million decrease in travel expenses resulting from reduced business travel due to fewer IYR engagements, which are typically labor intensive compared to software time-based license projects.the global COVID-19 pandemic, and a $0.2 million decrease in facilities and other expenses.
	•	Net loss was $5.4$40.4 million, compared to $7.7$5.4 million for the year ended December 31, 2018.2019. The decreaseincrease in net loss was primarily attributable to a $9.3(i) $24.2 million decreaseincrease in costincome tax provision due primarily to the recognition of a full valuation allowance against our U.S. net deferred tax assets, (ii) a $3.3 million increase in costs of revenues, partially offset by(iii) a $6.8$8.3 million increase in operating expenses as we continued to make investments in research and development and sales and marketing activities, and due to an increase in general and administrative expenses, primarily due to the acquisition of Cimetrix, increased subcontractor expenses, and legal fees related to an arbitration proceeding over a $0.2disputed customer contract, and (iv) a $1.5 million increase in tax benefits.
	•	Net loss per basicinterest and diluted share was $0.17, compared toother expense (income), net, loss per basic and diluted share of $0.24 for the year ended December 31, 2018,all partially offset by a decrease of $0.07 per basic and diluted share.$2.5 million increase in revenues.
	•	Cash, cash equivalents and short-term investments increased $1.5$47.7 million to $145.3 million at December 31, 2020, from $97.6 million at December 31, 2019,, from $96.1 million at December 31, 2018, primarily due to the collectionproceeds from the issuance of significant past due accounts receivables duringour common stock in connection with our strategic partnership with Advantest and cash generated from the third quarter of fiscal 2019,operating activities, partially offset by cash used in investing activities, relatedprimarily due to $28.6 million in cash used in the property and equipment purchased for the development our DFI initiative, expansion of our research and development laboratory and clean room, a paymentperiod for the acquisition of certain assets of StreamMosaic, Inc., a provider of artificial intelligence and machine learning solutions,Cimetrix and cash used for additions to property and equipment for our DFI™ solution, including investments in financing activities primarily due to repurchases of our common stock.constructing eProbe tools.

 

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Critical Accounting Policies and Estimates

 

The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires us to make judgments, assumptions, and estimates that affect the amounts reported in the Consolidated Financial Statements and accompanying notes. Notes 1 and 2 of Notes to Consolidated Financial Statements describe the significant accounting policies and methods used in the preparation of the Consolidated Financial Statements. We consider the accounting policies described below to be our critical accounting policies. These critical accounting policies are impacted significantly by judgments, assumptions, and estimates used in the preparation of the Consolidated Financial Statements and actual results could differ materially from the amounts reported based on these policies.

 

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Revenue Recognition

 

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

 

Analytics Revenue

 

Analytics revenue is derived from the following primary offerings: licenses for software, SaaS, Data Connectivity and services for ExensioEquipment Control Software, Exensio SaaS, DFIDFI™ and CVCV® systems that do not include performance incentives based on customers’ yield achievement.achievement, and services related to the foregoing.

 

Revenue from standalone Exensio Softwaresoftware 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 distinctconsidered as a separate performance obligation 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 of the delivery of the software license,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 standalone selling price (or SSP) attributed to each performance obligation.

 

Revenue from Exensio SaaS arrangements, which allow for the use of a cloud-based software product or service over a contractually determined period of time without takingthe customer having to take possession of software, is accounted for as subscriptionsa subscription and is recognized as revenue ratably, on a straight-line basis, over the subscription period beginning on the date the service is first made available to customers. For contracts with any combination of SaaS and related services, distinct performance obligations are accounted for separately. For contracts with multiple performance obligations, we allocate the transaction price of the contract to each performance obligation on a relative basis using SSP attributed to each performance obligation.

 

Revenue from DFI and CV systems that do not include performance incentives based on customers’ yield achievement is recognized primarily as services are performed. Where there are distinct performance obligations, we allocate revenue to all deliverables based on their standalone selling prices, or SSP. In such instances, we apply judgment to estimate the range of SSPs for each performance obligation.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. Due to the nature of the work performed in these arrangements, theThe estimation of percentage of completion method is complex and subject to many variables that require significant judgement. Key factors reviewed by us to estimate costs to complete each contract are future labor and product costs and expected productivity efficiencies. If circumstances arise that impact the original estimates of revenues, costs, or the extent of progress toward completion, revisions to the estimates are made. Revisions to estimates over the course of a service contract may be made and are accounted for on a cumulative catch-up basis. These revisions may result in increases or decreases in estimated revenues or costs. Revisions in profit estimates are reflected in the period in which the conditions that require the revisions become known and can be estimated (cumulative catch-up method). Losses on fixed-price solution implementation contracts are recognized in the period when they become probable.

 

Integrated Yield Ramp Revenue

 

Integrated Yield Ramp revenue is derived from our IYR engagements whichthat include Gainshare or other performance incentives based on customers’ yield achievement.achievement and Gainshare royalties, typically based on customer’s wafer shipments, pertaining to these fixed-price contracts, which royalties are variable.

 

Revenue under these project–based contracts, which are delivered over a specific period of time typically for a fixed fee component paid on a set schedule, is recognized as services are performed using a percentage of completion. Similar to the services provided in connection with 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 judgement.judgment.

 

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The Gainshare royalty contained in IYRyield ramp contracts is a variable fee related to continued usage of our IP after the fixed-fee service period ends, based on the customers’a customer’s 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 are required to record Gainshare as a usage-based royalty derived from customers' usage of intellectual property and record itrevenue in the same period in which the usage occurs. Because we generally do not receive the acknowledgment reports from our customers during a given quarter within the time frame necessary to adequately review the reports and include the actual amounts in quarterly results for such quarter, we accrue the related revenue based on estimates of customers underlying sales achievement. Our estimation process can be based on historical data, trends, seasonality, changes in the contract rate, knowledge of the changes in the industry and changes in customers’ manufacturing environment learned through discussions with customers and sales personnel. As a result of accruing revenue for the quarter based on such estimates, adjustments will be required in the following quarter to true-up revenue to the actual amounts reported.

