UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☑	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

	For the Quarterly Period ended March 31, 20~~September~~ 20~~30, 2019~~

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

	For the transition period from _______________ to ______________

Commission File Number 000-31311

PDF SOLUTIONS, INC.

(Exact name of Registrant as Specified in its Charter)

Delaware	25-1701361
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)

2858 De La Cruz Blvd.
Santa Clara, California	95050
(Address of Principal Executive Offices)	(Zip Code)

(408) 280-7900

(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.00015 par value	PDFS	The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐	Accelerated filer ☑
Non-accelerated filer ☐	Smaller reporting company ☑
	Emerging growth company ☐

If an emerging growth company, indicated by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑

There were ~~32,350,187~~32,795,326 shares of the Registrant’s Common Stock outstanding as of ~~November 1, 2019.~~May 2, 2020.

Table of Contents

T~~TABLE~~ABLE OF CONTENTS

	Page
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets	3
Condensed Consolidated Statements of Comprehensive Loss	4
Condensed Consolidated Statements of Stockholders’ Equity	5
Condensed Consolidated Statements of Cash Flows	76
Notes to Condensed Consolidated Financial Statements	87
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	2624
Item 3. Quantitative and Qualitative Disclosures About Market Risk	3634
Item 4. Controls and Procedures	3635
PART II OTHER INFORMATION
Item 1. Legal Proceedings	3736
Item 1A. Risk Factors	3736
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	3736
Item 3. Defaults Upon Senior Securities	3836
Item 4. Mine Safety Disclosures	3836
Item 5. Other Information	3836
Item 6. Exhibits	3837
SIGNATURES	3938
INDEX TO EXHIBITS	3837

Table of Contents

P~~PART~~ART I — FINANCIAL INFORMATION

Item 1. Financial Statements

PDF SOLUTIONS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)

(in thousands, except par value)

							March 31,			December 31,
	September 30, 2019			December 31, 2018			2020			2019
ASSETS
Current assets:
Cash and cash equivalents	$	100,259		$	96,089		$	100,385		$	97,605
Accounts receivable, net of allowance for doubtful accounts of $339 in 2019 and $332 in 2018		34,556			51,570
Accounts receivable, net of allowance for doubtful accounts of $154 in 2020 and $213 in 2019								37,363			40,651
Prepaid expenses and other current assets		8,026			9,562			11,628			9,320
Total current assets		142,841			157,221			149,376			147,576
Property and equipment, net		38,969			35,681			41,009			40,798
Operating lease right-of-use assets, net		7,581			—			7,368			7,609
Goodwill		2,293			1,923			2,293			2,293
Intangible assets, net		6,538			5,064			5,904	��		6,221
Deferred tax assets		23,100			19,044			25,085			25,327
Other non-current assets		8,025			6,972			8,322			9,720
Total assets	$	229,347		$	225,905		$	239,357		$	239,544
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	2,203		$	2,454		$	4,828		$	7,636
Accrued compensation and related benefits		4,313			4,727			4,754			5,072
Accrued and other current liabilities		2,452			3,235			1,406			1,665
Operating lease liabilities – current portion		1,826			—			1,954			1,867
Deferred revenues – current portion		8,612			8,477			12,326			10,639
Billings in excess of recognized revenues		1,219			635			1,796			1,117
Total current liabilities		20,625			19,528			27,064			27,996
Long-term income taxes payable		3,565			3,751			4,884			5,368
Non-current operating lease liabilities		7,726			—			7,310			7,677
Other non-current liabilities		2,444			2,831
Deferred revenues – non-current portion								1,630			2,346
Total liabilities		34,360			26,110			40,888			43,387
Commitments and contingencies (Note 13)
Commitments and contingencies (Note 12)
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 41,596 and 40,677, respectively; shares outstanding 32,350 and 32,382, respectively		5			5
Common stock, $0.00015 par value, 70,000 shares authorized; shares issued 42,182 and 41,797, respectively; shares outstanding 32,795 and 32,503, respectively								5			5
Additional paid-in-capital		322,183			310,660			329,681			325,197
Treasury stock at cost, 9,246 and 8,295 shares, respectively		(90,908	)		(79,142	)
Treasury stock at cost, 9,387 and 9,294 shares, respectively								(93,173	)		(91,695	)
Accumulated deficit		(34,540	)		(30,452	)		(36,398	)		(35,870	)
Accumulated other comprehensive loss		(1,753	)		(1,276	)		(1,646	)		(1,480	)
Total stockholders’ equity		194,987			199,795			198,469			196,157
Total liabilities and stockholders’ equity	$	229,347		$	225,905		$	239,357		$	239,544

See accompanying Notes to Condensed Consolidated Financial Statements (unaudited)

Table of Contents

P~~PDF~~DF SOLUTIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(unaudited)

(in thousands, except per share amounts)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018			Three Months Ended March 31,
													2020			2019
Revenues:
Solutions	$	16,208		$	13,976		$	46,298		$	47,431
Gainshare performance incentives		5,706			6,237			16,725			18,638
Analytics													$	13,248		$	11,434
Integrated Yield Ramp														7,910			9,107
Total revenues		21,914			20,213			63,023			66,069			21,158			20,541

Cost of Solutions
Direct costs of solutions		8,571			10,539			23,984			32,651
Amortization of acquired technology		144			144			431			431
Total cost of solutions		8,715			10,683			24,415			33,082
Gross profit		13,199			9,530			38,608			32,987

Operating expenses:
Costs and Expenses:
Costs of revenues														8,487			7,867
Research and development		8,435			6,755			23,993			21,100			8,590			8,246
Selling, general and administrative		5,990			5,507			19,940			17,801			7,895			7,011
Amortization of other acquired intangible assets		174			108			436			326			173			108
Restructuring charges		—			—			92			—			—			92
Total operating expenses		14,599			12,370			44,461			39,227

Loss from operations		(1,400	)		(2,840	)		(5,853	)		(6,240	)
Interest and other income (expense), net		202			223			307			283
Interest and other expense (income), net														20			6
Loss before income taxes		(1,198	)		(2,617	)		(5,546	)		(5,957	)		(4,007	)		(2,789	)
Income tax benefit		(511	)		(535	)		(1,458	)		(1,355	)		(3,479	)		(98	)
Net loss	$	(687	)	$	(2,082	)	$	(4,088	)	$	(4,602	)	$	(528	)	$	(2,691	)

Other comprehensive loss:
Foreign currency translation adjustments, net of tax		(461	)		(168	)		(477	)		(414	)		(166	)		(52	)
Comprehensive loss	$	(1,148	)	$	(2,250	)	$	(4,565	)	$	(5,016	)	$	(694	)	$	(2,743	)

Net loss per share:
Basic	$	(0.02	)	$	(0.06	)	$	(0.13	)	$	(0.14	)	$	(0.02	)	$	(0.08	)
Diluted	$	(0.02	)	$	(0.06	)	$	(0.13	)	$	(0.14	)	$	(0.02	)	$	(0.08	)

Weighted average common shares:
Basic		32,392			32,184			32,405			32,105			32,703			32,485
Diluted		32,392			32,184			32,405			32,105			32,703			32,485

See accompanying Notes to Condensed Consolidated Financial Statements (unaudited)

Table of Contents

PD~~PDF~~F SOLUTIONS, INC.

CONDENDSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(unaudited)

(in thousands)

	Nine Months Ended September 30, 2019																																			Accumulated
																Accumulated										Additional										Other			Total
						Additional										Other			Total			Common Stock				Paid-In		Treasury Stock					Accumulated			Comprehensive			Stockholders’
	Common Stock					Paid-In		Treasury Stock					Accumulated			Comprehensive			Stockholders’			Shares		Amount		Capital		Shares		Amount			Deficit			Loss			Equity
	Shares			Amount		Capital		Shares		Amount			Deficit			Loss			Equity
Balances, December 31, 2018		32,382		$	5	$	310,660		8,295	$	(79,142	)	$	(30,452	)	$	(1,276	)	$	199,795
Balances, December 31, 2019																							32,503	$	5	$	325,197		9,294	$	(91,695	)	$	(35,870	)	$	(1,480	)	$	196,157
Issuance of common stock in connection with employee stock purchase plan		87			-		782		-		-			-			-			782			89		-		810		-		-			-			-			810
Issuance of common stock in connection with exercise of options		87			-		518		-		-			-			-			518			21		-		161		-		-			-			-			161
Vesting of restricted stock units		104			-		-		-		-			-			-			-			182		-		-		-		-			-			-			-
Purchases of treasury stock in connection with tax withholdings on restricted stock grants		-			-		-		54		(557	)		-			-			(557	)		-		-		-		93		(1,478	)		-			-			(1,478	)
Repurchases of common stock		(314	)		-		-		314		(3,917	)		-			-			(3,917	)
Stock-based compensation		-			-		3,469		-		-			-			-			3,469
Stock-based compensation expense																							-		-		3,513		-		-			-			-			3,513
Comprehensive loss		-			-		-		-		-			(2,691	)		(52	)		(2,743	)		-		-		-		-		-			(528	)		(166	)		(694	)
Balances, March 31, 2019		32,346			5		315,429		8,663		(83,616	)		(33,143	)		(1,328	)		197,347
Issuance of common stock in connection with exercise of options		69			-		326		-		-			-			-			326
Vesting of restricted stock units		176			-		-		-		-			-			-			-
Purchases of treasury stock in connection with tax withholdings on restricted stock grants		-			-		-		72		(918	)		-			-			(918	)
Repurchases of common stock		(300	)		-		-		300		(3,790	)		-			-			(3,790	)
Stock-based compensation		-			-		2,601		-		-			-			-			2,601
Comprehensive income (loss)		-			-		-		-		-			(710	)		36			(674	)
Balances, June 30, 2019		32,291			5		318,356		9,035		(88,324	)		(33,853	)		(1,292	)		194,892
Issuance of common stock in connection with employee stock purchase plan		85			-		751		-		-			-			-			751
Issuance of common stock in connection with exercise of options		53			-		267		-		-			-			-			267
Vesting of restricted stock units		92			-		-		-		-			-			-			-
Purchases of treasury stock in connection with tax withholdings on restricted stock grants and exercise of options					-		-		40		(524	)		-			-			(524	)
Repurchases of common stock		(171	)		-		-		171		(2,060	)		-			-			(2,060	)
Stock-based compensation		-			-		2,809		-		-			-			-			2,809
Comprehensive loss		-			-		-		-		-			(687	)		(461	)		(1,148	)
Balances, September 30, 2019		32,350		$	5	$	322,183		9,246	$	(90,908	)	$	(34,540	)	$	(1,753	)	$	194,987
Balances, March 31, 2020																							32,795	$	5	$	329,681		9,387	$	(93,173	)	$	(36,398	)	$	(1,646	)	$	198,469

~~Table of Contents~~

																Accumulated
						Additional										Other			Total
	Common Stock					Paid-In		Treasury Stock					Accumulated			Comprehensive			Stockholders’
	Shares			Amount		Capital		Shares		Amount			Deficit			Loss			Equity
Balances, December 31, 2018		32,382		$	5	$	310,660		8,295	$	(79,142	)	$	(30,452	)	$	(1,276	)	$	199,795
Issuance of common stock in connection with employee stock purchase plan		87			-		782		-		-			-			-			782
Issuance of common stock in connection with exercise of options		87			-		518		-		-			-			-			518
Vesting of restricted stock units		104			-		-		-		-			-			-			-
Purchases of treasury stock in connection with tax withholdings on restricted stock grants		-			-		-		54		(557	)		-			-			(557	)
Repurchases of common stock		(314	)		-		-		314		(3,917	)		-			-			(3,917	)
Stock-based compensation expense		-			-		3,469		-		-			-			-			3,469
Comprehensive loss		-			-		-		-		-			(2,691	)		(52	)		(2,743	)
Balances, March 31, 2019		32,346		$	5	$	315,429		8,663	$	(83,616	)	$	(33,143	)	$	(1,328	)	$	197,347

~~PDF SOLUTIONS, INC.~~

~~CONDENDSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY~~ — ~~Continued~~

~~(unaudited)~~

~~(in thousands)~~

Nine Months Ended September 30, 2018

Additional

Accumulated
Other
Total

Common Stock

Paid-In

Treasury Stock

Accumulated

Comprehensive
Stockholders’

Shares

Amount

Capital

Shares

Amount

Deficit

Loss

Equity

Balances, December 31, 2017
32,112 $ 5 $ 297,950 7,688 $ (71,793
)
$ (27,089
)
$ (705
)
$ 198,368
Cumulative-effect adjustment from adoption of ASU 2014-09
- - - - - 4,353 - 4,353
Issuance of common stock in connection with employee stock purchase plan
108 - 1,007 - - - - 1,007
Issuance of common stock in connection with exercise of options
8 - 39 - - - - 39
Vesting of restricted stock units
74 - - - - - - -
Purchases of treasury stock in connection with tax withholdings on restricted stock grants
- - - 36 (557
)
- - (557
)
Repurchases of common stock
(338
)
- - 338 (4,123
)
- - (4,123
)
Stock-based compensation
- - 2,871 - - - - 2,871
Comprehensive income (loss)
- - - - - (424
)
525 101
Balances, March 31, 2018
31,964 5 301,867 8,062 (76,473
)
(23,160
)
(180
)
202,059
Issuance of common stock in connection with exercise of options
51 - 377 - - - - 377
Vesting of restricted stock units
159 - - - - - - -
Purchases of treasury stock in connection with tax withholdings on restricted stock grants
- - - 63 (819
)
- - (819
)
Repurchases of common stock
(99
)
- - 99 (1,125
)
- - (1,125
)
Stock-based compensation
- - 2,699 - - - - 2,699
Comprehensive loss
- - - - - (2,096
)
(771
)
(2,867
)
Balances, June 30, 2018
32,075 5 304,943 8,224 (78,417
)
(25,256
)
(951
)
200,324
Issuance of common stock in connection with employee stock purchase plan
92 - 824 - - - - 824
Issuance of common stock in connection with exercise of options
9 - 53 - - - - 53
Vesting of restricted stock units
81 - - - - - - -
Purchases of treasury stock in connection with tax withholdings on restricted stock grants
- - - 28 (334
)
- - (334
)
Stock-based compensation
- - 2,278 - - - - 2,278
Comprehensive loss
- - - - - (2,082
)
(168
)
(2,250
)
Balances, September 30, 2018
32,257 $ 5 $ 308,098 8,252 $ (78,751
)
$ (27,338
)
$ (1,119
)
$ 200,895

See accompanying Notes to Condensed Consolidated Financial Statements (unaudited)

Table of Contents

P~~PDF~~DF SOLUTIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands)

	Nine Months Ended September 30,						Three Months Ended March 31,
	2019			2018			2020			2019
Operating activities:
Cash flows from operating activities:
Net loss	$	(4,088	)	$	(4,602	)	$	(528	)	$	(2,691	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization		4,306			3,689			1,667			1,292
Stock-based compensation expense		8,642			7,825			3,368			3,476
Amortization of acquired intangible assets		867			757			317			252
Amortization of costs capitalized to obtain revenue contracts		344			278			124			105
Adjustment to contingent consideration related to acquisition		36			—
Reversal of allowance for doubtful accounts								(60	)		—
Deferred taxes		(3,998	)		(2,298	)		45			(2,054	)
Loss on disposal of property and equipment		130			4
Provision (reversal of allowance) for doubtful accounts and write-off of accounts receivable		67			(41	)
Unrealized loss on foreign currency forward contract		—			59
Unrealized gain on foreign currency forward contract								—			(2	)
Changes in operating assets and liabilities:
Accounts receivable		16,946			5,653			3,348			(1,641	)
Prepaid expenses and other current assets		(236	)		(3,722	)		(1,910	)		(402	)
Operating lease right-of-use assets								241			331
Other non-current assets		(966	)		2,367			(1,906	)		(285	)
Accounts payable		(191	)		(598	)		163			198
Accrued compensation and related benefits		(431	)		(1,377	)		(271	)		(472	)
Accrued and other liabilities		(483	)		(252	)		(589	)		585
Deferred revenues		1,482			632			972			429
Billings in excess of recognized revenues		584			669			679			894
Net cash provided by operating activities		23,011			9,043
Investing activities:
Proceeds from the sale of property and equipment		50			—
Operating lease liabilities								(280	)		(166	)
Net cash provided by (used in) operating activities								5,380			(151	)

Cash flows from investing activities:
Purchases of property and equipment		(6,891	)		(8,747	)		(2,068	)		(2,357	)
Payment for business acquisition		(2,660	)		—
Net cash used in investing activities		(9,501	)		(8,747	)
Financing activities:
Cash used in investing activities								(2,068	)		(2,357	)

Cash flows from financing activities:
Proceeds from exercise of stock options		983			469			161			518
Repurchases of common stock								—			(3,917	)
Proceeds from employee stock purchase plan		1,534			1,832			810			782
Repurchases of common stock		(9,639	)		(5,248	)
Payments for taxes related to net share settlement of equity awards		(1,898	)		(1,711	)		(1,478	)		(557	)
Payment of contingent consideration related to acquisition		(206	)		—
Net cash used in financing activities		(9,226	)		(4,658	)		(507	)		(3,174	)

Effect of exchange rate changes on cash and cash equivalents		(114	)		(117	)		(25	)		8

Net change in cash and cash equivalents		4,170			(4,479	)		2,780			(5,674	)
Cash and cash equivalents, beginning of period		96,089			101,267			97,605			96,089
Cash and cash equivalents, end of period	$	100,259		$	96,788		$	100,385		$	90,415

Supplemental disclosure of cash flow information:
Cash paid during the period for taxes	$	2,454		$	1,616		$	968		$	462
Cash paid for amounts included in the measurement of operating lease liabilities	$	1,268		$	—		$	397		$	276
Supplemental disclosure of noncash operating, investing, and financing activities:
Supplemental disclosure of noncash information:
Stock-based compensation capitalized as software development costs	$	244		$	—		$	128		$	—
Property and equipment received and accrued in accounts payable and accrued and other liabilities	$	1,340		$	3,398		$	796		$	1,284
Advances for purchase of fixed assets transferred from prepaid assets to property and equipment	$	1,416		$	—
Tenant allowance paid by landlord for leasehold improvements	$	—		$	1,536
Common shares repurchased from a cashless exercise of stock options	$	128		$	—

See accompanying Notes to Condensed Consolidated Financial Statements (unaudited)

Table of Contents

P~~PDF~~DF SOLUTIONS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The interim unaudited condensed consolidated financial statements included herein have been prepared by PDF Solutions, Inc. (the “Company”) pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”), including the instructions to the Quarterly Report on Form 10-Q and Article 10 of Regulation S-X. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America ~~(“U.S. GAAP”)~~ have been condensed or omitted. The interim unaudited condensed consolidated financial statements reflect, in the opinion of management, all adjustments necessary (consisting only of normal recurring adjustments), to present a fair statement of results for the interim periods presented. The operating results for any interim period are not necessarily indicative of the results that may be expected for other interim periods or the full fiscal year. The accompanying interim unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2018.~~2019.