 

Income Taxes

��

We are required to assess whether it is "more-likely-than-not"“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 appropriate for our federal and state net deferred tax assets (or DTAs) in the fourth quarter of 2020, primarily driven by an increased cumulative loss incurred over the 12-quarter period ended December 31, 2020, near term forecasted book losses, and the likelihood that we will not utilize tax attributes before they begin to expire at the end of 2022. The valuation allowance was approximately $10.5$41.9 million and $9.8$10.5 million as of December 31, 2020 and 2019, and 2018 respectively, whichrespectively. As of December 31, 2019, the valuation allowance was primarily related to California R&D tax credits and California net operating losses (or NOLs) related to an acquisition that we currently do not believe to be “more-likely-than-not” to be ultimately realized. 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 at a future financial reporting period that there has been a change in our ability to realize our California R&D credit and net operating loss carry forward deferred tax assets, and it is at such time “more-likely-than-not” that we are more likely than not to utilize some or all of our U.S. DTAs, we will realize the tax credits before applicable expiration dates,release some or all of our valuation allowance and our tax provision will decrease in the period in which we make such a determination.

 

We evaluate our deferred tax assetsDTAs 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 deferred tax assets,DTAs, less offsetting valuation allowance, in a period are recorded through the income tax provision and could have a material impact on the Consolidated Statements of Comprehensive Loss.

 

Our income tax calculations are based on application of applicable U.S. federal or state or foreign tax law. Our tax filings, however, are subject to audit by the respective tax authorities. Accordingly, we recognize tax liabilities based upon our estimate of whether, and the extent to which, additional taxes will be due when such estimates are more-likely-than-not to be sustained. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. To the extent the final tax liabilities are different than the amounts originally accrued, the increases or decreases are recorded as income tax expense or benefit in the Consolidated Statements of Comprehensive Loss. At December 31, 2019,2020, no deferred taxes have been provided on undistributed earnings from the Company’sour international subsidiaries. The Company intendsWe intend to reinvest the earnings of itsour non-U.S. subsidiaries in those operations indefinitely. As such, the Company haswe have not provided for any foreign withholding taxes on the earnings of foreign subsidiaries as of December 31, 2019.2020. The earnings of the Company’sour foreign subsidiaries are taxable in the U.S.United States in the year earned under the Global Intangible Low-Taxed Income rules implemented under 2017 Tax Cuts and Jobs Act.

 

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted. The CARES Act includes, among other things, refundable payroll tax credits, deferment of some employer FICA taxes, allowance of net operating loss carrybacks for up to five years, alternative minimum tax credit refunds, and technical amendments regarding the income tax depreciation of qualified improvement property placed in service after December 31, 2017. The removal of certain limitations on the utilization of NOLs resulted in our recognition of an income tax benefit of $1.2 million from the carryback of federal NOLs during the year ended December 31, 2020.

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Software Development Costs

 

Internally developed software includesis software developed to meet our internal needs to provide certain services to our customers. TheseOur capitalized software development costs consist of internal compensation related costs and external direct costs incurred during the application development stage and are amortized over their useful lives, which is generally five to six years. The costs to develop software that is marketed externally have not been capitalized as we believe our current software development process is essentially completed concurrent with the establishment of technological feasibility. As such, all related software development costs are expensed as incurred and included in research and development expense in our Consolidated Statements of Comprehensive Loss. 

 

Stock-Based Compensation

 

Stock-basedWe account for stock-based compensation is estimated atusing the grant datefair value method, which requires us to measure stock-based compensation based on the award’sgrant-date fair value of the awards and is recognized on a straight-line basisrecognize the compensation expense over the vesting period, which for us, is generally four years.requisite service period. As stock-based compensation expense recognized is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

 

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our restricted stock units is equal to the market value of our common stock on the date of the grant. These awards are subject to time-based vesting which generally occurs over a period of four years.

 

We have elected to useThe fair value of our stock options is estimated using the Black-Scholes-Merton option-pricing model, for our stock option grants, which incorporates various assumptions including volatility, expected life and interest rates. The expected volatility is based on the historical volatility of our common stock over the most recent period commensurate with the estimated expected life of our stock options. The expected life of an award is based on historical experience and on the terms and conditions of the stock awards granted to employees.options granted. The interest rate assumption is based upon observed Treasury yield curve rates appropriate for the expected life of our stock options.

Business Combinations

We allocate the fair value of purchase consideration to the tangible assets acquired, liabilities assumed and intangible assets acquired based on their estimated fair values at the date of the business combination. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. Such valuations require us to make significant estimates and assumptions, especially with respect to intangible assets. Significant estimates in valuing certain intangible assets include, but are not limited to, estimated replacement costs and future expected cash flows from acquired customers, acquired technology, acquired patents, and trade names from a market participant perspective, useful lives and discount rates. The estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. Allocation of purchase consideration to identifiable assets and liabilities affects our amortization expense, as acquired finite-lived intangible assets are amortized over the useful life, whereas any indefinite lived intangible assets, including IP R&D and goodwill, are not amortized. During the measurement period, which is not to exceed one year from the acquisition date, we record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Upon the conclusion of the measurement period, any subsequent adjustments are recorded to earnings.

 

Valuation of Long-lived Assets including Goodwill 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 further testing is required, we perform a two-step process. The first step involves comparing the fair value of its reporting unit to its carrying value, including goodwill. If the carrying value of the reporting unitamount exceeds its fair value, an impairment loss would be recognized equal to the second stepamount of excess, limited to the test is performed by comparing the carrying valueamount of the goodwill in the reporting unit to its implied fair value. An impairment charge is recognized for the excess of the carrying value of goodwill over its implied fair value. For the purpose of impairment testing, we have determined that we have one reporting unit.total goodwill. There was no impairment of goodwill for the year ended December 31, 2019.2020

 

Our long-lived assets, excluding goodwill, consist of property, and 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.

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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 including intangible assets for the year ended December 31, 2019.2020.

 

Leases

 

We have operating leases for our administrative and sales offices, research and development laboratory and clean room. We recognize our long-term operating lease rights and commitments as operating lease right-of-use assets, operating lease liabilities and operating lease liabilities, non-current, respectively, on our 2019 Consolidated Balance Sheet.Sheets.  

 

We determine if an arrangement is, or contains, a lease at inception. Operating lease right-of-use assets, and operating lease liabilities are initially recorded based on the present value of lease payments over the lease term. Lease terms include the minimum unconditional term of the lease, and may include options to extend or terminate the lease when it is reasonably certain at the commencement date that such options will be exercised. The decision to include these options involves consideration of our overall future business plans and other relevant business economic factors that may affect our business. Since the determination of the lease term requires an application of judgment, lease terms that differ in reality from our initial judgment may potentially have a material impact on our Consolidated Balance Sheet. In addition, our leases do not provide an implicit rate. In determining the present value of our expected lease payments, the discount rate is calculated using our incremental borrowing rate determined based on the information available, which requires additional judgment.

 

 

Recent Accounting Pronouncements and Accounting Changes 

 

See our Note 1, “Description of Business and Summary of Significant Accounting Policies” of “Notes to Consolidated Financial Statements” included under Part II, Item 8 of this Form 10-K for a description of recent accounting pronouncements and accounting changes, including the expected dates of adoption and estimated effects, if any, on our consolidated financial statements.

 

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Results of Operations

Income Statement Presentation

In the fourth quarter of fiscal 2019, in order to improve the transparency of our revenue reporting, we updated our Consolidated Statements of Comprehensive Loss to change our historical presentation of revenue categories. Previously, we presented revenue on two lines: Solutions and Gainshare performance incentives. Included within Solutions was revenue from software and related services, and revenue from SaaS offerings, DFI™ licenses, and fixed-price project-based solution implementation services. The previous Gainshare performance incentives category included only revenue from performance incentive programs. We now present revenue in the following categories: Analytics and Integrated Yield Ramp. Integrated Yield Ramp is comprised of all revenue from our engagements that include performance incentives based on customers’ yield achievement, i.e. both fixed-fees and Gainshare royalty from such engagements. Analytics comprises all other revenue, including from licenses and services for Exensio Software, Exensio SaaS, DFI and CV systems that do not contain performance incentives based on customers’ yield achievement.

The change in presentation of revenue does not change our net revenues or total cost of net revenues. The following table shows reclassified amounts to conform to the current period’s presentation (in thousands):

					Year Ended December 31, 2018
									Change in
					Previously				Presentation				Current
					Reported				Reclassification				Presentation
Revenues:
Design-to-silicon-yield solutions					$	60,081			$	(60,081)				N/A
Gainshare performance incentives						25,713				(25,713)				N/A
Analytics						N/A				38,502			$	38,502
Integrated Yield Ramp						N/A				47,292				47,292
Total revenues					$	85,794			$	—			$	85,794

Since certain costs of revenues are attributed to both Analytics and Integrated Yield Ramp revenue categories, we believe it is more appropriate and meaningful to present the Consolidated Statements of Comprehensive Loss under a one-step presentation format that excludes any measure of gross margin. In the fourth quarter of fiscal 2019, we elected to change our Consolidated Statements of Comprehensive Loss presentation from a two-step presentation, where total costs of revenues was deducted from total revenues to report a gross profit line, to a one-step presentation, where total costs and expenses are deducted from total revenues. The change in presentation does not change previously presented amounts for costs of revenues, operating expenses and other expenses (income), or loss before income taxes.

 

Discussion of Financial Data for the years ended December 31, 20192020 and 20182019

 

Revenues, Costs of Revenues, and Gross Margin

		Year Ended December 31,								$ Change				% Change
		2019				2018				2018 to 2019
(Dollars in thousands)
Revenues
Analytics		$	49,627			$	38,502			$	11,125				29	%
Integrated Yield Ramp			35,958				47,292				(11,334	)			(24	)%
Total revenues		$	85,585			$	85,794			$	(209	)			‒	%
Analytics revenue as a percentage of total revenues			58	%			45	%
Integrated Yield Ramp revenue as a percentage of total revenues			42	%			55	%

		Year Ended December 31,								$ Change				% Change
		2020				2019				2019 to 2020
(Dollars in thousands)
Revenues
Analytics		$	57,232			$	49,627			$	7,605				15	%
Integrated Yield Ramp			30,814				35,958				(5,144	)			(14	)%
Total revenues		$	88,046			$	85,585			$	2,461				3	%
Costs of revenues			36,765				33,474				3,291				10	%
Gross profit		$	51,281			$	52,111			$	(830	)			(2	)%
Gross margin			58	%			61	%
Analytics revenue as a percentage of total revenues			65	%			58	%
Integrated Yield Ramp revenue as a percentage of total revenues			35	%			42	%

 

Analytics Revenue

Analytics revenue increased $11.1was $57.2 million for the year ended December 31, 2019,2020, which was an increase of $7.6 million, compared to the year ended December 31, 2018,2019. The increase in Analytics revenue was driven by a $10.2 million increase, primarily due primarily to an increase in fees from Exensio licenses, higher hours for characterization services worked across multiple contracts and customers, and revenue from Cimetrix, partially offset by a $5.9$2.6 million increasedecrease in revenue from software licenses and SaaS offerings and a $5.2 million increase in revenue generated from DFI and CV systems due to strong business activity.systems.

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Integrated Yield Ramp Revenue

Integrated Yield Ramp revenue decreased $11.3$5.1 million for the year ended December 31, 2019,2020, compared to the year ended December 31, 2018,2019, due primarily to (i) a $9.7$1.7 million decrease in revenue from our IYR services from lower hours worked across multiple contracts and customers and (ii) a $1.6$3.3 million decreaseless in Gainshare royalty fromrevenue for the 28nm technology nodes, partially offset by higher incentivesperiod when compared to the non-recurring revenue from the 14nm technology nodes.a customer contract amendment, which was recognized in 2019. 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 revenues may also fluctuate in the future and are dependent on a number ofdue to other factors, including the semiconductor industry’s continued acceptance of our products, services and solutions, the timing of purchases by existing and new customers, cancellations by existing customers, 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.

Costs and Expenses:

Costs of Revenues

 

		Year Ended December 31,								$ Change				% Change
		2019				2018				2018 to 2019
(Dollars in thousands)
Costs of revenues		$	33,474			$	42,803			$	(9,329	)			(22	)%
As a percentage of total revenues			39	%			50	%

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. Costs of revenues consist of services costs and software licenses costs. Services costs consist ofinclude material, employee compensation and related benefits, 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 the Companyus in providing services to our customers in solution engagements or sold in conjunction with our software products.