The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries after the elimination of all intercompany balances and transactions.

The condensed consolidated balance sheet at December 31, ~~2018,~~2019, has been derived from the audited consolidated financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America.

Reclassification of Prior Period Amounts

Certain prior period amounts have been reclassified to conform to the current year presentation of reporting amortization of costs capitalized to obtain revenue contracts, operating lease right-of-use assets, and operating lease liabilities on the Condensed Consolidated Statements of Cash Flows. This reclassification had no effect on the Company’s reported net loss or net cash used in operating activities.

Change in Presentation

In the fourth quarter of fiscal 2019, in order to enhance the transparency of our revenue reporting, the Company updated its Condensed Consolidated Statements of Comprehensive Loss to change its historical presentation of revenue categories. Previously, the Company presented revenue on two lines: Solutions and Gainshare performance incentives. Included within Solutions, was revenue from software and related revenue, SaaS solutions, Design-for-Inspection (DFI™) licenses, and fixed-price project-based solution implementation services. The previous Gainshare performance incentive category included only revenue from performance incentive programs. The Company now presents revenue in the following categories: Analytics and Integrated Yield Ramp. Integrated Yield Ramp revenue is comprised of all revenue from the Company’s Integrated Yield Ramp services 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 the Company’s licenses and services for Exensio Software, Exensio SaaS, DFI™ and Characterization Vehicle (CV) systems that do not include performance incentives based on customers’ yield achievement.

Table of Contents

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

	For the Three Months Ended March 31, 2019
			Change in
	Previously		Presentation			Current
	Reported		Reclassification			Presentation
Revenues:
Design-to-silicon-yield solutions	$	16,661	$	(16,661	)		N/A
Gainshare performance incentives		3,880		(3,880	)		N/A
Analytics		N/A		11,434		$	11,434
Integrated Yield Ramp		N/A		9,107			9,107
Total revenues	$	20,541	$	—		$	20,541

Since certain costs of revenues are attributed to both Analytics and Integrated Yield Ramp revenue categories, the Company believes it is more appropriate and meaningful to present the Condensed 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, the Company elected to change its Condensed 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.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles in the United States (“U.S. ~~GAAP~~GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates in these financial statements include revenue recognition, impairment of goodwill and long-lived assets, accounting for stock-based compensation expense, and income taxes. Actual results could differ from those estimates.

~~Reclassification~~The global COVID-19 pandemic has impacted the operations and purchasing decisions of ~~Prior Period Amount~~

~~Certain prior period amounts have~~companies worldwide. It also has created and may continue to create significant uncertainty in the global economy. The Company has undertaken measures to protect its employees, partners, customers, and vendors. In addition, the Company’s personnel worldwide are subject to various travel restrictions, which limit the ability of the Company to provide services to customers and affiliates. This impacts the Company's normal operations. To date, the Company has been ~~reclassified~~able to ~~conform~~provide uninterrupted access to ~~current year presentation~~its products and services due to its globally distributed workforce, many of ~~reporting amortization of costs capitalized~~whom are working remotely, and its pre-existing infrastructure that supports secure access to ~~obtain revenue contracts~~the Company’s internal systems. If, however, the COVID-19 pandemic has a substantial impact on the ~~Condensed Consolidated Statements~~productivity of ~~Cash Flows. This reclassification had no effect on~~ the Company’s ~~reported net loss~~employees or ~~net cash provided by operating activities.~~its partners’ or customers’ decision to use the Company’s products and services, the results of the Company’s operations and overall financial performance may be adversely impacted. The duration and extent of the impact from the COVID-19 pandemic depends on future developments that cannot be accurately predicted at this time. As of the date of issuance of the financial statements, the Company is not aware of any specific event or circumstance that would require updates to the Company’s estimates and judgments or revisions to the carrying value of its assets or liabilities. These estimates may change, as new events occur and additional information is obtained, and are recognized in the condensed consolidated financial statements as soon as they become known. Actual results could differ from those estimates and any such differences may be material to the financial statements.

Recently Adopted Accounting Standards

~~Leases~~Intangibles – Goodwill and Other

In ~~February 2016,~~January 2017, the Financial Accounting Standards Board (or FASB) issued Accounting Standards Update (ASU) 2016-02, Leases (Topic 842) and subsequent amendments to the initial guidance: ASU 2017-13, ASU 2018-10, ASU 2018-11, ASU 2018-20 and ASU 2019-01 (collectively, Topic 842). Topic 842 aims to increase transparency and comparability among organizations by requiring lessees to recognize leases with a term greater than 12 months as a right-of-use asset (“ROU”) and corresponding lease liabilities on the balance sheet, regardless of lease classification, and requiring disclosure of key information about leasing arrangements. The lease liability should be initially measured at the present value of the remaining contractual lease payments. Subsequently, the ROU assets will be amortized generally on a straight-line basis over the lease term, and the lease liability will bear interest expense and be reduced for lease payments. Topic 842 became effective for public companies’ financial statements issued for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective application is required with an option to not restate comparative periods in the period of adoption. The Company adopted Topic 842 on January 1, 2019 using the modified retrospective approach, and financial information for the comparative period was not updated.

~~Table of Contents~~

In addition, the Company elected the transition package of three practical expedients which allow companies not to reassess (i) whether agreements contain leases, (ii) the classification of leases, and (iii) the capitalization of initial direct costs. Further, the Company elected to not separate lease and non-lease components for all of its leases. The Company also made an accounting policy election to recognize lease expense for leases with a term of 12 months or less on a straight-line basis over the lease term and recognize no ROU or lease liability for those leases.

The Company’s lease portfolio consists primarily of real estate assets, which include administrative and sales offices, and its research and development laboratory and clean room. Some of these leases also require the Company to pay maintenance, utilities, taxes, insurance, and other operating expenses associated with the leased space. Based upon the nature of the items leased and the structure of the leases, the Company’s leases are classified as operating leases and continue to be classified as operating leases under the new accounting standard.

~~As a result of the adoption of the new lease accounting guidance, the Company recognized on January 1, 2019:~~

	●	operating lease liabilities of approximately $10.5 million, which represent the present value of the remaining lease payments, as of the date of adoption, discounted using the Company’s incremental borrowing rate of 5.3%, and

	●	operating lease ROU assets of approximately $8.7 million which represent the operating lease liabilities of $10.5 million, adjusted for (1) deferred rent of approximately $0.3 million, and (2) lease incentives or tenant improvement allowance of $1.5 million.

The adoption of the new lease accounting standard did not have any other impact on the Company’s condensed consolidated balance sheet, and did not impact the Company’s operating results and cash flows. See Leases, in Note 5 for further information, including further discussion on the impact of adoption and changes in accounting policies relating to leases.

~~Income Statement – Reporting Comprehensive Income (Loss)~~

In February 2018, the FASB issued ASU No. 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effect from Accumulated Other Comprehensive Income. This update allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Job Act (TCJA) enacted in December 2017. This update became effective for the Company for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. The Company adopted this standard on January 1, 2019, and it did not have a material impact on its condensed consolidated financial statements and footnote disclosures.

~~Compensation - Stock Compensation~~

In June 2018, the FASB issued ASU 2018-07, Compensation – Stock Compensation (Topic 718), Improvements to Nonemployee Share-Based Payment Accounting. This ASU simplifies several aspects of the accounting for nonemployee share-based payment transactions resulting from expanding the scope of Topic 718, to include share-based payment transactions for acquiring goods and services from nonemployees and making guidance consistent with the accounting for employee share-based compensation. The Company adopted this standard on January 1, 2019, and it did not have a material impact on its condensed consolidated financial statements and footnote disclosures.

~~FASB~~ U~~pdates~~ C~~ertain SEC~~ G~~uidance in the Codification~~

In July 2019, the FASB issued ASU No. 2019-07, Codification Updates to SEC Sections – Amendments to SEC Paragraphs Pursuant to SEC Final Rule Releases No. 33-10532, “Disclosure Update and Simplification,” and Nos. 33-10231 and 33-10442, “Investment Company Reporting Modernization,” and Miscellaneous Updates. This ASU codifies the SEC releases that clarify and improve the disclosure and presentation requirements of a variety of codification topics, thereby eliminating or amending certain disclosure requirements that have become redundant, duplicative, overlapping, outdated, or superseded, in light of other SEC disclosure requirement, U.S. GAAP, or changes in the information environment. The amendments and updates to the SEC Final Rule are effective upon issuance of this ASU in July 2019. The Company adopted this ASU in the third quarter of 2019, and did not have a material impact on its condensed consolidated financial statements and footnote disclosures. Included also in the aforementioned SEC Final Rule is extending the disclosure requirement of presenting changes in stockholders’ equity for interim periods, which became effective to and adopted by the Company in the first quarter of 2019.

~~Management has reviewed other recently issued accounting pronouncements and has determined there are not any that would have a material impact on the condensed consolidated financial statements.~~

~~Table of Contents~~

~~Accounting Standards Not Yet Effective~~

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASU 2016-13) and also issued subsequent amendments to the initial guidance: ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instrument, and ASU 2019-05, Financial Instrument – Credit Losses (Topic 326): Targeted Transition Relief (collectively, Topic 326). Topic 326 requires measurement and recognition of expected credit losses for financial assets held at the reporting date based on external information, or a combination of both relating to past events, current conditions, and reasonable and supportable forecasts. The amendments affect loans, debt securities, trade receivables, net investments in leases, off-balance-sheet credit exposures, reinsurance receivables, and other financial assets that represent a right to receive cash. Topic 326 is effective for the Company beginning in the first quarter of 2020. Early adoption is permitted. The Company has not yet determined the impact of this standard on its condensed consolidated financial statements.

~~In January 2017, the FASB issued ASU~~ No. 2017-04, Intangibles – Goodwill and Other (Topic 350). This standard eliminates step 2 from the annual goodwill impairment test. This update is effective for ~~annual periods~~the Company beginning ~~after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted, and is to be applied on a prospective basis.~~in the first quarter of 2020. The Company ~~does not anticipate that the adoption of~~adopted this standard ~~will~~on January 1, 2020, and it did not have a ~~significant~~material impact on its condensed consolidated financial statements ~~or the related~~and footnote disclosures.

Table of Contents

Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract

In August 2018, the FASB issued ASU No. 2018-15, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The new guidance clarifies the accounting for implementation costs incurred to develop or obtain internal-use software in cloud computing arrangements. Further, the standard also requires entities to expense the capitalized implementation costs of a hosting arrangement over the term of the hosting arrangement. This standard is effective for the Company beginning in the first quarter of 2020. Early adoption is permitted. ASU No. 2018-15 should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The Company adopted ASU No. 2018-15 on January 1, 2020 on a prospective basis. There was no material impact on the Company’s condensed consolidated financial statements as a result of adoption of ASU No. 2018-15 as of January 1, 2020. As of March 31, 2020, the implementation costs capitalized by the Company pertaining to a cloud computing arrangement related to sales order and customer relation management was not material. The capitalized implementation costs were included in “Other noncurrent assets” on the Condensed Consolidated Balance sheet and within the operating activities section of the Company’s Condensed Consolidated Statement of Cash Flows for the months ended March 31, 2020. When the module or component of the hosting arrangement is ready for its intended use, the Company expects to amortize the capitalized implementation costs over the respective noncancellable period of the arrangement plus period covered by an option to extend the arrangement that is reasonably certain of being exercised. There has been no amortization expense related these assets for the months ended March 31, 2020.

Management has reviewed other recently issued accounting pronouncements and has determined there are not ~~yet determined~~any that would have a material impact on the condensed consolidated financial statements.

Accounting Standards Not Yet Effective

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASU 2016-13), which requires measurement and recognition of expected credit losses for financial assets held at the reporting date based on external information, or a combination of both relating to past events, current conditions, and reasonable and supportable forecasts. ASU No. 2016-13 replaces the existing incurred loss impairment model with a forward-looking expected credit loss model which will result in earlier recognition of credit losses. Subsequent to the issuance of ASU No. 2016-13, the FASB issued ASU No. 2018-19, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instrument, ASU No. 2019-05, Financial Instruments – Credit Losses (Topic 326) Targeted Transition Relief, ASU No. 2016-13, the FASB issued ASU No. 2019-10 Financial Instruments-Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842), and ASU No. 2019-11 Codification Improvements to Topic 326, Financial Instruments-Credit Losses. The subsequent ASUs do not change the core principle of the guidance in ASU No. 2016-13. Instead, these amendments are intended to clarify and improve operability of certain topics included within ASU No. 2016-13.

Additionally, ASU No. 2019-10 defers the effective date for the adoption of the new standard on credit losses for public filers that are considered small reporting companies (“SRC”) as defined by the SEC to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, which will be fiscal 2023 for the Company if it continue to be classified as a SRC. In February 2020, the FASB issued ASU 2020-02, which provides guidance regarding methodologies, documentation, and internal controls related to expected credit losses. The subsequent amendments will have the same effective date and transition requirements as ASU No. 2016-13. Early adoption is permitted. Topic 326 requires a modified retrospective approach by recording a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. While the Company is currently evaluating the impact of Topic 326, the Company does not expect the adoption of this ~~standard~~ASU to have a material impact on its condensed consolidated financial ~~statements.~~

~~2. BUSINESS COMBINATION~~

On April 29, 2019 (the “Acquisition Date”), the Company acquired certain assets from StreamMosaic, Inc., a privately held provider of artificial intelligence and machine learning solutions, including the Stream.AI software product line and related assets. Pursuant to the terms of an asset purchase agreement, the Company acquired certain assets, including all intellectual property, from StreamMosaic and certain related liabilities for the purpose of enhancing the Company’s position in advanced data analytics for semiconductors and electronics by broadening its product offering and expanding its customer reach. In connection with the acquisition, the Company paid a total consideration of approximately $2.7 million using cash on hand.

The Company accounted for this acquisition as a business combination. This method requires that assets acquired and liabilities assumed in a business combination be recognized at their 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 the Company anticipates from the acquired workforce and expectation for expanded sales opportunities in advanced data analytics for semiconductors and electronics. The amount of goodwill expected to be deductible for tax purposes is $370,000. Pro-forma results of operations have not been presented because the effect of the acquisition was not material to our financial results.

Intangible assets consist of developed technology and customer relationships. The value assigned to intangibles are based on estimates and judgments regarding expectations for success and life cycle of intangibles acquired. The following table summarizes the allocation of the fair values of the assets acquired and liabilities assumedstatements and the related ~~useful lives, where applicable:~~disclosure.

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740) related to simplifying the accounting for income taxes. The guidance is effective for the Company beginning in the first quarter of 2021 on a prospective basis. Early adoption is permitted. The Company is currently evaluating the impact of this ASU, and does not anticipate that the adoption of this ASU will have a significant impact on its consolidated financial statements or the related disclosures.

In January 2020, the FASB issued ASU No. 2020-01-Investments-Equity Securities (Topic 321), Investments-Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815)-Clarifying the Interactions between Topic 321, Topic 323, and Topic 815. This ASU clarifies the interaction between accounting standards related to equity securities (ASC 321), equity method investments (ASC 323), and certain derivatives (ASC 815). The amendments in this ASU are effective for fiscal years beginning after December 15, 2020. The Company does not anticipate that the adoption of this ASU will have a significant impact on its condensed consolidated financial statements or the related disclosures.

(in thousands)

Amortization
period (years)

Finite-lived intangible assets:

Developed technology
$ 1,640 9
Customer relationship
700 9
Deferred revenue
(50
)

Net asset acquired
$ 2,290
Goodwill
370
Purchase consideration
$ 2,660

Table of Contents

3.2. REVENUE FROM CONTRACTS WITH CUSTOMERS

The Company derives revenue from two sources: ~~Solutions~~Analytics revenue and ~~Gainshare performance incentives.~~Integrated Yield Ramp revenue.

The Company recognizes revenue in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”) Topic 606, Revenue from Contracts with Customers, and its related amendments (collectively known as “ASC 606”). ASC 606 outlines a single comprehensive model to use in accounting for revenue arising from contracts with customers. Revenue is recognized when control of products or services is transferred to customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those promised products or services.

The Company determines revenue recognition through the following five steps:

	●	Identification of the contract, or contracts, with a customer
	●	Identification of the performance obligations in the contract
	●	Determination of the transaction price
	●	Allocation of the transaction price to the performance obligations in the contract
	●	Recognition of revenue when, or as, performance obligations are satisfied

The Company accounts for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance, and collectability of consideration is probable.

Contracts with multiple performance obligations

The Company enters into contracts that can include various combinations of licenses, products and services, some of which are distinct and are accounted for as separate performance obligations. For contracts with multiple performance obligations, the Company allocates the transaction price of the contract to each performance obligation ~~generally~~ on a relative basis using ~~its~~ standalone selling price. ~~The Company does not adjust transaction price~~

Analytics Revenue

Analytics revenue is derived from the following primary offerings: licenses and services for ~~the effects of a significant financing component when the period between the transfers of the promised good or service to the customer~~Exensio Software, Exensio SaaS, DFI™ and ~~payment for~~CV systems that good or service by the customer is expected to be one year or less. The Company assessed each of its revenue generating arrangements in order to determine whether a significant financing component exists, and determined its contracts diddo not include ~~a significant financing component for the three and nine months ended September 30, 2019 and 2018.~~performance incentives based on customers’ yield achievement.

~~Nature of Products and Services~~

~~Solutions revenue – The Company recognizes revenue for each element of solutions revenue as follows:~~

The Company licenses the majority of its software products separately from project-based solution implementation service contracts, in particular, its Exensio platform and related products. The majority of this software is delivered as on-premise software licenses, while others can be delivered entirely or partially through Software-as-a-Service (SaaS) or cloud delivery models. Revenue from standalone Exensio Software is recognized depending on whether the license is perpetual or time-based. Perpetual (one-time charge) license software is recognized at ~~a point in~~the time atof the inception of the arrangement when control transfers to the ~~client,~~customers, if the software license is distinct from the services offered by ~~the Company.~~us. Revenue from post-contract support ~~subscription~~ is recognized over the contract term on a straight-line basis, because ~~the Company is~~we are providing ~~a service of standing ready to provide~~(i) support ~~when-and-if needed,~~ and ~~is providing~~(ii) unspecified software ~~upgrades~~updates on a when-and-if available basis over the contract term. Revenue from ~~time-based license~~time-based-licensed software is allocated to each performance obligation and is recognized either at a point in time or over ~~time.~~time as follows. The license component is recognized at ~~a point in~~the time atwhen control transfers to the ~~delivery of the software license,~~customer, with the post-contract support ~~subscription~~ component ~~being~~ recognized ratably over ~~for~~ 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 ~~software hosting or~~Exensio SaaS arrangements, ~~that~~which allow for the use of a ~~hosted~~cloud-based software product or service over a contractually determined period of time without taking possession of software, is accounted for as subscriptions and is recognized as revenue ratably, on a straight-line basis, over the ~~coverage~~subscription period beginning on the date the service is first made available to customers.

Table of Contents

~~The Company also licenses the Design-for-Inspection (“DFI”) system~~

Revenue from DFI™ and CV systems that do not include performance incentives based on customers’ yield achievement is recognized primarily as ~~a separate component of fixed-price service contracts that~~services are ~~not project-based solutions implementation services contracts. The~~performed. Where there are distinct performance obligations, the Company allocates revenue to all deliverables ~~under these DFI contracts~~ based on their standalone selling prices, or SSP. ~~In such instances,~~For these contracts with multiple performance obligations, the Company ~~applies judgment~~allocate the transaction price of the contract to ~~estimate the range of SSPs for~~ each performance ~~obligation.~~

~~Table of Contents~~

~~The Company generates~~obligation on a ~~portion of its solutions~~relative basis using SSP attributed to each performance obligation. Where there are not discrete performance obligations, historically, revenue from fixed-price, project-based solution implementation service contracts that are associated with its classic yield ramp business, which services are delivered over a specific period of time. Revenue under these project–based contracts for solution implementation services is primarily recognized as services are performed using a percentage of completion method based on costs or labor-hours inputs, ~~depending on~~ whichever is the most appropriate measure of the progress towards completion of the contract. ~~Due~~

Integrated Yield Ramp Revenue

The Integrated Yield Ramp revenue is derived from the Company’s fixed-fee engagements that include performance incentives based on customers’ yield achievement and Gainshare royalties, typically based on customer’s wafer shipments, pertaining to these fixed-price contracts.

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 ~~costs or hours at~~percentage of completion method is complex and subject to many variables and requires significant judgment. Key factors reviewed by the Company to estimate costs to complete each contract are future labor and product costs and expected productivity efficiencies. If circumstances arise that change the original estimates of revenues, costs, or extent of progress toward completion, revisions to the estimates are made. These revisions may result in increases or decreases in estimated revenues or costs. Losses on fixed-price solution implementation contracts are recognized in the period when they become probable. Revisions in profit estimates are reflected in the period in which the conditions that require ~~the revisions become known and can be estimated (the cumulative catch-up method).~~significant judgement. Please refer to “Significant Judgments” section of this Note for further discussion.

The Company typically includes some of its products and other technology as components of its fixed-price, project-based services contracts. In such instances, the Company determines whether the services performed and products/technology included, are distinct. In most cases, the arrangementGainshare royalty contained in IYR contracts is a single performance obligation and therefore follows the pattern of transfer as the service is provided. The Company applies a measure of progress (typically hours-to-hours or cost-to-cost) to any fixed consideration. As a result, revenue is generally recognized over the period the services are performed using percentage of completion method. This results in revenue recognition that corresponds with the value to the client for the services transferred to date relative to the remaining services promised.

Gainshare Performance Incentives — When the Company enters into a project-based solution implementation services contract, the contract usually includes two components: (1) a fixed fee for performance by the Company of services delivered over a specific period of time; and (2) a Gainshare performance incentive component where the customer pays a variable fee ~~usually after the fixed fee period has ended,~~ related to continued usage of the ~~Company's~~Company’s intellectual ~~property.~~property (“IP”) after the fixed-fee service period ends, based on the customers’ yield achievement. Revenue derived from Gainshare ~~performance incentives~~ is contingent upon the Company’s customers reaching certain defined production yield levels. Gainshare ~~performance incentive~~royalty periods are ~~usually~~generally subsequent to the delivery of all contractual services and performance obligations. The Company records Gainshare ~~revenue~~ as a usage-based royalty ~~based on customers'~~derived from customers’ usage of intellectual property and records it in the same period in which the usage occurs.

Disaggregation of ~~revenue~~Revenue

The Company disaggregates revenue from contracts with customers into ~~geographical regions, major contract performance obligations, and~~the timing of the transfer of goods and ~~services.~~services and the geographical regions. The Company determined that disaggregating revenue into these categories achieves the disclosure objective to depict how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors.

The ~~following table shows the revenues from contracts with customers by the nature of transactions (in thousands):~~

Three Months
Ended September 30,

Nine Months
Ended September 30,

2019

2018

2019

2018

Licenses and Gainshare Performance Incentives
$ 6,454 $ 7,729 $ 20,360 $ 22,044
Support and Services
15,267 11,905 42,298 43,095
Other
193 579 365 930
Total
$ 21,914 $ 20,213 $ 63,023 $ 66,069

Licenses and Gainshare Performance Incentives revenue is comprised of (i) the software license fees for perpetual and time-based software license contracts where the standalone selling prices are estimable by the Company, or distinct and separate performance obligations; and (ii) the variable fee component of the Company’s yield improvement service contracts, or Gainshare Performance Incentives, which is usually recognized as revenue subsequent to the delivery of all contractual services and performance obligations. The services component of such contracts, including recurring fees for unspecified software updates and technical support, is presented as support and services.

~~Table of Contents~~

~~The~~ Company’s performance obligations are satisfied either over time or at a point-in-time. The following table represents a disaggregation of revenue by timing of revenue:

	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended March 31,
	2019			2018			2019			2018			2020			2019
Over time		70	%		59	%		67	%		66	%		58	%		75	%
Point-in-time		30	%		41	%		33	%		34	%		42	%		25	%
Total		100	%		100	%		100	%		100	%		100	%		100	%

International revenues accounted for approximately ~~66% and 60%~~59% of ~~the Company’s~~our total revenues for the three ~~and nine~~ months ended ~~September 30, 2019, respectively,~~March 31, 2020 as compared to ~~59% and 58% of the Company’s total revenues~~55% for the three ~~and nine~~ months ended ~~September 30, 2018, respectively.~~March 31, 2019. See Note ~~11.~~10. Customer and Geographic Information.

Table of Contents

Significant Judgments

Judgments and estimates are required under ~~ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606).~~ASC 606. Due to the complexity of certain contracts, the actual revenue recognition treatment required under ~~Topic~~ASC 606 for the Company’s arrangements may be dependent on contract-specific terms and may vary in some instances.

In services arrangements, the Company typically satisfies the performance obligation and recognizes revenue over time. In Design-to-silicon-yield service arrangements, the performance obligation is satisfied over time either because the client controls the asset as it is created (e.g., when the asset is built at the customer site) or because the Company’s performance does not create an asset with an alternative use and the Company has an enforceable right to payment plus a reasonable profit for performance completed to date. In most other services arrangements, the performance obligation is satisfied over time because the client simultaneously receives and consumes the benefits provided as the Company performs the services.

For revenue under project-based contracts for fixed-price ~~solution~~ implementation services, revenue is recognized as services are performed using a percentage-of-completion method based on costs or labor-hours input method, 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, the estimation of percentage of completion method is complex, subject to many variables and requires significant judgment. Key factors reviewed by the Company to estimate costs to complete each contract are future labor and product costs and expected productivity efficiencies. If circumstances arise that change the original estimates of revenues, costs, or extent of progress toward completion, revisions to the estimates are made. These revisions may result in increases or decreases in estimated revenues or costs, and such revisions are reflected in revenue on a cumulative catch-up basis in the period in which the circumstances that gave rise to the revision become known.

The Company’s contracts with customers often include promises to transfer products, licenses software and provide services, including professional services, technical support services, and rights to unspecified updates to a customer. Determining whether ~~products,~~ licenses and services are distinct performance obligations that should be accounted for separately, or not distinct and thus accounted for together, requires significant judgment. The Company rarely licenses ~~or sells products~~software on a standalone basis, so the Company is required to estimate the range of SSPs for each performance obligation. In instances where SSP is not directly observable because the Company does not license the software or sell the ~~license, product or~~ service separately, the Company determines the SSP using information that may include market conditions and other observable inputs. The Company, in some cases, has more than one SSP for individual performance obligations. In these instances, the Company may use information such as the size of the customer and geographic region of the customer in determining the SSP.

The Company is required to record Gainshare royalty revenue in the same period in which the usage occurs. Because the Company generally does not receive the acknowledgment reports from its 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, the Company accrues the related revenue based on estimates of ~~customer's~~customers underlying sales achievement. The Company’s 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 the customer’s 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.

~~Table of Contents~~

Contract Balances

The Company performs its obligations under a contract with a customer by ~~transferring products~~licensing software or providing services in exchange for consideration from the customer. The timing of the Company’s performance often differs from the timing of the customer’s payment, which results in the recognition of a receivable, a contract asset or a contract liability.

The Company classifies the right to consideration in exchange for ~~products~~software or services transferred to a ~~client~~customer as either a receivable or a contract asset. A receivable is a right to consideration that is unconditional, as compared to a contract asset, which is a right to consideration that is conditional upon factors other than the passage of time. The majority of the Company’s contract assets represent unbilled amounts related to fixed-price ~~solution implementation~~ service contracts when the ~~costs or labor-hours input method of revenue recognition is utilized and~~ revenue recognized exceeds the amount billed to the ~~client, and the right to consideration is subject to milestone completion or client acceptance.~~customer. The contract assets are generally classified as current and are recorded on a net basis with deferred revenue (i.e., contract liabilities) at the contract level. At ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, contract assets of ~~$3.0~~$1.4 million and ~~$2.7~~$3.6 million, respectively, are included in prepaid expenses and other current assets in the ~~condensed consolidated balance sheets.~~Condensed Consolidated Balance Sheets. The ~~change in the~~Company did not record any asset impairment charges related to contract assets ~~balance~~ during the ~~period relates to the recording of revenues for which the right to consideration is subject to milestone completion or client acceptance~~months ended March 31, 2020 and ~~movement of previously recorded contract assets to receivables as the right to consideration becomes unconditional.~~2019.

~~Contract liabilities primarily consist of deferred revenues and billings in excess of recognized revenues.~~ Deferred revenues consist substantially of amounts invoiced in advance of revenue recognition and isare recognized as the revenue recognition criteria are met. Deferred revenues that will be recognized during the succeeding twelve-month period are recorded as current deferred revenues and the remaining portion is recorded as non-current deferred ~~revenues. This balance was recorded~~revenues in the other non-current liabilities in the accompanying condensed consolidated balance sheets. The non-current portion of deferred revenue included in other non-current liabilities was $2.4 million and $1.0 million, respectively, as of September 30, 2019 and December 31, 2018. Billings in excess of recognized revenues included and presented separately in the condensed consolidated balance sheets are attributable to billings in excess of costs under the percentage of completion method representing the difference between contractually invoiced amounts (billings) and revenue recognized based on costs incurred to total estimated total costs at end of period. Billings in excess of recognized revenues are expected to be realized during the succeeding twelve-month period.Condensed Consolidated Balance Sheets. Revenue recognized for ~~each of~~ the three months ended ~~September 30,~~March 31, 2020 and 2019, ~~and 2018,~~ that was included in the deferred revenues and billings in excess of recognized revenues balances at the beginning of each reporting period was $4.4 million. Revenue recognized for the nine months ended September 30, 2019, and 2018, that was included in the deferred revenues and billings in excess of recognized revenues balances at the beginning of each reporting period was $13.0$4.6 million and ~~$12.0~~$3.3 million, respectively.

Table of Contents

At ~~September 30, 2019,~~March 31, 2020, the aggregate amount of the transaction price allocated to the remaining performance obligations related to customer contracts that were unsatisfied or partially unsatisfied was approximately ~~$35.5~~$68.5 million. Given the applicable contract terms, the majority of this amount is expected to be recognized as revenue over the next two years, with the remainder in the following five years. This amount does not include contracts to which the customer is not committed, ~~nor contracts with original expected lengths of one year or less,~~ nor contracts for which we recognize revenue equal to the amount we have the right to invoice for services performed, or future sales-based or usage-based royalty payments in exchange for a license of intellectual property. This amount is subject to change due to future revaluations of variable consideration, terminations, other contract modifications, or currency adjustments. The estimated timing of the recognition of remaining unsatisfied performance obligations is subject to change and is affected by changes to the scope, change in timing of delivery of products and services, or contract modifications.

Payment terms and conditions vary by contract type, although terms generally include a requirement of payment within 30 to 90 days upon invoicing. Invoicing occurs generally upon delivery of license for perpetual software and equally over the expected time period for time-based software and/or service engagements. In instances where the timing of revenue recognition differs from the timing of invoicing, the Company has determined that its contracts generally do not include a significant financing component. The primary purpose of invoicing terms is to provide customers with simplified and predictable ways of purchasing the Company’s products and services, and not to facilitate financing arrangements.

The adjustment to revenue recognized in the three months ended ~~September 30,~~March 31, 2020 and 2019 ~~and 2018~~ from performance obligations satisfied (or partially satisfied) in previous periods was an increase of ~~$0.3~~$0.7 million and $1.3 million, respectively. The adjustment to revenue recognized in the nine months ended September 30, 2019 and 2018 from performance obligations satisfied (or partially satisfied) in previous periods was an increasedecrease of ~~$0.1 million and $1.6~~$0.5 million, respectively. These amounts primarily represent changes in estimated percentage-of-completion based contracts and changes in estimated Gainshare ~~performance incentives~~royalty for those customers that reported actual Gainshare revenue with some time lag.

~~Table of Contents~~

Costs to obtain or fulfill a contract

The Company capitalizes the incremental costs to obtain or fulfill a contract with a customer, including direct sales commissions and related fees, when it expects to recover those costs. As a result, these costs will need to be capitalized and amortized over an appropriate period, which may exceed the initial contract term. The incremental costs of obtaining a contract are costs that would not have been incurred if the contract had not been obtained. The Company uses the portfolio method to recognize the amortizationAmortization expense related to these capitalized costs ~~related to initial contracts and renewals and such expense~~ is recognized over the period associated with the revenue offrom which the ~~related portfolio.~~cost was incurred. Total capitalized direct sales commission costs included in prepaid expenses and other current assets in the accompanying Condensed Consolidated Balance Sheets as of ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018~~2019 were ~~$0.7~~$0.4 million. Total capitalized direct sales commission costs included in other non-current assets in the accompanying Condensed Consolidated Balance Sheets as of March 31, 2020 and December 31, 2019 were $0.8 million and ~~$0.5~~$0.4 million, respectively. Amortization of these assets during each of the three months ended ~~September 30,~~March 31, 2020 and 2019 ~~and 2018~~ was $0.1 ~~million in each period. Amortization of these assets during each of the nine months ended September 30, 2019 and 2018 was $0.3 million in each period.~~million. There was no impairment loss in relation to the costs capitalized for the periods presented.

Certain eligible initial project costs are capitalized when the costs relate directly to the contract, the costs generate or enhance resources of the Company that will be used in satisfying the performance obligation in the future, and the costs are expected to be recovered.

These costs primarily consist of transition and set-up costs related to the installation of systems and processes and other deferred fulfillment costs eligible for capitalization. Capitalized costs are amortized consistent with the transfer to the ~~client~~customer of the services to which the asset relates and recorded as a component of cost of revenues. The Company also ~~incurred~~incurs certain direct costs to provide ~~solution implementation~~ services in relation to the specific anticipated contracts. The Company recognizes such costs as a component of ~~cost~~costs of revenues, the timing of which is dependent upon identification of a contract arrangement. The Company also defers costs from arrangements that required it to defer the revenues, typically due to the pattern of transfer of the performance obligations in the contract. These costs are recognized in proportion to the related revenue. At the end of the reporting period, the Company evaluates its deferred costs for their probable recoverability. The Company recognizes impairment of deferred costs when it is determined that the costs no longer have future benefits and are no longer recoverable. There was no impairment loss in relation to the costs capitalized for the periods presented. Deferred costs balance ~~was $0.2 million as of September 30, 2019 and December 31, 2018. The balance was~~ included in prepaid expenses and other current assets in the accompanying Condensed Consolidated Balance Sheets as of March 31, 2020 and December 31, 2019 was $0.3 million. Deferred costs balance included in other non-current assets in the accompanying ~~condensed consolidated balance sheets.~~Condensed Consolidated Balance Sheets as of March 31, 2020 was immaterial and was $0.2 million as of December 31, 2019.