The decreaseincrease in costs of revenues of $9.3$3.3 million for the year ended December 31, 2020, compared to the year ended December 31, 2019, was primarily driven bydue to (i) a reduction$2.9 million increase in cloud-delivery related costs and depreciation expense of $9.0test equipment, (ii) a $1.4 million increase in personnel-related costs, primarily relating(iii) an $0.8 million increase in direct costs related to consulting fixed fee Integrated Yield Ramp business, which are typically labor intensive comparedthird-party software royalty and licenses expense, equipment and hardware expense, and the timing of deferral of contract costs, and (iv) a $0.1 million increase in amortization intangible assets related to software time-based license projects, and (ii) $0.8our acquisition of Cimetrix, partially offset by a $1.8 million decrease in travel expenses resulting from our cost management efforts, partially offset by a $0.4 million increase in information technology-related costs and facilities expense mainly due to the global COVID-19 pandemic, and a $0.2 million decrease in facilities and other expenses.

Gross Margin

Gross margin for the year ended December 31, 2020 was 58% compared to 61% for the year-ago period, or a decrease of 3%. The higher cloud-delivery related costs and depreciation expense.gross margin during year December 31, 2019 was primarily due to $4.5 million in nonrecurring revenue from a customer contract amendment recognized in such period.

Operating Expenses:

Research and Development 

 

		Year Ended December 31,								$ Change				% Change				Year Ended December 31,								$ Change				% Change
		2019				2018				2018 to 2019								2020				2019				2019 to 2020
(Dollars in thousands)
Research and development		$	32,747			$	27,998			$	4,749				17	%		$	34,654			$	32,747			$	1,907				6	%
As a percentage of total revenues			38	%			33	%											39	%			38	%

 

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

 

Research and development expenses increased for the year ended December 31, 2019,2020, compared to the year ended December 31, 2018,2019, primarily due to (i) a $4.1$0.7 million increase in personnel-related expense, driven by an(ii) a $0.6 million increase in stock based compensation expense of $1.5 million, higher payroll expense due to the shifting of more resources from our IYR activities to research and development activities, additional headcount, and an increase in salarysubcontractor expenses that is primarily related to our worldwide merit increases,DFI systems and (ii)Exensio initiatives, (iii) a $1.3$0.5 million increase in facilities and information technology (IT) related-costs, driven primarily by (A) higher costs allocation for certain facilities and IT related-expenses, which are calculated using(iv) a proportional allocation based on headcount, (B) an$0.4 million increase in development costs for cloud-based delivery for our Exensio software (C) higher depreciationlicenses and maintenance expense, for our laboratory

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certain equipment, and (D) higher amortization expense of leasehold improvements related to the expansion of our research and development laboratory and clean room.  These increases in research and development expense wereall partially offset by a $0.6 million decrease in subcontractortravel expenses primarily relateddue to our DFI systems and Exensio software.the global COVID-19 pandemic.

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We anticipate our expenses in research and development will fluctuate in absolute dollars from period to period as a result of the size and the timing of product development projects and revenue generating activity requirements.projects.

  

Selling, General and Administrative

 

		Year Ended December 31,								$ Change				% Change				Year Ended December 31,								$ Change				% Change
		2019				2018				2018 to 2019								2020				2019				2019 to 2020
(Dollars in thousands)
Selling, general and administrative		$	26,299			$	23,934			$	2,365				10	%		$	32,677			$	26,299			$	6,378				24	%
As a percentage of total revenues			31	%			28	%											37	%			31	%

 

Selling, general and administrative expenses consist primarily of compensation and benefits for sales, marketing and general and administrative personnel, legal and accounting services, marketing communications expenses, travel and facilities cost allocations, and stock-based compensation expense.

 

Selling, general and administrative expenses increased for the year ended December 31, 2019,2020, compared to the year ended December 31, 2018,2019, primarily due to (i) a $2.6$1.8 million increase in personnel-related expenses driven by higher payroll expenses allocated to selling and marketing activities as a result of the shifting of resources from our IYR activities, salary expenses related to our worldwide merit increases, and an increase in accrued vacation benefits,costs, (ii) a $0.3$1.5 million increase in other facilities and IT related-expenses,acquisition-related costs for Cimetrix, (iii) a $0.3$1.5 million increase in subcontractor expenses, (iv) a $1.3 million increase in fees for legal expense,services primarily related to the arbitration proceeding over a business acquisitiondisputed customer contract, (v) a $0.6 million increase in the second quarter of fiscal 2019,cloud-services related costs, and (iv)(vi) a $0.2 million increase in consulting and subcontractors fees. These increases in selling, general and administrative expenses in 2019 werefrom a write-down of equipment, all partially offset by (i) a $0.6 million decrease in professional fees due primarily to lower audit fees, (ii) a $0.3 million decrease in travel expenses resulting from our cost management effort, and (iii) a $0.3 million decrease in operating lease expense.expenses.

 

We anticipate our selling, general and administrative expenses will fluctuate in absolute dollars from period to period as a result of cost control initiatives and to support increased selling efforts in the future.

 

Amortization of other acquired intangible assets

 

		Year Ended December 31,								$ Change				% Change				Year Ended December 31,								$ Change				% Change
		2019				2018				2018 to 2019								2020				2019				2019 to 2020
(Dollars in thousands)
Amortization of other acquired intangible assets		$	609			$	435			$	174				40	%		$	741			$	609			$	132				22	%

 

Amortization of other acquired intangible assets consists of amortization of intangibles acquired as a result of certain business combinations. The increase in amortization of other acquired intangible assets for the year ended December 31, 2019,2020, compared to the year-ago period,year ended December 31, 2019, was primarily related to amortization of other acquired intangible assets related toin the acquisition of certain assets from StreamMosaic, Inc.Cimetrix.     

Restructuring charges

		Year Ended December 31,								$ Change				% Change
		2019				2018				2018 to 2019
(Dollars in thousands)
Restructuring charges		$	92			$	576			$	(484	)			(84	)%

Restructuring charges for the year ended December 31, 2019, were primarily related to employee separation charges incurred as part of our restructuring plan announced on September 27, 2018, to reduce expenses and align our operations with evolving business needs. As of December 31, 2019, we have substantially completed the implementation of the restructuring plan, and the remaining charges expected to be incurred are not expected to be significant. See Note 10, Restructuring Charges, in Notes to Consolidated Financial Statements in Item 8 of Part II of this Report for more information regarding this restructuring plan.