Practical Expedients

The Company does not adjust transaction price for the effects of a significant financing component when the period between the transfers of the promised good or service to the customer and payment for that good or service by the customer is expected to be one year or less. The Company assessed each of its revenue generating arrangements in order to determine whether a significant financing component exists, and determined its contracts did not include a significant financing component for the three months ended March 31, 2020 and 2019.

4.3. BALANCE SHEET COMPONENTS

Accounts receivable

~~Account~~Accounts receivable ~~includes~~include amounts that are unbilled at the end of the period that are expected to be billed and collected within 12-month period. Unbilled accounts receivable, included in accounts receivable, totaled ~~$10.2~~$9.4 million and ~~$22.2~~$7.4 million as of ~~September 30, 2019,~~March 31, 2020, and December 31, ~~2018,~~2019, respectively. 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 ~~$6.2~~$2.8 million and ~~$5.3~~$4.1 million as of ~~September 30, 2019,~~March 31, 2020, and December 31, ~~2018,~~2019, respectively.

Table of Contents

Property and equipment

Property and equipment, net ~~consists~~consist of the following (in thousands):

	September 30, 2019			December 31, 2018			March 31,			December 31,
Property and equipment, net:
							2020			2019
Computer equipment	$	10,675		$	10,536		$	10,893		$	10,880
Software		4,486			4,112			4,685			4,690
Furniture, fixtures and equipment		7,314			4,688			2,419			2,395
Leasehold improvements		6,045			5,474			6,087			6,095
Laboratory and other equipment								4,974			4,933
Test equipment		22,250			14,697			23,604			22,980
Construction-in-progress		15,831			20,293			19,377			18,245
		66,601			59,800			72,039			70,218
Less: accumulated depreciation and amortization		(27,632	)		(24,119	)		(31,030	)		(29,420	)
Total	$	38,969		$	35,681		$	41,009		$	40,798

Test equipment includes DFI™ assets at customer sites that are contributing to ~~solution~~DFI™ revenues. The construction-in-progress balance ~~as of September 30, 2019 and December 31, 2018 was primarily~~ related to construction of ~~DFI assets.~~DFI™ assets totaled $17.7 million and $16.6 million as of March 31, 2020 and December 31, 2019, respectively. Depreciation and amortization expense for the three months ended ~~September 30,~~March 31, 2020 and 2019 ~~and 2018~~ was $1.7 million and ~~$1.2~~$1.3 million, respectively. ~~Depreciation and amortization expense for the nine months ended September 30, 2019 and 2018 was $4.3 million and $3.7 million, respectively.~~

~~Table of Contents~~

Goodwill and Intangible Assets

As of ~~September 30, 2019,~~March 31, 2020, and December 31, ~~2018,~~2019, the carrying ~~amounts~~amount of goodwill ~~were~~was $2.3 ~~million and $1.9 million, respectively.~~million.

Intangible assets balance was ~~$6.5~~$5.9 million and ~~$5.1~~$6.2 million as of ~~September 30, 2019,~~March 31, 2020 and December 31, ~~2018,~~2019, respectively. Intangible assets as of ~~September 30, 2019,~~March 31, 2020 and December 31, ~~2018~~2019 consist of the following (in thousands):

																			March 31, 2020							December 31, 2019
																		Amortization	Gross					Net		Gross					Net
				September 30, 2019							December 31, 2018							Period	Carrying		Accumulated			Carrying		Carrying		Accumulated			Carrying
	Amortization Period (Years)			Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		(Years)	Amount		Amortization			Amount		Amount		Amortization			Amount
Acquired identifiable intangibles:
Customer relationships	1	‒	9	$	7,440	$	(4,823	)	$	2,617	$	6,740	$	(4,514	)	$	2,226	1 ‒ 9	$	7,440	$	(5,047	)	$	2,393	$	7,440	$	(4,935	)	$	2,505
Developed technology	4	‒	9		17,460		(13,912	)		3,548		15,820		(13,404	)		2,416	4 ‒ 9		17,460		(14,290	)		3,170		17,460		(14,101	)		3,359
Tradename	2	‒	7		790		(667	)		123		790		(648	)		142	2 ‒ 7		790		(679	)		111		790		(673	)		117
Patent	7	‒	10		1,800		(1,550	)		250		1,800		(1,520	)		280	7 ‒ 10		1,800		(1,570	)		230		1,800		(1,560	)		240
Total				$	27,490	$	(20,952	)	$	6,538	$	25,150	$	(20,086	)	$	5,064		$	27,490	$	(21,586	)	$	5,904	$	27,490	$	(21,269	)	$	6,221

The weighted average amortization period for acquired identifiable intangible assets was ~~6.4~~6.0 years as of ~~September 30, 2019. For~~March 31, 2020. Intangible asset amortization expense was $0.3 million during each of the three months ended ~~September 30,~~March 31, 2020 and 2019, ~~and 2018, intangible asset amortization~~which was recorded in other expense ~~was $0.3 million. For~~(income), net in the ~~nine months ended September 30, 2019 and 2018, total intangible asset amortization expense was $0.9 million and $0.8 million, respectively.~~Company’s Condensed Consolidated Statements Comprehensive Loss. The Company expects annual amortization of acquired identifiable intangible assets to be as follows (in thousands):

Year ending December 31,	Amount
2019 (remaining three months)	$	317
2020		1,269
Year Ending December 31,			Amount
2020 (remaining nine months)			$	952
2021		1,093		1,093
2022		886		886
2023		886		886
2024 and thereafter		2,087
2024				747
2025 and thereafter				1,340
Total future amortization expense	$	6,538	$	5,904

Table of Contents

Intangible assets are amortized over their useful lives unless these lives are determined to be indefinite. Intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. During the three ~~and nine~~ months ended ~~September 30, 2019,~~March 31, 2020, there were no indicators of impairment related to the Company’s intangible assets.

5.4. LEASES

The Company leases administrative and sales offices and certain equipment under ~~noncancelable~~noncancellable operating leases, which contain various renewal options and, in some cases, require payment of common area costs, taxes and utilities. These operating leases expire at various times through 2028. The Company had no leases that were classified as a financing lease as of ~~September 30, 2019.~~March 31, 2020 and December 31, 2020.

Leases with an initial term of 12 months or less are not recorded on the balance ~~sheet~~sheets, and the Company recognizes lease expense for these leases on a straight-line basis over the lease term. Long-term operating leases are included in operating lease ~~ROU~~right-of-used (ROU) assets and operating lease liabilities in the Company’s ~~condensed consolidated balance sheet as of September 30, 2019.~~Condensed Consolidated Balance Sheets.

ROU assets represent the Company’s right to use an underlying asset for the lease term and operating lease liabilities represent the Company’s obligation to make lease payments arising from the lease. ~~Effective January 1, 2019, operating~~Operating lease ROU assets and liabilities are recognized based on the present value of remaining lease payments over the lease term. In determining the present value of lease payments, implicit rate must be used when readily determinable. As the Company’s leases do not provide implicit rates, at the date of the Company’s adoption of the new lease standard, the discount rate is calculated using the Company’s incremental borrowing rate determined based on the information available. The operating lease ROU asset also includes any lease payments made and excludes lease incentives or tenant improvement allowance. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. ~~Lease~~Operating lease expense for lease payments is recognized on a straight-line basis over the lease term. Variable lease payment amounts that cannot be determined at the commencement of the lease such as increases in lease payments based on changes in index rates or usage, and common area maintenance costs are not included in the ROU assets or operating lease liabilities. These are expensed as incurred and recorded as variable lease expense.

Lease expense for the three months ended March 31, 2020 and 2019 was comprised of the following (in thousands):

	Three Months Ended March 31,
	2020		2019
Operating lease expense	$	455	$	470
Short-term lease and variable lease expense		147		111
Total lease expense	$	602	$	581

Supplemental balance sheets information related to leases was as follows:

	March 31,			December 31,
	2020			2019
Weighted average remaining lease term under operating ROU leases (in years)		7.04			7.2
Weighted average discount rate for operating lease liabilities		5.25	%		5.25	%
Operating lease ROU assets obtained (in thousands)	$	—		$	333

Table of Contents

Operating lease expense was $0.6 million for each of the three months ended September 30, 2019 and 2018. Operating lease expense was $1.7 million and $1.9 million for the nine months ended September 30, 2019 and 2018, respectively. Operating lease cost includes short-term leases and variable lease costs, which are immaterial.

Maturity of operating lease liabilities as of ~~September 30, 2019,~~March 31, 2020, are as follows (in thousands):

Year ending December 31,	Amount⁽¹⁾
2019 (remaining three months)	$	388
2020		1,842
Year Ending December 31,				Amount(a)
2020 (remaining nine months)				$	1,529
2021		1,693			1,776
2022		1,510			1,567
2023		1,393			1,350
2024 and thereafter		4,750
2024					1,070
2025 and thereafter					3,789
Total future minimum lease payments	$	11,576		$	11,081
Less: Interest^(2)(b)		(2,024	)		(1,817	)
Present value of operating lease liabilities⁽³⁾	$	9,552
Present value of future minimum lease payments operating lease liabilities(c)				$	9,264

	^(1)(a)	As of ~~September 30, 2019,~~March 31, 2020, the total operating lease liability includes approximately $1.0 million related to an option to extend a lease term that is reasonably certain to be exercised.
	^(2)(b)	Calculated using incremental borrowing interest rate for each lease.
	^(3)(c)	Includes the current portion of operating lease liabilities of ~~$1.8~~$2.0 million as of ~~September 30, 2019.~~March 31, 2020.

~~As of September 30, 2019, the weighted average remaining lease term under operating ROU leases was 7.5 years.~~

~~As of September 30, 2019, the weighted average discount rate for operating lease liabilities was approximately 5.3%.~~

~~No new operating lease ROU asset was obtained in exchange for operating lease liabilities during the three and nine months ended September 30, 2019.~~

6.5. STOCKHOLDERS’ EQUITY

Stock Repurchase Program

On October 25, 2016, the Board of Directors adopted a program (the “2016 Program”) that was effective immediately to repurchase up to $25.0 million of the Company’s common stock both on the open market and in privately negotiated transactions over the next two years. On May 29, 2018, the Board of Directors terminated ~~that~~the 2016 stock repurchase program, and adopted a new program (the “2018 Program”) to repurchase up to $25.0 million of the Company’s common stock both on the open market and in privately negotiated transactions over the next two years. During the three ~~and nine~~ months ended ~~September 30,~~March 31, 2020, no shares were repurchased under the 2018 program. During the three months ended March 31, 2019, the Company repurchased approximately 171,000 shares and 785,000 shares, respectively. As of September 30, 2019, approximately 785,000 shares had been repurchased at an average price of $12.43 per share, for a total price of $9.8 million under the 2018 Program. During the three and nine months ended September 30, 2018, the Company repurchased zero and approximately 437,000 shares, respectively, under the 2016 Program and no shares were repurchased under 2018 Program. As of May 29, 2018, the Company had repurchased approximately 1,279,000314,000 shares at an average price of ~~$14.59~~$12.46 per share, for ~~a total price of $18.7~~$3.9 million under the ~~2016 Program.~~2018 program. Under the 2018 program, as of ~~September 30, 2019,~~March 31, 2020, $15.2 million of the Company's common stock remained available for future ~~repurchases of the Company’s common stock.~~repurchases.

~~Table of Contents~~

7.6. EMPLOYEE BENEFIT PLANS

On ~~September 30, 2019,~~March 31, 2020, the Company had the following stock-based compensation plans:

Employee Stock Purchase Plan

In July 2001, the Company adopted a ten-year Employee Stock Purchase Plan (as amended, the “Purchase Plan”) under which eligible employees can contribute up to 10% of their compensation, as defined in the Purchase Plan, towards the purchase of shares of PDF common stock at a price of 85% of the lower of the fair market value at the beginning of the offering period or the end of the purchase period. The Purchase Plan consists of twenty-four-month offering periods with four ~~nine-month~~six-month purchase periods in each offering period. Under the Purchase Plan, on January 1 of each year, starting with 2002, the number of shares reserved for issuance will automatically increase by the lesser of (1) 675,000 shares, (2) 2% of the Company’s outstanding common stock on the last day of the immediately preceding year, or (3) the number of shares determined by the board of directors. At the annual meeting of stockholders on May 18, 2010, the Company’s stockholders approved an amendment to the Purchase Plan to extend it through May 17, 2020.

On April 26, 2020, the Company’s Board of Directors approved an amendment to the Purchase Plan to extend it through June 22, 2030, subject to the approval of the Company’s stockholders.

Table of Contents

The Company estimated the fair value of purchase rights granted under the Purchase Plan during the period using the Black-Scholes-Merton option-pricing model with the following weighted average assumptions, resulting in the following weighted average fair values:

	Nine Months Ended September 30,						Three Months Ended March 31,
	2019			2018			2020			2019
Expected life (in years)		1.25			1.25			1.25			1.25
Volatility		42.45	%		42.85	%		34.25	%		45.19	%
Risk-free interest rate		2.24	%		2.48	%		1.43	%		2.52	%
Expected dividend		—			—			—			—
Weighted average fair value per share of options granted during the period	$	4.08		$	3.62
Weighted average fair value of purchase rights granted during the period							$	4.83		$	3.67

During the three months ended ~~September 30,~~March 31, 2020 and 2019, ~~and 2018,~~ a total of approximately ~~85,000~~89,000 and ~~92,000~~88,000 shares, respectively, were issued at a weighted-average purchase price of ~~$8.90~~$9.02 and $8.93 per share, respectively. During the nine months ended September 30, 2019 and 2018, a total of approximately 172,000 and 200,000 shares, respectively, were issued at a weighted-average purchase price of $8.92 and $9.12 per share, respectively. As of ~~September 30, 2019,~~March 31, 2020, there was ~~$0.9~~$0.7 million of unrecognized compensation cost related to the Purchase Plan. That cost is expected to be recognized over a weighted average period of ~~1.4~~1.01 years. As of ~~September 30, 2019, 5.2~~March 31, 2020, 5.8 million shares were available for future issuance under the Purchase Plan.

Stock Incentive Plans

On November 16, 2011, the Company’s stockholders initially approved the 2011 Stock Incentive Plan, which has been amended and restated and approved by the Company’s stockholders a number of times since then (as amended, the “2011 Plan”). Under the 2011 Plan, the Company may award stock options, stock appreciation rights, stock grants or stock units covering shares of the Company’s common stock to employees, directors, non-employee directors and contractors. The aggregate number of shares reserved for awards under this plan is 10,300,000 shares, plus up to 3,500,000 shares previously issued under the 2001 Stock Plan adopted by the Company in 2001, which expired in 2011 (the “2001 Plan”) that are (i) forfeited or (ii) repurchased by the Company or shares subject to awards previously issued under the 2001 Plan that expire or that terminate without having been exercised or settled in full on or after November 16, 2011. In case of awards other than options or stock appreciation rights (“SARs”), the aggregate number of shares reserved under the 2011 Plan will be decreased at a rate of 1.33 shares issued pursuant to such awards. The exercise price for stock options must generally be at prices no less than the fair market value at the date of grant. Stock options generally expire ten years from the date of grant and become vested and exercisable over a four-year period.

~~In 2001,~~On April 26, 2020 the ~~Company adopted~~Company’s Board of Directors amended the 2011 Plan, subject to the approval of the Company’s stockholder, to increase the number of shares reserved for awards under it to a ~~2001 Stock~~total of 11,550,000 shares, which is an increase of an additional 1,250,000 shares and extend the term of the 2011 Plan ~~(the “2001 Plan”).~~ through June 22, 2030.

In 2003, in connection with its acquisition of IDS Systems Inc., the Company assumed IDS’ 2001 Stock Option / Stock Issuance Plan (the “IDS Plan”). ~~Both of the 2001 and the~~The IDS ~~Plans~~Plan expired in 2011. Stock options granted under the 2001 Plan and IDS ~~Plans~~Plan generally expire ten years from the date of grant and become vested and exercisable over a four-year period. Although no new awards may be granted under the 2001 Plan or IDS ~~Plans,~~Plan, awards made under the 2001 Plan and IDS ~~Plans~~Plan that are currently outstanding remain subject to the terms of each such plan.

~~Table of Contents~~

As of ~~September 30, 2019,~~March 31, 2020, 10.8 million shares of common stock were reserved to cover stock-based awards under the 2011 Plan, of which ~~3.5~~3.4 million shares were available for future grant. The number of shares reserved and available under the 2011 Plan includes 0.5 million shares that were subject to awards previously made under the 2001 Plan and were forfeited, expired or repurchased by the Company after the adoption of the 2011 Plan through ~~September 30, 2019.~~March 31, 2020. As of ~~September 30, 2019,~~March 31, 2020, there were no outstanding awards that had been granted outside of the 2011, 2001 or the IDS Plans (collectively, the “Stock Plans”).

Table of Contents

The Company estimated the fair value of share-based awards granted under the 2011 Stock Plan during the period using the Black-Scholes-Merton option-pricing model with the following weighted average assumptions, resulting in the following weighted average fair values:

Three Months Ended March 31,

2020

2019

Expected life (in years)
4.45 4.46
Volatility
38.77 % 45.26 %
Risk-free interest rate
0.88 % 2.55 %
Expected dividend
— —
Weighted average fair value per share of options granted during the period
$ 5.21 $ 4.51

Stock-based compensation is estimated at the grant date based on the award’s fair value and is recognized on a straight-line basis over the vesting periods, generally four years. Stock-based compensation expense before taxes related to the Company’s stock plans and employee stock purchase plan was allocated as follows (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended March 31,
	2019		2018		2019		2018		2020		2019
Cost of solutions	$	745	$	787	$	2,404	$	2,768
Costs of revenues									$	909	$	860
Research and development		1,062		725		3,681		2,449		1,455		1,718
Selling, general and administrative		925		756		2,557		2,608		1,004		898
Stock-based compensation expenses	$	2,732	$	2,268	$	8,642	$	7,825	$	3,368	$	3,476

The stock-based compensation expense in the table above includes immaterial expense or credit adjustments related to cash-settled ~~stock appreciation rights (“SARs”)~~SARs granted to certain employees. The Company accounted for these awards as liability awards and the amount was included in accrued compensation and related benefits. Stock-based compensation capitalized in the capitalized software development costs, which were included in the Property and Equipment, net, was approximately ~~$0.2~~$0.1 million at ~~September 30, 2019.~~March 31, 2020.

~~Stock Options~~

The Company estimated the fair value of each stock option granted under the 2011 Stock Plan during the period using the Black-Scholes-Merton option-pricing model with the following weighted average assumptions, resulting in the following weighted average fair values:

Three Months
Ended September 30,

Nine Months
Ended September 30,

2019

2018

2019

2018

Expected life (in years)
4.46 4.43 4.46 4.43
Volatility
39.93
%
44.01
%
42.61
%
43.82
%
Risk-free interest rate
1.40
%
2.73
%
1.99
%
2.71
%
Expected dividend
— — — —
Weighted average fair value per share of options granted during the period
$ 4.70 $ 4.21 $ 4.61 $ 4.22

Additional information with respect to options under the Stock Plans during the ~~nine~~three months ended ~~September 30, 2019,~~March 31, 2020, was as follows:

Number of
Options
(in thousands)

Weighted
Average
Exercise
Price per Share

Weighted
Average
Remaining
Contractual
Term (years)

Aggregate
Intrinsic
Value
(in thousands)

Outstanding, January 1, 2019
1,027 $ 9.75
Granted (weighted average fair value of $4.61 per share)
66 $ 12.35
Exercised
(217
)
$ 5.13
Canceled
(75
)
$ 14.53
Expired
(55
)
$ 16.09
Outstanding, September 30, 2019
746 $ 9.79 4.54 $ 2,521
Vested and expected to vest, September 30, 2019
732 $ 10.33 4.45 $ 2,502
Exercisable, September 30, 2019
582 $ 9.79 3.33 $ 2,291

~~Table of Contents~~

Weighted

Weighted

Average

Average

Remaining

Aggregate

Number of

Exercise

Contractual

Intrinsic

Options

Price per

Term

Value

(in thousands)

Share

(years)

(in thousands)

Outstanding, January 1, 2020
745 $ 10.64
Granted (weighted average fair value of $5.21 per share)
13 $ 15.76
Exercised
(21 ) $ 7.68
Canceled
(2 ) $ 10.66
Expired
(9 ) $ 8.86
Outstanding, March 31, 2020
726 $ 10.84 4.44 $ 1,566
Vested and expected to vest, March 31, 2020
713 $ 10.79 4.35 $ 1,560
Exercisable, March 31, 2020
562 $ 10.10 3.18 $ 1,484

The aggregate intrinsic value in the table above represents the total intrinsic value based on the Company’s closing stock price of ~~$13.07~~$11.72 per share as of ~~September 30, 2019.~~March 31, 2020. The total intrinsic value of options exercised during the ~~nine~~three months ended ~~September 30, 2019,~~March 31, 2020, was ~~$1.5~~$0.1 million.

Table of Contents

As of ~~September 30, 2019,~~March 31, 2020, there was $0.7 million of total unrecognized compensation cost ~~net of forfeitures,~~ related to unvested stock options. That cost is expected to be recognized over a weighted average period of ~~2.8~~2.7 years. The total fair value of shares vested during the ~~nine~~three months ended ~~September 30, 2019,~~March 31, 2020, was $0.1 million.

~~Restricted Stock Units~~

~~The fair value and compensation cost before estimated forfeitures for restricted stock units is calculated using the closing price of common stock on the date of grant.~~

Nonvested restricted stock units activity during the ~~nine~~three months ended ~~September 30, 2019,~~March 31, 2020, was as follows:

	Shares (in thousands)			Weighted Average Grant Date Fair Value Per Share					Weighted
Nonvested, January 1, 2019		1,835		$	11.93
									Average Grant
						Shares			Date Fair Value
						(in thousands)			Per Share
Nonvested, January 1, 2020							1,887		$	12.30
Granted		895		$	13.33		248		$	15.35
Vested		(530	)	$	13.40		(275	)	$	13.52
Forfeited		(164	)	$	12.03		(26	)	$	11.78
Nonvested, September 30, 2019		2,036		$	12.17
Nonvested, March 31, 2020							1,834		$	12.54

As of ~~September 30, 2019,~~March 31, 2020, there was ~~$19.4~~$18.2 million of total unrecognized compensation cost related to nonvested restricted stock units. That cost is expected to be recognized over a weighted average period of ~~2.8~~2.6 years. Restricted stock units do not have rights to dividends prior to vesting.

8.7. RESTRUCTURING CHARGES

On September 27, 2018, the Board of Directors of the Company approved a reduction in its workforce to reduce expenses and align its operations with evolving business needs. Notifications to the affected employees began on October 24, 2018.

From inception of the restructuring plan to ~~September 30, 2019,~~March 31, 2020, the Company has recorded restructuring charges of $0.7 million, primarily consisting of employee separation charges. ~~The~~As of March 31, 2020, the Company ~~is in~~has substantially completed the ~~process~~implementation of ~~implementing~~ the restructuring plan, and the remaining charges expected to be incurred are not expected to be significant.

The following table summarizes the activities of restructuring liabilities under this plan (in thousands):

						Three Months Ended March 31,
	Three Months Ended September 30, 2019		Nine Months Ended September 30, 2019			2020		2019
Beginning balance	$	—	$	244		$	—	$	244
Restructuring charges		—		92			—		92
Cash payments		—		(336	)		—		(245	)
Ending balance	$	—	$	—		$	—	$	91

Cash payments for the remaining restructuring liabilities as of March 31, 2019 were paid in the second quarter of fiscal 2019.

9.8. INCOME TAXES

Income tax benefit increased ~~$0.1~~$3.4 million for the ~~nine~~three months ended ~~September 30, 2019,~~March 31, 2020, to a ~~$1.5~~$3.5 million income tax benefit as compared to an income tax benefit of ~~$1.4~~$0.1 million for the ~~nine~~three months ended ~~September 30, 2018.~~March 31, 2019. The Company’s effective tax rate benefit was ~~26.2%~~87% and ~~22.8%~~4% for the ~~nine~~three months ended ~~September 30,~~March 31, 2020 and 2019, ~~and 2018,~~ respectively. The Company’s effective tax rate benefit increased in the ~~nine~~three months ended ~~September 30, 2019,~~March 31, 2020, as compared to the same period in ~~2018,~~2019, primarily due to a favorable ~~reductions~~increase in excess tax benefits related to employee stock compensation and ~~a change~~an income tax benefit recorded to carryback net operating losses (NOLs), pursuant to the provisions of Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) passed on March 27, 2020, which allows any federal net operating losses generated in years beginning after December 31, 2017 and before January 1, 2021 to be carried back up to five taxable years to offset taxable income in the ~~level of forecasted income/loss.~~prior periods.

20
19

Table of Contents

The Company’s total amount of unrecognized tax benefits, excluding interest and penalties, as of ~~September 30, 2019,~~March 31, 2020, was ~~$13.5~~$13.0 million, of which ~~$7.8~~$7.4 million, if recognized, would affect the Company’s effective tax rate. The Company’s total amount of unrecognized tax benefits, excluding interest and penalties, as of December 31, ~~2018,~~2019, was ~~$13.3~~$13.6 million, of which ~~$7.8~~$7.9 million, if recognized, would affect the ~~Company's~~Company’s effective tax rate. As of ~~September 30, 2019,~~March 31, 2020, the Company has recorded unrecognized tax benefits of ~~$2.8~~$2.6 million, including interest and penalties of ~~$0.7~~$0.8 million, as long-term taxes payable in its ~~condensed consolidated balance sheet.~~Condensed Consolidated Balance Sheet. The remaining ~~$11.4~~$11.2 million has been recorded net of our deferred tax assets, of which ~~$5.7~~$5.6 million is subject to a full valuation allowance.

The valuation allowance was approximately ~~$10.4~~$10.0 million and ~~$9.8~~$10.5 million as of ~~September 30, 2019,~~March 31, 2020, and December 31, ~~2018,~~2019, respectively, which was related to California R&D tax credits and California net operating losses related to ~~the Company’s~~our acquisition of ~~Syntricity. The Company has recorded a valuation allowance against these deferred tax assets because it believes~~Syntricity that ~~it is~~we currently do not believe are more likely than not ~~that these tax attributes will not~~to be ultimately realized.

Effective January 1, 2018, the 2017 Tax Cuts and Jobs Acts (the Tax Act) creates a new requirement to include in U.S. income global intangible low-taxed income (“GILTI”) earned by controlled foreign corporations (“CFCs”). The GILTI must be included currently in the gross income of the CFCs’ U.S. shareholder. Under U.S. GAAP, the Company is allowed to make an accounting policy choice of either (1) treating taxes due on future U.S. inclusions related to GILTI as a current-period expense when incurred (the “period cost method”) or (2) factoring such amounts into a company’s measurement of its deferred taxes (the “deferred method”). During the first quarter of 2018, the Company selected the period cost method in recording the tax effects of GILTI in its condensed consolidated financial statements.

The Company conducts business globally and, as a result, files numerous consolidated and separate income tax returns in the U.S. federal, various state and foreign jurisdictions. Because the Company used some of the tax attributes carried forward from previous years to tax years that are still open ~~statutes~~for audit, the federal and California statute of ~~limitation remain~~limitations remains open for all tax years ~~to the extent of the attributes carried forward into tax year~~since 1999 and 2002, ~~for federal and California tax purposes.~~respectively. The Company is not currently subject to an income tax ~~examinations~~examination or under audit in any ~~of its major foreign subsidiaries’ jurisdictions.~~

jurisdiction.

~~10.~~9. NET LOSS PER SHARE

Basic net loss per share is computed by dividing net loss by weighted average number of common shares outstanding for the period (excluding outstanding stock options and shares subject to repurchase). Diluted net loss per share is computed using the weighted-average number of common shares outstanding for the period plus the potential effect of dilutive securities which are convertible into common shares (using the treasury stock method), except in cases in which the effect would be anti-dilutive. The following is a reconciliation of the numerators and denominators used in computing basic and diluted net loss per share (in thousands except per share amount):

	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended March 31,
	2019			2018			2019			2018			2020			2019
Numerator:
Net loss	$	(687	)	$	(2,082	)	$	(4,088	)	$	(4,602	)	$	(528	)	$	(2,691	)
Denominator:
Basic weighted-average common shares outstanding		32,392			32,184			32,405			32,105
Effect of dilutive options and restricted stock		—			—			—			—
Basic weighted-average shares outstanding														32,703			32,485
Effect of dilutive options and restricted stock units														—			—
Diluted weighted average shares outstanding		32,392			32,184			32,405			32,105			32,703			32,485

Net loss per share – Basic	$	(0.02	)	$	(0.06	)	$	(0.13	)	$	(0.14	)
Net loss per share – Diluted	$	(0.02	)	$	(0.06	)	$	(0.13	)	$	(0.14	)
Net loss per share - Basic													$	(0.02	)	$	(0.08	)
Net loss per share - Diluted													$	(0.02	)	$	(0.08	)

For the ~~three~~periods ended March 31, 2020 and ~~nine months ended September 30,~~ 2019, ~~and 2018,~~because the Company was in a loss position, basic net loss per share is the same as diluted net loss per share as the inclusion of the potential common shares would have been anti-dilutive.

~~Table of Contents~~

The following table sets forth potential shares of common stock that are not included in the diluted net loss per share calculation above because to do so would be anti-dilutive for the periods indicated (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended March 31,
	2019		2018		2019		2018		2020		2019
Outstanding options		525		598		584		625		400		622
Nonvested restricted stock units		1,394		1,093		985		1,054		716		748
Employee Stock Purchase Plan		53		465		150		165		100		379
Total		1,972		2,156		1,719		1,844		1,216		1,749

Table of Contents

~~11.~~10. CUSTOMER AND GEOGRAPHIC INFORMATION

Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or group, in deciding how to allocate resources and in assessing performance.

The Company’s chief operating decision maker, the chief executive officer, reviews discrete financial information presented on a consolidated basis for purposes of regularly making operating decisions, allocation of resources, and assessing financial performance. Accordingly the Company considers itself to be in one operating and reporting segment, specifically the ~~licensing~~provision of services for differentiated data and ~~implementation of yield improvement~~analytics solutions ~~for companies designing and/or manufacturing integrated circuits.~~ to the semiconductor and electronics industries.

The Company had revenues from an individual ~~customers~~customer in excess of 10% of total revenues as follows:

	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended March 31,
Customer	2019			2018			2019			2018			2020			2019
A		22	%		38	%		30	%		39	%		26	%		36	%
B		16	%		*	%		*	%		*	%

~~represents less than 10%~~

The Company had gross accounts receivable from individual customers in excess of 10% of gross accounts receivable as follows:

Customer

September 30,
2019

December 31,
2018

A
30
%
35
%
B
14
%
21
%
C
11
%
*
%

~~represents less than 10%~~

~~Table of Contents~~

March 31,

December 31,

Customer

2020

2019

A
17 % 27 %
B
15 % 14 %
C
14 % 12 %

Revenues from customers by geographic area based on the location of the customers’ work sites are as follows (in thousands):

Three Months Ended September 30,

2019

2018

Revenues

Percentage
of
Revenues

Revenues

Percentage
of
Revenues

United States
$ 7,341 34
%
$ 8,366 41
%
China
5,118 23 4,644 23
Japan
2,423 11 1,652 8
Taiwan
1,945 9 936 5
Rest of the world
5,087 23 4,615 23
Total revenue
$ 21,914 100
%
$ 20,213 100
%

											Three Months Ended March 31,
	Nine Months Ended September 30,										2020					2019
	2019					2018							Percentage					Percentage
	Revenues		Percentage of Revenues			Revenues		Percentage of Revenues			Revenues		of Revenues			Revenues		of Revenues
United States	$	25,203		40	%	$	27,430		42	%	$	8,617		41	%	$	9,315		45	%
China		11,369		18			14,186		21			2,959		14			2,983		15
Taiwan		6,041		10			4,109		6			2,668		12			1,755		9
Japan		4,761		7			4,193		7
Rest of the world		15,649		25			16,151		24			6,914		33			6,488		31
Total revenue	$	63,023		100	%	$	66,069		100	%	$	21,158		100	%	$	20,541		100	%

Long-lived assets, net by geographic area are as follows (in thousands):

					March 31,		December 31,
	September 30, 2019⁽¹⁾		December 31, 2018⁽²⁾		2020		2019
United States	$	44,370	$	35,173	$	46,065	$	46,000
Rest of the world		2,180		508		2,312		2,407
Total long-lived assets, net	$	46,550	$	35,681	$	48,377	$	48,407

	⁽¹⁾	~~Amounts consist of property and equipment, net, and operating lease right-of-use assets, net~~
	⁽²⁾	~~Amounts consist of property and equipment, net~~

Table of Contents

~~12.~~11. FAIR VALUE MEASUREMENTS

Fair value is the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. The multiple assumptions used to value financial instruments are referred to as inputs, and a hierarchy for inputs used in measuring fair value is established, that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs reflect assumptions market participants would use in pricing an asset or liability based on market data obtained from independent sources while unobservable inputs reflect a reporting entity’s pricing based upon its own market assumptions. These inputs are ranked according to a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels.

Level 1 -

Inputs are quoted prices in active markets for identical assets or liabilities.

~~Table of Contents~~


	Level 2 -	Inputs are quoted prices for similar assets or liabilities in an active market, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable and market-corroborated inputs which are derived principally from or corroborated by observable market data.


Level 3 -	Inputs are derived from valuation techniques in which one or more significant inputs or value drivers are unobservable.

The following table represents the Company’s assets measured at fair value on a recurring basis as of ~~September 30, 2019,~~March 31, 2020, and the basis for that measurement (in thousands):

											Quoted
											Prices in
											Active		Significant
											Markets for		Other		Significant
											Identical		Observable		Unobservable
											Assets		Inputs		Inputs
Assets	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total		(Level 1)		(Level 2)		(Level 3)
Money market mutual funds	$	27,524	$	27,524	$	—	$	—	$	27,745	$	27,745	$	—	$	—

The following table represents the Company’s assets measured at fair value on a recurring basis as of December 31, ~~2018,~~2019, and the basis for that measurement (in thousands):

											Quoted
											Prices in
											Active		Significant
											Markets for		Other		Significant
											Identical		Observable		Unobservable
											Assets		Inputs		Inputs
Assets	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total		(Level 1)		(Level 2)		(Level 3)
Money market mutual funds	$	27,068	$	27,068	$	—	$	—	$	27,644	$	27,644	$	—	$	—

The Company enters into foreign currency forward contracts ~~from time to time~~ to reduce the exposure to foreign currency exchange rate fluctuations on certain foreign currency denominated monetary assets and liabilities, primarily on third-party accounts payables and intercompany balances. The primary objective of the Company’s hedging program is to reduce volatility of earnings related to foreign currency exchange rate fluctuations. The counterparty to these foreign currency forward contracts is a financial institution that the Company believes is creditworthy, and therefore, the Company believes the credit risk of counterparty nonperformance is not significant. These foreign currency forward contracts are not designated for hedge accounting treatment.