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Interest and Other Expense (Income), Net

 

		Year Ended December 31,								$ Change				% Change				Year Ended December 31,								$ Change				% Change
		2019				2018				2018 to 2019								2020				2019				2019 to 2020
(Dollars in thousands)
Interest and other expense (income), net		$	(276	)		$	(493	)		$	217				44	%		$	1,269			$	(276	)		$	1,545				(560	)%

 

Interest and other expense (income), net primarily consists of interest income, gains, and losses from foreign currency forward contracts, and foreign currency transaction exchange gains and losses. The change in interest

Interest and other expense (income), net by $0.2 millionincreased for the year ended December 31, 2019,2020, compared to the year ended December 31, 2018, was2019, primarily due to a decrease in interest income due to lower interest rates and a higher net unfavorable fluctuations in foreign exchange rates, partially offset by a decrease in loss related to foreign currency forward contracts.  contracts and an increase in other income.

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Income Tax BenefitProvision (Benefit)

 

		Year Ended December 31,								$ Change				% Change				Year Ended December 31,								$ Change				% Change
		2019				2018				2018 to 2019								2020				2019				2019 to 2020
(Dollars in thousands)
Income tax benefit		$	(1,942	)		$	(1,743	)		$	199				11	%
Income tax provision (benefit)																		$	22,303			$	(1,942	)		$	24,245				(1,248	)%

 

Our effective tax rate for 20192020 was 26.7%(123.5%), which was different from the statutory federal tax rate primarily due to impacts from employee stock-based compensation expense andrecognition of a full valuation allowance against our U.S. net deferred tax credits. The change inassets due to the uncertainty of the ultimate realization of the future benefits of such deferred tax assets, partially offset by an income tax benefit from the carryback of $0.2 million forfederal NOLs pursuant to the year ended December 31, 2019 from an income tax provisionprovisions of $1.7 million for the year ended December 31, 2018, was primarily due to a lower unfavorable tax impact related to employee stock-based compensation expense and an increase in federal tax credits.CARES Act.

 

Any significant change in our future effective tax rates could adversely impact our consolidated financial position, results of operations and cash flows. Our future tax rates may be adversely affected by a number of factors including increase in expenses not deductible for tax purposes, tax legislations in the U.S.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.

 

For a discussion of our results of operations for the years ended December 31, 20182019, and 2017,2018, please see our Annual Report on Form 10-K for the year ended December 31, 20182019 filed with the SEC on March 8, 2019.10, 2020.

 

 

Liquidity and Capital Resources

 

As of December 31, 2019,2020, our working capital, defined as total current assets less total current liabilities, was $119.6$151.2 million, compared to $137.7 million as of December 31, 2018. Accounts payable was $7.6$119.6 million as of December 31, 2019, compared to $2.52019. Cash, cash equivalents and short-term investments, on a consolidated basis, were $145.3 million as of December 31, 2018. The significant increase in accounts payable was primarily due2020, compared to a vendor invoice received for a multi-year licensing and distribution agreement related to our Exensio software during the fourth quarter of fiscal 2019. Other current and non-current assets balances at December 31, 2019, also increased primarily due to the aforementioned software distribution agreement. Cash and cash equivalents, on a consolidated basis, were $97.6 million as of December 31, 2019, compared to $96.1 million as2019.  As of December 31, 2018.  As of December 31,2020 and 2019, and 2018, cash and cash equivalents held by our foreign subsidiaries were $3.8$4.0 million and $4.1$3.8 million, respectively. We believe that our existing cash resources and anticipated funds from operations will satisfy our cash requirements to fund our operating activities, capital expenditures, and other obligations, for at least the next twelve months.

There has been no significant impact to our liquidity and capital resources from the global COVID-19 pandemic. For risk discussion about the continuing impact of global COVID-19 pandemic on our operations or demand for our products, refer to Item 1A, Risk Factors on Part I of this Report.

Private Placement

On July 29, 2020,we entered into a strategic partnership with Advantest, which included the sale to Advantest America, Inc. of 3,306,924 shares of our common stock, at a purchase price of $19.7085 per share, for aggregate gross proceeds of $65.2 million on July 30, 2020. All of the shares were offered and sold by us pursuant to an exemption from the registration requirements of the Securities Act 1933, as amended.

Cimetrix Acquisition

As of December 31, 2020, payment made for the Cimetrix acquisition, net of cash acquired, amounted to $28.6 million. The Company held back $3.5 million of the purchase price (the “Holdback Amount”) to satisfy adjustments to the closing balance sheet and claims for indemnity arising out of breaches of certain representations, warranties and covenants, and certain other enumerated items in the merger agreement.  The Holdback Amount, as adjusted, is expected to be paid to the participating equity holders in 2021 on approximately the one-year anniversary of the closing.

 

 

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		Year Ended December 31,								$ Change
		2019				2018				2018 to 2019
(In thousands)
Consolidated Statements of Cash Flows Data
Net cash flows provided by (used in):
Operating activities		$	24,590			$	13,338			$	11,252
Investing activities			(13,212	)			(13,116	)			(96	)
Financing activities			(9,835	)			(5,202	)			(4,633	)
Effect of exchange rate changes on cash and cash equivalents			(27	)			(198	)			171
Net increase (decrease) in cash and cash equivalents		$	1,516			$	(5,178	)		$	6,694

Consolidated Statements of Cash Flows Data

		Year Ended December 31,								$ Change
		2020				2019				2019 to 2020
(In thousands)
Net cash flows provided by (used in):
Operating activities		$	21,783			$	24,590			$	(2,807	)
Investing activities			(150,502	)			(13,212	)			(137,290	)
Financing activities			64,798				(9,835	)			74,633
Effect of exchange rate changes on cash and cash equivalents			131				(27	)			158
Net increase (decrease) in cash, cash equivalents, and restricted cash		$	(63,790	)		$	1,516			$	(65,306	)

 

Net Cash Provided by Operating Activities

 

Cash flow from operating activities during 20192020 mostly consisted of net loss, adjusted for certain non-cash items, which primarily consisted of depreciation and amortization, share-based compensation expense and deferred tax assets. Cash generated from operating activities increaseddecreased by $11.3$2.8 million for the year ended December 31, 2019,2020, compared to the year ended December 31, 2018,2019, driven primarily by (i) a $7.1$34.9 million increase in net change from operating assets and liabilities,loss, (ii) a $2.3$27.9 million decrease in net loss, and (ii) an increase in non-cash adjustments to net loss, by $1.9 million, primarily due to increasesincrease in depreciation and amortizationdeferred taxes of $1.1$25.5 million and increasedincrease in stock-based compensation expense of $1.1$1.0 million,  partially offset byand (iii) a $4.2 million increase in deferred taxnet change in operating assets of $0.4 million.