Table of Contents

Therefore, the change in fair value of these contracts is recorded into earnings as a component of other ~~income (expense)~~expense (income), net, and offsets the change in fair value of the foreign currency denominated assets and liabilities, which is also recorded in other ~~income (expense)~~expense (income), net. ~~For the three months ended September 30, 2019 and 2018, the~~The Company recognized a realized loss of ~~$0.4~~$0.3 million during each of the three months ended March 31, 2020 and ~~a realized loss of $0.1 million on the contracts, respectively,~~2019, which was recorded in other ~~income (expense)~~expense (income), net in the Company’s Condensed Consolidated Statements of Comprehensive Loss. For the nine months ended September 30, 2019 and 2018, the Company recognized a realized loss of $0.7 million and a realized loss of $0.5 million on the contracts, respectively, which was recorded in other income (expense), net in the Company’s Condensed Consolidated Statements of Comprehensive Loss.

The Company carries these derivatives financial instruments on its ~~condensed consolidated balance sheets~~Condensed Consolidated Balance Sheets at their fair values. The Company’s foreign currency forward contracts are classified as Level 2 because ~~they are~~it is not actively traded and the valuation inputs are based on quoted prices and market observable data of similar instruments. As of ~~September 30,~~March 31, 2020 and December 31, 2019, the Company had no outstanding forward contract. As of December 31, 2018, the Company had one outstanding forward contract with a notional amount of $8.2 million and recorded $55,000 other current liability associated with the outstanding forward contract.contracts.

~~Table of Contents~~

~~13.~~12. COMMITMENTS AND CONTINGENCIES

Indemnifications — The Company generally provides a warranty to its customers that its software will perform substantially in accordance with documented specifications typically for a period of 90 days following initial delivery of its products. The Company also indemnifies certain customers from third-party claims of intellectual property infringement relating to the use of its products. Historically, costs related to these guarantees have not been significant. The Company is unable to estimate the maximum potential impact of these guarantees on its future results of operations.

Purchase obligations — The Company has purchase obligations with certain suppliers for the purchase of goods and services entered in the ordinary course of business. As of ~~September 30, 2019,~~March 31, 2020, total outstanding purchase obligations were ~~$14.9~~$12.8 million, the majority of which ~~are primarily~~ due within the next 1224 months.

Indemnification of Officers and Directors — As permitted by the Delaware general corporation law, the Company has included a provision in its certificate of incorporation to eliminate the personal liability of its officers and directors for monetary damages for breach or alleged breach of their fiduciary duties as officers or directors, other than in cases of fraud or other willful misconduct.

In addition, the Bylaws of the Company provide that the Company is required to indemnify its officers and directors even when indemnification would otherwise be discretionary, and the Company is required to advance expenses to its officers and directors as incurred in connection with proceedings against them for which they may be indemnified. The Company has entered into indemnification agreements with its officers and directors containing provisions that are in some respects broader than the specific indemnification provisions contained in the Delaware general corporation law. The indemnification agreements require the Company to indemnify its officers and directors against liabilities that may arise by reason of their status or service as officers and directors other than for liabilities arising from willful misconduct of a culpable nature, to advance their expenses incurred as a result of any proceeding against them as to which they could be indemnified, and to obtain directors’ and officers’ insurance if available on reasonable terms. The Company has obtained directors’ and officers’ liability insurance in amounts comparable to other companies of the Company’s size and in the Company’s industry. Since a maximum obligation of the Company is not explicitly stated in the Company’s Bylaws or in its indemnification agreements and will depend on the facts and circumstances that arise out of any future claims, the overall maximum amount of the obligations cannot be reasonably estimated.

~~Litigation~~Legal Proceedings — From time to time, the Company is subject to various claims and legal proceedings that arise in the ordinary course of business. The Company accrues for losses related to litigation when a potential loss is probable and the loss can be reasonably estimated in accordance with FASB requirements. As of ~~September 30, 2019,~~March 31, 2020, the Company was 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. The Company seeks 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.

25
23

Table of Contents

Ite~~Item~~m 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

The following discussion of our financial condition and results of operations contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements other than statements of historical fact may be forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may,” “could,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential”, “target” or “continue,” the negative effect of terms like these or other similar expressions. Any statement concerning future financial performance (including future revenues, earnings or growth rates), ongoing business strategies or prospects, ~~and~~ possible actions taken by us or our subsidiaries, and the potential impact of the COVID-19 pandemic on our business, which may be provided by us are also forward-looking statements. These forward-looking statements are only predictions. Forward-looking statements are based on current expectations and projections about future events and are inherently subject to a variety of risks and uncertainties, many of which are beyond our control, which could cause actual results to differ materially from those anticipated or projected. All forward-looking statements included in this document are based on information available to us on the date of filing and we further caution investors that our business and financial performance are subject to substantial risks and uncertainties. We assume no obligation to update any such forward-looking statements. In evaluating these statements, you should specifically consider various factors, including the risk factors set forth in Item 1. “Business” and Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, ~~2018,~~2019, filed with the Securities and Exchange Commission on March ~~8, 2019.~~10, 2020. All references to “we”, “us”, “our”, “PDF”, “PDF Solutions” or “the Company” refer to PDF Solutions, Inc.

Overview

We offer products and services designed to empower engineers and data scientists across the semiconductor ecosystem to improve the yield, quality, and profitability of their products. We derive revenues from two sources: Analytics and Integrated Yield Ramp. Our ~~solutions~~offerings combine proprietary software, physical ~~intellectual property (or IP)~~IP for ~~integrated circuit~~Integrated Circuits (or IC) designs, electrical measurement hardware tools, proven methodologies, and professional services. We primarily monetize our ~~solutions~~offerings through time-based license fees, ~~and~~ contract revenue for professional ~~services.~~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 ~~a Gainshare performance incentive.~~Gainshare. Our products, services, and ~~services~~solutions have been sold to integrated device manufacturers (or IDMs), fabless semiconductor companies, foundries, out-sourced semiconductor assembly and test (or OSATs), and system houses.

Industry Trend

The global COVID-19 pandemic has impacted the operations and purchasing decisions of companies worldwide. The full potential economic impact is not yet known and is difficult to predict. The global financial markets have been significantly disrupted, which may impact access to financing or result in a recession or long-term market correction. 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 continue to limit the ability of our local employees to travel to customer sites or visit our other offices. Our offices in Italy and Germany were closed in February 2020 and by March 2020 our corporate headquarters in the United States and several other impacted locations were temporarily closed as well. In addition, our personnel worldwide are subject to various travel restrictions, which limit our ability to provide services to customers at their facilities. To date, we have been able to provide uninterrupted access to our products and services due to our globally distributed workforce, many of whom are already working remotely, and our pre-existing infrastructure, which supports secure access to our internal systems. If, however, the COVID-19 pandemic has a substantial impact on our employees’ productivity or our partners or customers decision to use our products and services, our ability to deliver on current commitments, to secure future bookings, or achieve expected financial performance may be harmed. 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, the extent and effectiveness of containment actions and the impact of these and other factors on our employees, customers, partners and vendors.

Table of Contents

Certain general business trends may affect our ~~analytics opportunities.~~Analytics revenue. 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. 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 ~~increased~~decreased year to year. The combination of these two trends means that more data is collected and stored than ever before. 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 ~~the~~ analytics programs. The combination of these two trends means that cloud-based, analytic programs that effectively manage identity management, physical security and data protection are increasingly ~~demanded~~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 a combination of advanced analytics capabilities, proven and established data infrastructures, and professional services to optimize their environment to customers’ specialized needs.

~~Table of Contents~~

Other business trends may continue to affect our ~~integrated yield ramp opportunities.~~Integrated Yield Ramp revenue. The logic foundry market at the leading edge nodes, such as 10nm and 7nm has undergone significant change over the past few years. The leading foundry continues to increase market share as other foundries have 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 ~~yield ramp solutions~~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, 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 for at least the next few years.~~continue. In order for these trends to provide opportunities for us to increase our business in process control and electrical characterization, Chinese semiconductors manufacturers will need to increase their production volumes on advanced technology nodes and continue to engage foreign suppliers. As a result of these market developments, we have chosen to focus our resources and investments in products, services, and solutions for analytics.

There are other general business trends that may affect our business ~~opportunities in general.~~opportunities. For instance, the demand for consumer electronics, communications devices, and high performance computing continues to drive technological innovation in the semiconductor industry as the need for products with greater performance, lower power consumption, reduced costs and smaller size continues to grow with each new product generation. In addition, advances in computing systems and mobile devices have fueled 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 of products and services that address yield loss across the IC product life cycle.

Table of Contents

Financial Highlights

Financial highlights for the three months ended ~~September 30, 2019,~~March 31, 2020, were as follows:

●•

Total revenues were ~~$21.9~~$21.2 million, which was an increase of ~~$1.7~~$0.6 million, or 8%3%, compared to the ~~year-ago period. Solutions~~three months ended March 31, 2019. Analytics revenue was ~~$16.2~~$13.2 million, which was an increase of ~~$2.2~~$1.8 million, or 16%, compared to the ~~year-ago period.~~three months ended March 31, 2019. The increase in ~~Solutions~~Analytics revenue was primarily driven by $1.5 million higher business activity in licenses and services for our Exensio products, and $1.5 million increase in Characterization Vehicle (CV) services due to ~~the increases in our Exensio platform revenues that were driven~~higher hours worked across multiple contracts and customers. The increase was offset by ~~higher business activity. Gainshare performance incentives~~$1.2 million lower revenue ~~was $5.7~~from Design-for-Inspection™ (DFI™) systems and services. Integrated Yield Ramp revenue decreased $1.2 million a decrease of $0.5 million, or 9%, compared to the year-ago period. The decrease was primarily due to lower wafer volumes at the 14nm and 28nm technology nodes covered by contracts with Gainshare performance incentives revenue.

●	Gross margin was 60%, compared to 47% for the year-ago period. Gross profit was significantly higher than the prior period due primarily to higher Solutions revenue and a reduction in headcount primarily related to our yield ramp business, which is a cost of revenues. Cost of solutions decreased for the three months ended ~~September 30, 2019,~~March 31, 2020, compared to the ~~year-ago period,~~three months ended March 31, 2019, due primarily to a $3.3 million decrease in revenue from our yield ramp services from lower hours worked across multiple contracts and customers, partially offset by a $2.1 million increase in Gainshare royalty from the 14nm technology nodes.

	•	Costs of revenues increased $0.6 million for the three months ended March 31, 2020, compared to the three months ended March 31, 2019, primarily due to (i) a ~~$2.5~~$0.6 million increase in direct costs related to third-party software royalty and licenses expense, equipment and hardware expense related to a new customer engagement, and amortization of deferred costs, and (ii) a $0.7 million increase in information technology-related costs and facilities expense mainly due to higher cloud-delivery related costs and depreciation expense of test equipment, partially offset by (i) a $0.5 million decrease in personnel-related ~~cost driven by lower headcount,~~costs, and (ii) a $0.2 million decrease in travel expenses resulting from ~~our cost management effort. These decreases~~lesser business travel in ~~cost~~the first quarter of solutions were partially offset by (i) a $0.5 million decrease in Gainshare performance incentives, (ii) a $0.7 million increase in hardware and equipment expense, (iii) a $0.2 million increase in cloud-delivered solutions-related costs, and (iv) a $0.3 million increase in depreciation expense.2020 due to the global COVID-9 pandemic.


	●•	Gross margin of 60%, compared to 62% for the three months ended March 31, 2019.

	•	Net loss was ~~$0.7~~$0.5 million, compared to ~~a net loss of $2.1~~$2.7 million for the ~~year-ago period.~~three months ended March 31, 2019. The decrease in net loss was primarily attributable to a ~~$1.7~~$0.6 million increase in ~~total~~ revenues and a ~~$2.0~~$3.4 million ~~decrease~~increase in ~~cost of solutions,~~tax benefits, partially offset by a ~~$2.2~~$0.6 million increase in costs of revenues, and a $1.2 million increase in operating expenses as we continued to make investments in research and development ~~and~~ sales and marketing activities.

●
	~~Net loss per basic and diluted share was $(0.02), compared to net loss per basic and diluted share of $(0.06) for the year-ago period, a decrease of $0.04 per basic and diluted share.~~

●•

Cash, ~~and~~ cash equivalents and investments increased ~~$4.2~~$2.8 million to ~~$100.3~~$100.4 million at ~~September 30, 2019,~~March 31, 2020, from ~~$96.1~~$97.6 million at December 31, ~~2018,~~2019, primarily due to the collection of ~~significant past due~~ accounts receivables, ~~during the third quarter of fiscal 2019,~~ partially offset by cash used in investing activities related to the property and equipment purchased for the development ~~our DFI solution, expansion~~ of our research and development laboratory and clean room, and a payment for the acquisition of certain assets of StreamMosaic, Inc., a provider of artificial intelligence and machine learning solutions, and cash used in financing activities primarily due to repurchases of our common stock.

~~Table of Contents~~

~~Financial highlights for the nine months ended September 30, 2019, were as follows:~~

●

Total revenues were $63.0 million, which was a decrease of $3.0 million, or 5%, compared to the compared to the year-ago period. Solutions revenues were $46.3 million, which was a decrease of $1.1 million, or 2%, compared to the year-ago period. The decrease in Solutions revenue was primarily related to a decrease in the revenue from our yield ramp solutions resulting from lower hours worked across multiple contracts and customers, which was partially offset by increases in Exensio platform revenues. Gainshare performance incentives revenue was $16.7 million, a decrease of $1.9 million, or 10%, compared to the year-ago period. The decrease in Gainshare performance incentives revenue was primarily due to lower incentives revenue from the 28nm technology node.

●

Gross margin was 61%, compared to 50% for the year-ago period. Gross profit was significantly higher than the prior period due primarily to (i) recognition of Solutions revenue of $3.3 million from a customer contract amendment during the first quarter of fiscal year 2019, without which our gross margin would have been approximately 2% lower, and (ii) a reduction in headcount primarily related to our yield ramp business, which is a cost of revenues. Cost of solutions decreased compared to the year-ago period, primarily due to (i) a $7.6 million decrease in personnel-related cost driven by lower headcount and lower chargeable hours incurred across multiple contracts and customers, and a decrease in stock-based compensation expense, partially offset by an increase in salary expenses related to our worldwide merit increases, (ii) a $0.2 million decrease in hardware and equipment expense due to lower Solutions revenue, and (iii) a $0.7 million decrease in travel expenses resulting from our cost management efforts. These decreases in cost of solutions were partially offset by (i) a $1.9 million decrease in Gainshare performance incentives, (ii) a $0.2 million increase in cloud-delivered solutions related costs, and (iii) $0.3 million increase in depreciation expense.

●

Net loss was $4.1 million, compared to a net loss of $4.6 million for the year-ago period. The decrease in net loss was primarily attributable to (i) a $3.4 million decrease in cost of solutions and operating expenses related to a decrease in personnel-related costs driven by lower headcount, hardware and equipment costs, travel, operating lease and subcontractor expenses and accounting and audit fees, partially offset by increase in employee stock compensation expense, recruiting and legal fees, facilities and depreciation and amortization expenses, and (ii) a $3.0 million decrease in total revenues.

●	~~Net loss per basic and diluted share was $(0.13), compared to net loss per basic and diluted share of $(0.14) for the year-ago period, a decrease of $0.01 per basic and diluted share.~~DFI™ solution.

Critical Accounting Policies and Estimates

See Note 1 of “Notes to Condensed Consolidated Financial Statements (Unaudited)” of this Quarterly Report on Form 10-Q for a description of recent accounting pronouncements and accounting changes, including the expected dates of adoption and ~~expected~~estimated effects, if any, on our condensed consolidated financial statements, and to Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, ~~2018.~~2019.

~~With the exception of the changes made to our accounting for leases as a result of the adoption of ASC 842, there~~There have been no material changes during the ~~nine~~three months ended ~~September 30, 2019,~~March 31, 2020 to the items that we disclosed as our critical accounting policies and estimates in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2018.~~2019.

Table of Contents

The following is a brief discussion of the more significant accounting policies and methods that we use.

General

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

~~Table of Contents~~

Revenue Recognition

We derive ~~revenues~~revenue from two sources: ~~Solutions revenue~~Analytics and ~~Gainshare performance incentives.~~Integrated Yield Ramp.

~~Solutions revenue — We recognize revenue for each element of solutions revenue as follows:~~Analytics Revenue

~~We license~~Analytics revenue is derived from the ~~majority of our software products separately from project-based solution implementation service contracts, in particular, our~~following primary offerings: licenses and services for Exensio ~~platform~~Software, Exensio SaaS, DFI and related products. The majority of this software is delivered as on-premise software licenses, while others can be delivered entirely or partially through Software-as-a-Service (SaaS) or cloud delivery models. CV systems that do not include performance incentives based on customers’ yield achievement.

Revenue from standalone Exensio Software is recognized depending on whether the license is perpetual or time-based. Perpetual (one-time charge) license software is recognized at ~~a point in~~the time atof the inception of the arrangement when control transfers to the ~~client,~~customers, if the software license is distinct from the services offered by us. Revenue from post-contract support ~~subscription~~ is recognized over the contract term on a straight-line basis, because we are providing ~~a service of standing ready to provide~~(i) support ~~when-and-if needed,~~ and ~~is providing~~(ii) unspecified software ~~upgrades~~updates on a when-and-if available basis over the contract term. Revenue from ~~time-based license~~time-based-licensed software is allocated to each performance obligation and is recognized either at a point in time or over ~~time.~~time as follows. The license component is recognized at ~~a point in~~the time ~~at the delivery of the software license,~~when control transfers to customers, with the post-contract support ~~subscription~~ component ~~being~~ recognized ratably over ~~for~~ 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 ~~software hosting or~~Exensio SaaS arrangements, ~~that~~which allow for the use of a ~~hosted~~cloud-based software product or service over a contractually determined period of time without taking possession of software, ~~are~~is accounted for as subscriptions and is recognized as revenue ratably, on a straight-line basis, over the ~~coverage~~subscription period beginning on the date the service is first made available to customers.