Theand liabilities, the major contributors to the net change in operating assets and liabilities for the year ended December 31, 2019,2020, were as follows:

 

●	Accounts●	accounts receivable decreased by $10.9$8.1 million, due primarily due to collectionincreased collections and lower contractual invoicing activity during the fourth quarter of significant past due accounts receivables from three customers in Asia. 2020;
●	Operating lease right-of-use assets and operating lease liabilities increased by $1.4 million and $1.3 million, respectively, as a result of the adoption of new accounting standard for leases. Refer to Note 1 of “Notes to Consolidated Financial Statements” (Item 8 of Part II of this Report) for further discussion about our adoption of Accounting Standards Update (ASU) 2016-02, Leases.
●	Deferred revenues increasedother non-current assets decreased by $3.4$2.1 million, primarily due to a decrease in the noncurrent portion of unbilled receivables due to the timing of billing and revenue recognition. recognition;
	●	accrued compensation and related benefits increased by $1.9 million, primarily due to the timing of payments of accrued bonuses and accrued payroll taxes, and increases in accrued vacation; and,
	●	billings in excess of recognized revenues and deferred revenues and increased by $8.0 million, primarily due to the timing of billing and revenue recognition.

 

Net Cash Used in Investing Activities

 

CashNet cash used in investing activities was relatively flatincreased by $137.3 million for the year ended December 31, 2019,2020, compared to the year-ago period.year ended December 31, 2019.

For the year ended December 31, 2020, cash used in investing activities primarily related to (i) purchases of $131.5 million short-term investments and property, (ii) a $28.6 million payment for the acquisition of Cimetrix, and (iii) a $7.0 million for equipment purchased and prepayment for our DFI system, including construction of additional eProbe tools, partially offset by $16.5 million proceeds from maturities of short-term investments.

 

For the year ended December 31, 2019, cash used in investing activities related to (i) $10.6 million of property and equipment purchased primarily related to the construction of our DFIDFI™ assets and expansion of our research and development laboratory and clean room, and (ii) a $2.7 million payment for a business acquisition.acquisition of certain assets from StreamMosaic, Inc.

Net Cash Provided by (Used in) Financing Activities

Net cash provided by financing activities increased by $74.6 million for the year ended December 31, 2020, compared to the year ended December 31, 2019. 

 

For the year ended December 31, 2018,2020, net cash usedprovided by financing activities primarily consisted of $65.1 million net proceeds from the issuance of common stock in investing activitiesconnection with the Securities Purchase Agreement with Advantest, and $4.2 million of proceeds under our Employee Stock Purchase Plan and the exercise of stock options, partially offset by $4.5 million in cash payments for taxes related to property and equipment purchased for the developmentnet share settlement of our DFI system, furniture, fixtures and leasehold improvements for our new office headquarters.equity awards.

 

Net Cash Used in Financing Activities

Net cash used in financing activities increased by $4.6 million for the year ended

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December 31, 2019Table of Contents, compared to the year ended December 31, 2018. 

 

For the year ended December 31, 2019,, net cash used in financing activities primarily consisted of $9.6 million in cash used to repurchase shares of our common stock, and $2.7 million in cash payments for taxes related to net share settlement of equity awards, partially offset by $2.7 million of proceeds fromunder our Employee Stock Purchase Plan and the exercise of stock options. 

 

For the year ended December 31, 2018, net cash used in financing activities primarily consisted of $5.2 million cash used to repurchase shares of our common stock, and $2.1 million cash payments for taxes related to net share settlement of equity awards, partially offset by $2.4 million of proceeds from our Employee Stock Purchase Plan and exercise of stock options.

Related Party Transactions

 

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Refer to Note 3, Strategic Partnership Agreement with Advantest and Related Party Transactions of Contents

the Notes to Consolidated Financial Statements (Item 8 of Part II of this Report) for a discussion on related party transactions between the Company and Advantest.

 

Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements, investments in special purpose entities or undisclosed borrowings or debt.  

 

Contractual Obligations

 

The following table summarizes our known contractual obligations (in thousands) as of December 31, 2019:2020:     

  

		Payments Due by Period																												Payments Due by Period
Contractual Obligations		2020				2021				2022				2023				2024				2025 and thereafter				Total				2021				2022				2023				2024				2025				2026 and thereafter				Total
Operating lease obligations(1)		$	1,914			$	1,783			$	1,574			$	1,113			$	806			$	2,976			$	10,166			$	1,967			$	1,704			$	1,145			$	812			$	827			$	2,154			$	8,609
Purchase obligations(2)			11,275				2,778				1,617				363				321				321				16,675				10,332				2,034				363				320				321				—				13,370
Total(3)		$	13,189			$	4,561			$	3,191			$	1,476			$	1,127			$	3,297			$	26,841			$	12,299			$	3,738			$	1,508			$	1,132			$	1,148			$	2,154			$	21,979

 

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(1)	(1)	Refer to Note 67 of “Notes to Consolidated Financial Statements” (Item 8 of Part II of this Report) for further discussion.
	(2)	Purchase obligations consist of agreements to purchase goods and services entered in the ordinary course of business.
(3)	The contractual obligation table above excludes liabilities for uncertain tax positions of $2.9 million, which are not practicable to assign to any particular years due to the inherent uncertainty of the tax positions.  See Note 1112 of “Notes to Consolidated Financial Statements” (Item 8 of Part II of this Report) for further discussion.

 

 

Item 7A.   Quantitative and Qualitative Disclosures About Market Risk

 

The following discusses our exposure to market risk related to changes in interest rates and foreign currency exchange rates. We do not currently own any equity investments, nor do we expect to own any in the foreseeable future. This discussion contains forward-looking statements that are subject to risks and uncertainties. Actual results could vary materially as a result of a number of factors.