~~We also license our DFI system~~Revenue from DFI™ and CV systems that do not include performance incentives based on customers’ yield achievement is recognized primarily as ~~a separate component of fixed-price service contracts that~~services are ~~not project-based solutions implementation services contracts. We~~performed. Where there are distinct performance obligations, we allocate revenue to all deliverables ~~under these DFI contracts~~ based on their standalone selling prices, or SSP. ~~In such instances,~~For these contracts with multiple performance obligations, we ~~apply judgment~~allocate the transaction price of the contract to ~~estimate the range of SSPs for~~ each performance ~~obligation.~~

~~We generate~~obligation on a ~~portion of our Solutions~~relative basis using SSP attributed to each performance obligation. Where there are not discrete performance obligations, historically, revenue from fixed-price, project-based solution implementation service contracts that are associated with our classic yield ramp business, which services are delivered over a specific period of time. Revenue under these project–based contracts for solution implementation services is primarily recognized as services are performed using a percentage of completion method based on costs or labor-hours inputs, ~~depending on~~ whichever is the most appropriate measure of the progress towards completion of the contract. ~~Due~~

Integrated Yield Ramp Revenue

Integrated Yield Ramp revenue is derived from our yield ramp engagements, which include Gainshare or other performance incentives based on customers’ yield achievement.

Revenue under these project–based contracts, which are delivered over a specific period of time typically for a fixed fee component paid on a set schedule, is recognized as services are performed using a percentage of completion. 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 ~~costs or hours at~~percentage of completion method is complex and subject to many variables and requires significant judgment. 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 change the original estimates of revenues, costs, or extent of progress toward completion, revisions to the estimates are made. These revisions may result in increases or decreases in estimated revenues or costs. Losses on fixed-price solution implementation contracts are recognized in the period when they become probable. Revisions in profit estimates are reflected in the period in which the conditions that require ~~the revisions become known and can be estimated (the cumulative catch-up method).~~significant judgement.

~~We typically include some~~

Table of our products and other technology as components of our fixed-price, project-based services contracts. In such instances, we determine whether the services performed and products/technology included, are distinct. In most cases, the arrangement is a single performance obligation, and therefore, follows the pattern of transfer as the service is provided. We apply a measure of progress (typically hours-to-hours or cost-to-cost) to any fixed consideration. As a result, revenue is generally recognized over the period the services are performed using the percentage of completion method. This results in revenue recognition that corresponds with the value to the client of the services transferred to date relative to the remaining services promised.
Contents

The Gainshare Performance Incentives — When we enter into a project-based solution implementation services contract, the contract usually includes two components: (1) a fixed fee for performance by the Company of services delivered over a specific period of time; and (2) a Gainshare performance incentive component where the customer paysroyalty contained in yield ramp contracts is a variable fee ~~usually after the fixed fee period has ended,~~ related to continued usage of our IP after the ~~Company's intellectual property.~~fixed-fee service period ends, based on the customers’ yield achievement. Revenue derived from Gainshare ~~performance incentives~~ is contingent upon our customers reaching certain defined production yield levels. Gainshare ~~performance incentive~~royalty periods are ~~usually~~generally subsequent to the delivery of all contractual services and performance obligations. We ~~recorded~~record Gainshare ~~revenue~~ as a usage-based royalty ~~based on~~derived from customers' usage of intellectual property and ~~recorded~~record it in the same period in which the usage occurs.

~~Table of Contents~~

Income Taxes

~~Income Taxes~~

We are required to assess whether it is "more-likely-than-not" that we will realize our deferred tax assets. If we believe that they are not likely to be fully realizable before the expiration dates applicable to such assets, then to the extent we believe that recovery is not likely, we must establish a valuation allowance. The ~~Company's provision for income~~valuation allowance was approximately $10.0 million and $10.5 million as of March 31, 2020 and December 31, 2019 respectively, which was related to California R&D tax ~~comprises its current tax liability~~credits and California net operating losses related to an acquisition that we currently do not believe to be “more-likely-than-not” to be ultimately realized. 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 ~~liabilities. Deferred tax assets and liabilities are recognized for the expected tax consequences of temporary differences between~~it is at such time “more-likely-than-not” that we will realize the tax ~~bases of assets and liabilities. The measurement of current and~~credits before applicable expiration dates, our tax provision will decrease in the period in which we make such determination.

We evaluate our deferred tax assets for realizability considering both positive and ~~liabilities is~~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 ~~provisions of enacted tax laws; the effect of future~~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 ~~rates is not factored in. Valuation allowances are provided to reduce~~variances between future projected operating performance and actual results. Changes in the net deferred tax assets, ~~to an amount that~~less offsetting valuation allowance, in ~~management’s judgment is more likely than not to be recoverable against future taxable income. No U.S. taxes~~a period are ~~provided~~recorded through the income tax provision and could have a material impact on ~~earnings~~the Condensed Consolidated Statements of ~~non-U.S. subsidiaries, to the extent such earnings are deemed to be permanently invested. The Company's~~Comprehensive Loss.

Our income tax calculations are based on application of ~~the respective~~applicable U.S. federal, state, or foreign tax ~~laws. The Company’s~~law. Our tax filings, however, are subject to audit by the respective tax authorities. Accordingly, ~~the Company recognizes~~we recognize tax liabilities based upon ~~its~~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 ~~from~~than the amounts originally accrued, the increases or decreases are recorded as income tax expense or benefit in the ~~condensed consolidated statements~~Condensed Consolidated Statements of ~~comprehensive loss.~~ Comprehensive Loss. At March 31, 2020, no deferred taxes have been provided on undistributed earnings from the Company’s international subsidiaries. The Company intends to reinvest the earnings of its non-U.S. subsidiaries in those operations indefinitely. As such, the Company has not provided for any foreign withholding taxes on the earnings of foreign subsidiaries as of March 31, 2020. The earnings of the Company’s foreign subsidiaries are taxable in the U.S. in the year earned under the Global Intangible Low-Taxed Income rules implemented under 2017 Tax Cuts and Jobs Act.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“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 the Company to recognize an income tax benefit of $2.3 million from the carryback of federal NOLs during the three months ended March 31, 2020.

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 the carrying amount exceeds its fair value, an impairment loss would be recognized equal to the amount of excess, limited to the amount of total goodwill. There was no goodwill impairment for the three months ended March 31, 2020.

Table of Contents

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. If it is determined that an asset group is not recoverable, an impairment loss is recorded in the amount by which the carrying amount of the asset group exceeds its fair value. There was no impairment of long-lived assets for the three months ended March 31, 2020.

Recent Accounting Pronouncements and Accounting Changes

Results of Operations

Income Statement Presentation

In the fourth quarter of fiscal 2019, in order to enhance the transparency of our revenue reporting, the Company updated its Condensed Consolidated Statements of Comprehensive Loss to change its historical presentation of revenue categories. Previously, the Company presented revenue on two lines: Solutions and Gainshare performance incentives. Included within Solutions, was revenue from software and related revenue, SaaS solutions, Design-for-Inspection (DFI™) licenses, and fixed-price project-based solution implementation services. The previous Gainshare performance incentive category included only revenue from performance incentive programs. The Company now presents revenue in the following categories: Analytics and Integrated Yield Ramp. Integrated Yield Ramp revenue is comprised of all revenue from the Company’s Integrated Yield Ramp services 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 the Company’s licenses and services for Exensio Software, Exensio SaaS, DFI™ and CV systems that do not include performance incentives based on customers’ yield achievement.

For the Three Months Ended March 31, 2019

Change in

Previously

Presentation

Current

Reported

Reclassification

Presentation

Revenues:

Design-to-silicon-yield solutions
$ 16,661 $ (16,661 ) N/A
Gainshare performance incentives
3,880 (3,880 ) N/A
Analytics
N/A 11,434 $ 11,434
Integrated Yield Ramp
N/A 9,107 9,107
Total revenues
$ 20,541 $ — $ 20,541
Since certain costs of revenues are attributed to both Analytics and Integrated Yield Ramp revenue categories, the Company believes it is more appropriate and meaningful to present the Condensed 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, the Company elected to change its Condensed 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.
29
Table of Contents
Discussion of Financial Data for the Three ~~and~~ ~~Nine~~Months Ended March 31, 2020~~September~~ ~~30, 2019~~ and ~~2018~~2019
Revenues, Costs of Revenues, and Gross Margin

Three Months Ended
September 30,

Change

Nine Months Ended
September 30,

Change

2019

2018
$ % 2019 2018 $ %
(Dollars in thousands)
Solutions
$ 16,208 $ 13,976 $ 2,232 16
%
$ 46,298 $ 47,431 $ (1,133
)
(2
)%
Gainshare performance incentives
5,706 6,237 (531 ) (9
)%
16,725 18,638 (1,913
)
(10
)%
Total revenues
$ 21,914 $ 20,213 $ 1,701 8
%
$ 63,023 $ 66,069 $ (3,046
)
(5
)%
Solutions revenue as a percentage of total revenues
74
%
69
%
73
%
72
%

Gainshare performance incentives as a percentage of total revenues
26
%
31
%
27
%
28
%

Three Months Ended March 31,

Change

2020

2019

$

%

(Dollars in thousands)

Revenues:

Analytics
$ 13,248 $ 11,434 $ 1,814 16 %
Integrated Yield Ramp
7,910 9,107 (1,197 ) (13 )%
Total revenues
$ 21,158 $ 20,541 $ 617 3 %
Costs of revenues 8,487 7,867 620 8 %
Gross profit $ 12,671 $ 12,674 $ (3 ) — %
Gross margin 60 % 62 %

Analytics revenue as a percentage of total revenues
63 % 56 %
Integrated Yield Ramp revenue as a percentage of total revenues
37 % 44 %

~~Solutions revenue is derived from services (including solution implementations, software support and maintenance, consulting, and training), software licenses, and hardware.  Solutions~~Analytics Revenue
Analytics revenue increased ~~$2.2~~$1.8 million for the three months ended ~~September 30, 2019,~~March 31, 2020, compared to the ~~year-ago period,~~three months ended March 31, 2019. The increase in Analytics revenue was primarily driven by $1.5 million higher business activity in licenses and services for our Exensio products, $1.5 million increase in CV services due to higher hours worked across multiple contracts and customers. The increase was offset by $1.2 million lower revenue from DFI™ systems and services.
Integrated Yield Ramp Revenue
Integrated Yield Ramp revenue decreased $1.2 million for the three months ended March 31, 2020, compared to the three months ended March 31, 2019, due primarily to ~~the increase in our Exensio platform revenues that were driven by higher business activity. Solutions revenue decreased by $1.1~~a $3.3 million ~~for the nine months ended September 30, 2019, compared to the year-ago period, due primarily to the~~ decrease in ~~the~~ revenue from our yield ramp ~~solutions resulting~~services from lower hours worked across multiple contracts and customers, ~~which was~~ partially offset by ~~increases~~a $2.1 million increase in Exensio platform revenues. Our Solutions revenue may fluctuate in the future and is dependent on a number of factors, including the semiconductor industry’s continued acceptance of our solutions, the timing of purchases by existing and new customers, cancellations by existing customers, and our ability to attract new customers, penetrate new markets, and further penetrate 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.
30
~~Table of Contents~~
Gainshare ~~performance incentives revenues represent royalties and performance incentives earned contingent upon our customers reaching certain defined operational levels. Revenue derived~~royalty from ~~Gainshare performance incentives decreased by $0.5 million for the three months ended September 30, 2019, compared to the year-ago period, due primarily to lower wafer volumes at~~ the 14nm ~~and 28nm~~ technology nodes covered by contracts with Gainshare performance incentives revenue. Revenue derived from Gainshare performance incentives decreased by $1.9 million for the nine months ended September 30, 2019, compared to the year-ago period, due primarily to lower wafer volumes at the 28nm technology node covered by contracts with Gainshare performance incentives revenue.nodes. Our ~~Gainshare performance incentives~~Integrated Yield Ramp revenue may continue to fluctuate from period to ~~period.~~period primarily due to the contribution of Gainshare ~~performance incentives revenue~~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 ~~solutions~~ contracts containing ~~Gainshare performance incentives.~~ Gainshare.

~~Gross Margin~~Our revenues may fluctuate in the future and are dependent on a number of factors, including the semiconductor industry’s continued acceptance of our products, services and solutions, the timing of purchases by existing and new customers, cancellations by existing customers, and our ability to attract new customers and penetrate new markets, and further penetration of our current customer base. Fluctuations in future results may also occur if any of our significant customers renegotiate pre-existing contractual commitments, including due to adverse changes in their own business.

Three Months Ended
September 30,

Change

Nine Months Ended
September 30,

Change

2019

2018
$ % 2019 2018 $ %
(Dollars in thousands)
Solutions
$ 7,493 $ 3,293 $ 4,200 128
%
$ 21,883 $ 14,349 $ 7,534 53
%
Gainshare performance incentives
5,706 6,237 (531 ) (9
)%
16,725 18,638 (1,913
)
(10
)%
Gross profit
$ 13,199 $ 9,530 $ 3,669 38
%
$ 38,608 $ 32,987 $ 5,621 17
%
Gross margin – Solutions revenue
46
%
24
%
47
%
30
%

Gross margin – Gainshare performance incentives
100
%
100
%
100
%
100
%

Gross margin – Total Company
60
%
47
%
61
%
50
%

Costs of Revenues

~~Gross margin increased for~~Costs of revenues consist 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 of material, employee compensation and related benefits, overhead costs, travel and allocated facilities-related costs. Software license costs consist of costs associated with licensing third-party software used by the ~~three months ended September 30, 2019 compared to the year-ago period, due primarily to higher Solutions revenue and a reduction~~Company in ~~headcount related~~providing services to our ~~yield ramp business, which is a cost~~customers in solution engagements, or sold in conjunction with our software products. The increase in costs of ~~revenues. Cost~~revenues of ~~solutions decreased for the three months ended September 30, 2019, compared to the year-ago period,~~$0.6 million was primarily due to (i) a ~~$2.5~~$0.6 million increase in direct costs related to third-party software royalty and licenses expense, equipment and hardware expense related to a new customer engagement, and amortization of deferred costs, and (ii) a $0.7 million increase in information technology (IT) related costs and facilities expense mainly due to higher cloud-delivery related costs and depreciation expense of test equipment, partially offset by (i) a $0.5 million decrease in personnel-related ~~cost driven by lower headcount,~~costs, and (ii) a $0.2 million decrease in travel expenses resulting from ~~our cost management effort. These decreases~~lesser business travel in ~~cost~~the first quarter of ~~solutions were partially offset by (i) a $0.5 million decrease in Gainshare performance incentives, (ii) a $0.7 million increase in hardware and equipment expense~~2020 due to ~~higher solutions revenue, (iii) a $0.2 million increase in cloud-delivered solutions-related costs, and (iv) a $0.3 million increase in depreciation expense.~~the global COVID-9 pandemic.
30
Table of Contents
Gross Margin

Gross margin ~~increased for~~in the ~~nine months ended September 30, 2019~~first quarter of 2020 was 60% compared to 62% for the year-ago period, or a decrease of 2%. The higher gross margin during the first quarter of 2019 was primarily due ~~primarily~~ to ~~(i) recognition of Solutions revenue of~~a $3.3 million nonrecurring revenue from a customer contract amendment, partially offset by an overall increase in Analytics revenue during the first quarter of ~~fiscal year 2019, without~~2020, which ~~our gross margin would be approximately 2%~~revenue is comprised of software and term-based licenses that include lower and (ii) a reduction in headcount primarily related to our yield ramp business, which is a cost of revenues. Cost of solutions decreased for the nine months ended September 30, 2019, compared to the year-ago period, primarily due to (i) a $7.6 million decrease in personnel-related cost driven by lower headcount and lower chargeable hours incurred across multiple contracts and customers, and decrease in stock-based compensation expense, partially offset by increase in salary expenses related to our worldwide merit increases, (ii) a $0.2 million decrease in hardware and equipment expense due to lower solutions revenue, and (iii) a $0.7 million decrease in travel expenses resulting from our cost management efforts. These decreases indirect costs of solutions partially offset by (i) a $1.9 million decrease in Gainshare performance incentives, (ii) a $0.2 million increase in cloud-delivered solutions-related costs, and (iii) $0.3 million increase in depreciation expense.revenues to deliver than IYR offerings.

31
~~Table of Contents~~
Operating Expenses:

Research and Development

Three Months Ended
September 30,

Change

Nine Months Ended
September 30,

Change

2019

2018
$ % 2019 2018 $ %
Three Months Ended March 31,

Change

(Dollars in thousands)
2020

2019

$

%

Research and development
$ 8,435 $ 6,755 $ 1,680 25
%
$ 23,993 $ 21,100 $ 2,893 14
%
$ 8,590 $ 8,246 $ 344 4 %
Research and development as a percentage of total revenues
38
%
33
%
38
%
32
%

As a percentage of total revenues
41 % 40 %

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 three months ended ~~September 30, 2019,~~March 31, 2020, compared to the year-ago period, primarily due to (i) a ~~$1.2~~$0.2 million increase in personnel-related cost, driven primarily by salary expenses related to our annual merit performance program, higher payroll expenses due to the shifting of more resources from our yield ramp business to research and development activities, additional headcount, and an increase in stock based compensationdepreciation expense, ~~and~~ (ii) a ~~$0.5~~$0.2 million increase ~~in facilities and information technology related-costs driven primarily by increased in development costs for our cloud-based delivery for our Exensio platform and higher depreciation expense.~~
Research and development expenses increased for the nine months ended September 30, 2019, compared to the year-ago period due primarily to (i) a $2.6 million increase in personnel-related expense, driven by an increase in stock based compensation expense of $1.2 million, higher payroll expenses due to the shifting of more resources from our yield ramp business to research and development activities, additional headcount, and an increase in salary expenses related to our worldwide merit increases, and (ii) a $1.0 million increase in facilities and information technology (IT) related-costs, driven primarily by higher costs allocation for certain facilities and IT related-expenses which are calculated using a proportional allocation based on headcount, an increase in development costs for our cloud-based delivery for our Exensio platform, and higher depreciation expense for our laboratory equipment and 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 were partially offset by a $0.7 million decrease in subcontractor expenses that is primarily related to our ~~DFI~~DFI™ and Exensio ~~solutions.~~
solutions, and (iii) a $0.1 million increase in software licenses and maintenance expense, partially offset by a $0.2 million decrease in personnel-related costs. We anticipate our expenses in research and development will fluctuate in absolute dollars from period to period ~~as a result of cost control initiatives and~~due to the timing of product development projects and supporting revenue generating activity requirements.