 

Interest Rate Risk.   As of December 31, 2019,2020, we had cash and cash equivalents and short-term investments of $97.6$145.3 million. Cash and cash equivalents consisted of cash and highly liquid money market instruments.instruments and short-term investments consisted of U.S. Treasury bills. We would not expect our operating results or cash flows to be affected to any significant degree by the effect of a sudden change in market interest on our portfolio. A hypothetical increase in market interest rates of 100 basis points from the market rates in effect at December 31, 2019,2020, would cause the fair value of these investments to decrease by an immaterial amount which would not have significantly impacted our financial position or results of operations.

 

At December 31, 2020 and periodically throughout the year, we have maintained cash balances in various operating accounts in excess of federally insured limits. We limit the amount of credit exposure with any one financial institution by evaluating the creditworthiness of the financial institutions with which we invest and investing through more than one financial institution.

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Foreign Currency and Exchange Risk. Certain of our receivables and payables for our international offices are denominated in the local currency, including the Euro, Yen and RMB. Therefore, a portion of our revenues and operating expenditures isare subject to foreign currency risks. WeFrom time to time, we enter into foreign currency forward contracts to reduce the exposure to foreign currency exchange rate fluctuations on certain foreign currency denominated monetary assets and liabilities. We do not use foreign currency forward contracts for speculative or trading purposes. We record these forward contracts at fair value. The counterparty to these foreign currency forward contracts is a financial institution that we believe is creditworthy, and therefore, we believe the credit risk of counterparty non-performance is not significant. The change in fair value of these contracts is recorded into earnings as a component of other expense (income)income (expense), net and offsets the change in fair value of foreign currency denominated monetary assets and liabilities, which is also recorded in other expense (income)income (expense), net. As of December 31, 2019,2020, we had no outstanding forward contracts.  Subsequent to the end of fourth fiscal quarter of 2019, we entered into one outstanding forward contract with a notional amount of $8.4 million. A foreign currency exchange rate movement of plus-or-minus 10% will result in the change in fair value of this contract of plus-or-minus $0.8 million.

 

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Item 8.   Financial Statements and Supplementary Data

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

 

To the Board of Directors and Stockholders  

PDF Solutions, Inc.

 

Opinion on the Consolidated Financial Statements

 

We have audited the accompanying consolidated balance sheets of PDF Solutions, Inc. (a Delaware corporation) and its subsidiaries (the “Company”) as of December 31, 20192020 and 2018,2019, and the related consolidated statements of comprehensive loss, stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2019,2020, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 20192020 and 2018,2019, and the results of its operations and its cash flows for the two years in the period ended December 31, 2019,2020, in conformity with accounting principles generally accepted in the United States of America.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2019,2020, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 10, 2020,11, 2021, expressed an unqualified opinion.

Change in Accounting Principle

As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for leases in 2019 due to adoption of the new lease standard.

 

Basis for Opinion

 

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

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Revenue Recognition

As described in Note 2 to the consolidated financial statements, the Company derives revenue from Analytics and Integrated Yield Ramp Revenue.  Contracts with customers can include various combinations of licenses, products and services, some of which are distinct and are accounted for as separate performance obligations.  Significant judgment is exercised by the Company in determining revenue recognition for customer agreements, including determining whether licenses and services are distinct performance obligations, determining the standalone selling price (or SSP) attributed to each performance obligation, establishing the pattern of delivery for each distinct performance obligation, and estimating variable consideration when determining the amount of revenue to recognize.  In addition, for revenue under project-based contracts for fixed-price services, revenue is recognized as services are performed using a percentage-of-completion (or POC) method based on costs or labor-hours input method.  Estimated costs to complete each contract are based on i) future labor and product costs and ii) expected productivity efficiencies.  Changes in these estimates can have a material effect on revenue recognized and/or related cost.  Finally, the Company recognized Gainshare royalty revenue in the same period in which the usage occurs.  The Company accrues the related revenue based on estimates of customers’ underlying sales achievements.  These estimates are based on historical data, trends, seasonality, changes in contract rate, knowledge of changes in the industry and changes in the customer’s manufacturing environment learned through discussions with customers and sales personnel.

The principal audit considerations for our determination that performing procedures related to the Company’s revenue recognition for customer agreements is a critical audit matter are the significant amount of judgment required by management in this process.  Significant judgment is required in determining SSP as the Company rarely licenses software on a standalone basis, so the Company is required to estimate the range of SSPs for each performance obligation, which in turn led to significant auditor judgment, subjectivity and effort in performing audit procedures in assessing the allocation of SSPs to performance obligations.  In addition, significant judgment is required in determining the total estimated contract costs for fixed-price contracts, which in turn led to significant auditor judgment, subjectivity, and effort in performing audit procedures and in evaluating audit evidence relating the total estimated contract costs.  Significant judgment is also required in recording Gainshare royalty revenue in the same period in which the usage occurs.  The Company generally does not receive the acknowledgment reports from customers during a given quarter, so the Company is required to accrue the related revenue based on estimates of customers underlying sales achievement, which in turn led to significant auditor judgment, subjectivity, and effort in evaluating the reasonableness of these estimates based on historical data, trends, seasonality and other factors.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of internal controls relating to the revenue recognition process, including internal controls related to (1) the identification of distinct performance obligations and data used to establish SSP for products and services, (2) project estimates to completion for fixed fee arrangements accounted for under POC and (3) estimates of Gainshare royalty revenue accrual and subsequent true-ups.  These procedures also included, among others, evaluating management’s significant accounting policies related to these customer agreements for reasonableness.  In addition, for a sample of customer agreements, we obtained and read contract source documents, including master agreements and other documents that were part of the agreement, tested management’s identification of significant terms for completeness, including the identification of distinct performance obligations and variable consideration, assessed the terms in the customer agreements and evaluated the appropriateness of management’s application of their accounting policies, along with their use of estimates, in the determination of revenue recognition conclusions, and tested the mathematical accuracy of management’s calculations of revenue and the associated timing of revenue recognized in the financial statements.  In addition, we evaluated the reasonableness of management’s estimates of SSP for projects and services that are not sold separately, where applicable, costs to complete for project-based contracts for fixed-price services and customers’ underlying achievements for royalty revenue.

 

We have served as the Company’s auditor since 2018.

 

/s/ BPM LLP

San Jose, CA

March 10, 202011, 2021

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

 

To the Board of Directors and Stockholders  

PDF Solutions, Inc.

 

Opinion on Internal Control over Financial Reporting

 

We have audited the internal control over financial reporting of PDF Solutions, Inc. (a Delaware corporation) and its subsidiaries (the “Company”) as of December 31, 2019,2020, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the “COSO criteria”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019,2020, based on the COSO criteria.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheets as of December 31, 20192020 and 20182019 and the related consolidated statements of comprehensive loss, stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2019,2020, and the related notes (collectively referred to as the “consolidated financial statements”) of the Company, and our report dated March 10, 202011, 2021 expressed an unqualified opinion on those consolidated financial statements.

 

Basis for Opinion

 

The Company’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Assessment of Internal Controls Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

 

Definition and Limitations of Internal Control over Financial Reporting

 

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

 

/s/ BPM LLP

San Jose, California

March 10, 202011, 2021

 

 

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PDF SOLUTIONS, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except par values)

 

		December 31,								December 31,
		2019				2018				2020				2019
ASSETS	ASSETS								ASSETS
Current assets:
Cash and cash equivalents		$	97,605			$	96,089			$	30,315			$	97,605
Accounts receivable, net of allowances of $213 in 2019 and $332 in 2018			40,651				51,570
Short-term investments											114,981				0
Accounts receivable, net of reserves of $963 in 2020 and $213 in 2019											34,140				40,651
Prepaid expenses and other current assets			9,320				9,562				13,944				9,320
Total current assets			147,576				157,221				193,380				147,576
Property and equipment, net			40,798				35,681				39,242				40,798
Operating lease right-of-use assets, net			7,609				—				6,672				7,609
Goodwill			2,293				1,923				15,774				2,293
Intangible assets, net			6,221				5,064				24,573				6,221
Deferred tax assets			25,327				19,044				249				25,327
Other non-current assets			9,720				6,972				7,690				9,720
Total assets		$	239,544			$	225,905			$	287,580			$	239,544
LIABILITIES AND STOCKHOLDERS’ EQUITY	LIABILITIES AND STOCKHOLDERS’ EQUITY								LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	7,636			$	2,454			$	4,399			$	7,636
Accrued compensation and related benefits			5,072				4,727				8,339				5,072
Accrued and other current liabilities			1,665				3,235				6,309				1,665
Operating lease liabilities – current portion			1,867				—				1,926				1,867
Deferred revenues – current portion			10,639				8,477				19,895				10,639
Billings in excess of recognized revenues			1,117				635				1,337				1,117
Total current liabilities			27,996				19,528				42,205				27,996
Long-term income taxes payable			5,368				3,751				2,956				5,368
Non-current operating lease liabilities			7,677				—				6,516				7,677
Other non-current liabilities			2,346				2,831				1,397				2,346
Total liabilities			43,387				26,110				53,074				43,387
Commitments and contingencies (Note 7)
Commitments and contingencies (Note 8)
Stockholders’ equity:
Preferred stock, $0.00015 par value, 5,000 shares authorized, no shares issued and outstanding			—				—
Common stock, $0.00015 par value, 70,000 shares authorized; shares issued 41,797 and 40,677, respectively; shares outstanding 32,503 and 32,382, respectively		$	5			$	5
Additional paid-in capital			325,197				310,660
Treasury stock, at cost, 9,294 and 8,295 shares, respectively			(91,695	)			(79,142	)
Preferred stock, $0.00015 par value, 5,000 shares authorized, no shares issued and outstanding										$	0			$	0
Common stock, $0.00015 par value, 70,000 shares authorized; shares issued 46,400 and 41,797, respectively; shares outstanding 36,850 and 32,503, respectively											6				5
Additional paid-in-capital											407,173				325,197
Treasury stock at cost, 9,550 and 9,294 shares, respectively											(96,215	)			(91,695	)
Accumulated deficit			(35,870	)			(30,452	)			(76,233	)			(35,870	)
Accumulated other comprehensive loss			(1,480	)			(1,276	)			(225	)			(1,480	)
Total stockholders’ equity			196,157				199,795				234,506				196,157
Total liabilities and stockholders’ equity		$	239,544			$	225,905			$	287,580			$	239,544

 

See accompanying notes to consolidated financial statements.

 

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PDF SOLUTIONS, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(in thousands, except per share amounts)

 

		Year Ended December 31,								Year Ended December 31,
		2019				2018				2020				2019
Revenues:
Analytics		$	49,627			$	38,502			$	57,232			$	49,627
Integrated Yield Ramp			35,958				47,292				30,814				35,958
Total revenues			85,585				85,794				88,046				85,585
Costs and Expenses:
Costs of revenues			33,474				42,803				36,765				33,474
Research and development			32,747				27,998				34,654				32,747
Selling, general and administrative			26,299				23,934				32,677				26,299
Amortization of other acquired intangible assets			609				435				741				609
Restructuring charges			92				576				0				92
Interest and other expense (income), net			(276	)			(493	)			1,269				(276	)
Loss before income taxes			(7,360	)			(9,459	)			(18,060	)			(7,360	)
Income tax benefit			(1,942	)			(1,743	)
Income tax provision (benefit)											22,303				(1,942	)
Net loss		$	(5,418	)		$	(7,716	)		$	(40,363	)		$	(5,418	)
Other comprehensive loss:
Other comprehensive income (loss):
Foreign currency translation adjustments, net of tax			(204	)			(571	)		$	1,253			$	(204	)
Change in unrealized losses related to available-for-sale debt securities, net of tax											2				0
Total other comprehensive income (loss)										$	1,255			$	(204	)
Comprehensive loss		$	(5,622	)		$	(8,287	)		$	(39,108	)		$	(5,622	)
Net loss per share:
Basic		$	(0.17	)		$	(0.24	)		$	(1.17	)		$	(0.17	)
Diluted		$	(0.17	)		$	(0.24	)		$	(1.17	)		$	(0.17	)
Weighted average common shares:
Basic			32,411				32,169				34,458				32,411
Diluted			32,411				32,169				34,458				32,411