Selling, General and Administrative

Three Months Ended
September 30,

Change

Nine Months Ended
September 30,

Change

2019

2018
$ % 2019 2018 $ %
Three Months Ended March 31,

Change

(Dollars in thousands)
2020

2019

$

%

Selling, general and administrative
$ 5,990 $ 5,507 $ 483 9
%
$ 19,940 $ 17,801 $ 2,139 12
%
$ 7,895 $ 7,011 $ 884 13 %
Selling, general and administrative as a percentage of total revenues
27
%
27
%
32
%
27
%

As a percentage of total revenues
37 % 34 %

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, travel and facilities cost allocations, and stock-based compensation charges.
32
~~Table of Contents~~
Selling, general and administrative expenses increased for the three months ended ~~September 30, 2019,~~March 31, 2020, compared to the year-ago period, primarily due to (i) a ~~$0.5~~$0.4 million increase in personnel-related expenses driven by higher payroll expenses allocated to selling and marketing activities as a result of shifting of resources from our yield ramp business, salary expenses related to our worldwide merit increases, and increase in stock-based compensation, andcosts, (ii) a ~~$0.1~~$0.3 million increase in ~~professional~~legal fees, ~~due mainly from timing of professional audit fees causing variance between the two periods. These increases~~and (iii) a $0.3 million increase in ~~selling, general and administrative~~subcontractor expenses, ~~were~~ partially offset by a $0.1 million decrease in travel ~~expenses resulting from~~expenses. We anticipate our ~~cost management effort, and a $0.1 million decrease in legal expense.~~
Selling, general and administrative expenses increased for the nine months ended September 30, 2019, compared to the year-ago period, primarily due to (i) a $2.2 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 yield ramp business, salary expenses related to our worldwide merit increases, an increase in accrued vacation benefits, and increase in recruiting expense, (ii) a $0.3 million increase in other facilities and IT related-expenses, and (iii) a $0.2 million increase in legal expense primarily related to a business acquisition in the second quarter of fiscal 2019. These increases in selling, general and administrative expenses ~~were partially offset by (i)~~will fluctuate in absolute dollars from period to period as a ~~$0.3 million decrease~~result of cost control initiatives and to support increased selling efforts 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 $0.2 million decrease in operating lease expense.the future.

Amortization of Other Acquired Intangible Assets

Three Months Ended
September 30,

Change

Nine Months Ended
September 30,

Change

2019

2018
$ % 2019 2018 $ %
Three Months Ended March 31,

Change

(Dollars in thousands)
2020

2019

$

%

Amortization of other acquired intangible assets
$ 174 $ 108 $ 66 61
%
$ 436 $ 326 $ 110 34
%
$ 173 $ 108 $ 65 60 %

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 three and nine months ended September 30, 2019, compared to the year-ago periods, was primarily related to amortization of other acquired intangible assets related to acquisition of certain assets from StreamMosaic, Inc.combination.

31
Table of Contents
Interest and Other ~~Income (Expense)~~Expense (Income), Net

Three Months Ended
September 30,

Change

Nine Months Ended
September 30,

Change

2019

2018
$ % 2019 2018 $ %
Three Months Ended March 31,

Change

(Dollars in thousands)
2020

2019

$

%

Interest and other income (expense), net
$ 202 $ 223 $ (21
)
(9
)%
$ 307 $ 283 $ 24 8
%
Interest and other expense (income), net
$ 20 $ 6 $ 14 233 %

Interest and other ~~income (expense)~~expense (income), net, primarily consists of interest income and foreign currency transaction exchange ~~gain (loss).~~gains and losses. Interest and other ~~income (expense)~~expense (income), net ~~slightly decreased~~increased for the three months ended ~~September 30, 2019,~~March 31, 2020, compared to year-ago period, primarily due to a decrease in interest income due to lower interest rates, partially offset by lower net unfavorable fluctuations in foreign exchange rates.
Income Tax Benefit

Three Months Ended March 31,

Change

(Dollars in thousands)

2020

2019

$

%

Income tax benefit
$ (3,479 ) $ (98 ) $ (3,381 ) 3,450 %
Income tax benefit increased $3.4 million for the three months ended March 31, 2020, compared to the year-ago period, primarily due to a decrease in other miscellaneous income and an increase in loss related to foreign currency forward contracts, partially offset by higher interest income and net favorable fluctuations in foreign exchange rates. Interest and other income (expense), net, slightly increased for the nine months ended September 30, 2019, compared to the year-ago period, primarily due to an increase in interest income and net favorable fluctuations in foreign exchange rates, partially offset by loss related to foreign currency forward contracts.
33
~~Table of Contents~~
~~Income Tax Benefit~~

Three Months Ended
September 30,

Change

Nine Months Ended
September 30,

Change

2019

2018
$ % 2019 2018 $ %
(Dollars in thousands)
Income tax benefit
$ (511
)
$ (535
)
$ (24
)
(4
)%
$ (1,458
)
$ (1,355
)
$ 103 8
%
~~Income~~excess tax benefit ~~is relatively flat for~~from employee stock compensation expense and as a result of the provisions of the CARES Act. During the three months ended ~~September 30, 2019, compared~~March 31, 2020, the Company recorded income tax benefit of $2.3 million from the carryback of federal NOLs pursuant to the ~~year-ago period. Income tax benefit increased for~~provisions of the nine months ended September 30, 2019, compared to the year-ago period, primarily due to the changes in forecasted income/loss between fiscal year 2019 and 2018, and higher excess tax benefit for employee stock compensation compared to the year-ago period.CARES Act.

Liquidity and Capital Resources

As of ~~September 30, 2019,~~March 31, 2020, our working capital, defined as total current assets less total current liabilities, was ~~$122.2~~$122.3 million, compared to ~~$137.7~~$119.6 million as of December 31, ~~2018.~~2019. Cash and cash equivalents were ~~$100.3~~$100.4 million as of ~~September 30, 2019,~~March 31, 2020, compared to ~~$96.1~~$97.6 million as of December 31, ~~2018.~~2019. As of ~~September 30, 2019,~~March 31, 2020, and December 31, ~~2018,~~2019, cash and cash equivalents held by our foreign subsidiaries were ~~$4.6~~$2.3 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.

Nine Months Ended
September 30,
Three Months Ended March 31,

2019

2018

$ Change

2020

2019

$ Change

(In thousands)

Net cash flows provided by (used in):

Operating activities
$ 23,011 $ 9,043 $ 13,968 $ 5,380 $ (151 ) $ 5,531
Investing activities
(9,501
)
(8,747
)
(754
)
(2,068 ) (2,357 ) 289
Financing activities
(9,226
)
(4,658
)
(4,568
)
(507 ) (3,174 ) 2,667
Effect of exchange rate changes on cash and cash equivalents
(114
)
(117
)
3 (25 ) 8 (33 )
Net increase (decrease) in cash and cash equivalents
$ 4,170 $ (4,479
)
$ 8,649 $ 2,780 $ (5,674 ) $ 8,454

Net Cash Flows Provided by (Used in) Operating Activities

Cash flow from operating activities during the ~~nine~~three months ended ~~September 30, 2019~~March 31, 2020 mostly consisted of net loss, adjusted for certain non-cash items which primarily consisted of depreciation and amortization, share-based compensation expense and deferred ~~taxes.~~tax assets. The ~~$14.0~~$5.5 million increase in cash flows from operating activities for the ~~nine~~three months ended ~~September 30, 2019,~~March 31, 2020, compared to the year-ago period, was driven primarily by ~~(i)~~ a ~~$0.5~~$2.2 million decrease in net loss, ~~(ii)~~ an increase in non-cash adjustments to net loss by ~~$0.1~~$2.4 million, which was primarily due to ~~an increase in stock-based compensation expense of $0.8 million, an increase in depreciation and amortization expense of $0.6 million, partially offset by~~ an increase in deferred tax assets of ~~$1.7~~$2.1 million, and ~~(iii)~~an increase in depreciation and amortization of $0.4 million, and a ~~$13.3~~$0.9 million increase in net change from operating assets and liabilities.
32
Table of Contents
The major contributors to the net change in operating assets and liabilities for the ~~nine~~three months ended ~~September 30, 2019~~March 31, 2020 were as follows:

●
Accounts receivable decreased by ~~$16.9~~$3.3 million, ~~for the nine months ended September 30, 2019~~ primarily due to increased collection ~~of significant past~~and lower invoicing activity due to the decline in revenue during the quarter, partially offset by increase in unbilled accounts receivables ~~from three customers in Asia.~~due to timing of billing and revenue recognition.

● Prepaid and other current assets increased by $1.9 million, primarily due to increase in income tax receivable, partially offset by decrease in contract assets due to timing of billing and revenue recognition related to our fixed-price service contracts.
● Other noncurrent assets decreased by $1.9 million, primarily due to decrease in noncurrent portion of unbilled receivables due to timing of billing and revenue recognition.
●
~~Other noncurrent assets~~Deferred revenues increased by $1.0 million, primarily due to ~~an increase in unbilled receivables resulting from increase in solutions revenue recognized during the third quarter of fiscal 2019.~~
●
~~Deferred revenue increased by $1.5 million primarily due to the~~ timing of billing and revenue recognition.

34
~~Table of Contents~~
~~Net~~ Cash Flows Used in Investing Activities

~~Net cash~~Cash used in investing activities ~~increased~~decreased by ~~$0.8~~$0.3 million for the ~~nine~~three months ended ~~September 30, 2019~~March 31, 2020 compared to the year-ago period. For the ~~nine~~three months ended ~~September 30, 2019,~~March 31 2020, cash flows used in investing activities related to (i) $6.9 million of property and equipment purchased primarily related to the construction of our DFI assets and expansion of our research and development laboratory and clean room, and (ii) a $2.7 million payment for a business acquisition. For the nine months ended September 30, 2018, cash flows used in investing activities related to property and equipment purchased for the development our DFI™ solution. For the three months ended March 31 2019, cash used in investing activities related to property and equipment purchased for the development our DFI™ solution, new office headquarters and expansion of our ~~DFI solution, furniture~~research and ~~fixture~~development laboratory and ~~leasehold improvements for the office headquarters.~~clean room.
Net Cash Flows Used in Financing Activities

Net cash used in financing activities ~~increased~~decreased by ~~$4.6~~$2.7 million for the ~~nine~~three months ended ~~September 30, 2019,~~March 31, 2020 compared to the year-ago period. For the ~~nine~~three months ended ~~September 30, 2019,~~March 31, 2020, net cash used in financing activities primarily consisted of ~~$9.6~~$1.5 million ~~in cash used to repurchase shares of our common stock, and $1.9 million in~~ cash payments for taxes related to net share settlement of equity awards, partially offset by ~~$2.5~~$1.0 million of proceeds from our Employee Stock Purchase Plan and exercise of stock options. For the ~~nine~~three months ended ~~September 30, 2018,~~March 31, 2019, net cash used in financing activities primarily consisted of ~~$5.2~~$3.9 million in cash used to repurchase shares of our common stock ~~$1.7~~and $0.6 million of cash payments for taxes related to net share settlement of equity awards, partially offset by ~~$2.3~~$1.3 million of proceeds from our Employee Stock Purchase Plan and exercise of stock options.
Off-Balance Sheet Agreements
We do not have any off-balance sheet arrangements, investments in special purpose entities or undisclosed borrowings or debt.
33
Table of Contents

Contractual Obligations

The following table summarizes our known contractual obligations (in thousands) as of ~~September 30, 2019:~~March 31, 2020:

Payments Due by Period

Contractual Obligations

2019
(remaining
three
months)

2020

2021

2022

2023

2024 and
thereafter

Total

Operating lease obligations(1)
$ 388 $ 1,842 $ 1,693 $ 1,510 $ 1,152 $ 3,673 $ 10,258
Purchase obligations(2)
6,612 7,259 1,005 62 3 ‒ 14,941
Total(3)
$ 7,000 $ 9,101 $ 2,698 $ 1,572 $ 1,155 $ 3,673 $ 25,199

Payments Due by Period

2020

(remaining

2025 and

Contractual Obligations

nine months)

2021

2022

2023

2024

thereafter

Total

Operating lease obligations(1)
$ 1,529 $ 1,776 $ 1,567 $ 1,108 $ 806 $ 2,976 $ 9,762
Purchase obligations(2)
8,422 2,905 447 364 320 321 12,779
Total(3)
$ 9,951 $ 4,681 $ 2,014 $ 1,472 $ 1,126 $ 3,297 $ 22,541

(1)
Refer to Note 54, Leases of ~~“Notes~~the Notes to Condensed Consolidated Financial Statements ~~(Unaudited)”~~ (Item 1 of Part I 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 ~~$2.8~~$2.6 million, which are not practicable to assign to any particular years, due to the inherent uncertainty of the tax positions. See Note 98 of “Notes to Condensed Consolidated Financial ~~Statements (Unaudited)” (Item 1 of Part I of this Report)~~Statements” for further discussion.

35
~~Table of Contents~~

Ite~~Item~~m 3. Quantitative and Qualitative Disclosures about Market Risk

We are exposed to three primary types of market risks: credit risk and counterparty risk, foreign currency exchange rate risk and interest rate 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 ~~September 30, 2019,~~March 31, 2020, we had cash and cash equivalents of ~~$100.3~~$100.4 million. Cash and cash equivalents consisted of cash and highly liquid money market instruments. 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 ~~September 30, 2019,~~March 31, 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.

Foreign Currency and Exchange Risk.   Certain of our payables for our international offices are denominated in the local currency, including the Euro, Yen and RMB. Therefore, a portion of our operating expenditures is subject to foreign currency risks. 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 income (expense), net and offsets the change in fair value of foreign currency denominated monetary assets and liabilities, which is also recorded in other income (expense), net. As of ~~September 30, 2019,~~March 31, 2020, we had no outstanding forward ~~contracts.~~contract. Subsequent to the end of ~~third~~first quarter of ~~2019,~~2020, we entered into one outstanding forward contract with a notional amount of ~~$8.0~~$8.2 million. The 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.

~~Off-Balance Sheet Arrangements~~
~~We do not have any off-balance sheet arrangements, investments in special purpose entities or undisclosed borrowings or debt.~~
34
Table of Contents

Ite~~Item~~m 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our principal executive officer and principal financial and accounting officer, evaluated the effectiveness of our ~~“disclosure~~"disclosure controls and ~~procedures”~~procedures" as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) as of ~~September 30, 2019,~~March 31, 2020, in connection with the filing of this Quarterly Report on Form 10-Q. Based on that evaluation as of ~~September 30, 2019,~~March 31, 2020, our principal executive officer and principal financial and accounting officer concluded that our disclosure controls and procedures were effective to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in rules and forms of the SEC and accumulated and communicated to our management as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There were no changes in the ~~Company's~~Company’s internal control over financial reporting during the three months ended ~~September 30, 2019,~~March 31, 2020, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

36
35
Table of Contents

PA~~PART~~RT II — OTHER INFORMATION

I~~Item~~tem 1. 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 FASB requirements. During the reported period, we were not a party to any material legal proceedings, thus no loss was probable and no amount was accrued at ~~September 30, 2019.~~March 31, 2020.
On May 6, 2020, we 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.

Ite~~Item~~m 1A. Risk Factors

Item 1A, “Risk Factors,” on pages 1312 through 1920 of the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2018, and Item 1A, “Risk Factors,” on page 36 of the Company’s Quarterly Report on Form 10-Q for the second quarter ended June 30,~~ 2019 ~~provide~~provides information on the significant risks associated with our business. Except as set forth below, there have been no subsequent material changes to these 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.
As a result of the global COVID-19 pandemic, 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 continue to limit the ability of our local employees to travel to customer sites or visit our other offices. Our offices in Italy and Germany were closed in February 2020 and by March 2020, our corporate headquarters in the United States and several other impacted locations were temporarily closed as well. In addition, our personnel worldwide are subject to various 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 or our partners’ or customers’ decision to use our products and services, our results of operations and overall financial performance may be harmed. 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, the extent and effectiveness of containment actions 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, our business 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.
It~~Item~~em 2. Unregistered Sales of Equity Securities and Use of Proceeds

The table below sets forth the information with respect to 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 three months ended September 30, 2019 (in thousands except per share amounts):
~~ISSUER PURCHASES OF EQUITY SECURITIES~~

Period

Total
Number of
Shares
Purchased
(in thousands)
(1)

Average
Price Paid
Per Share

Total Number
of Shares
Purchased
as Part of
Publicly
Announced
Programs
(in thousands)
(1)

Approximate
Dollar
Value of
Shares that
May Yet Be
Purchased
Under
Programs
(in thousands)
(1)

July 1, 2019 through July 31, 2019
— $ — — $ 17,293
August 1, 2019 through August 31, 2019
76 $ 11.62 76 $ 16,410
September 1, 2019 through September 30, 2019
95 (2) $ 12.37 95 (2) $ 15,233
Total
171 $ 12.04 171
~~(1)~~
On May 29, 2018, the Board of Directors adopted a new 2018 program to repurchase up to $25.0 million of common stock both on the open market and in privately negotiated transactions, from time to time, over the next two years. See Note 6 of “Notes to Condensed Consolidated Financial Statements (Unaudited)” (Item 1 of Part I of this Report) for further information regarding our stock repurchase program.
(2)
This includes approximately 10,000 shares which were previously owned by an employee that were tendered to the Company to pay the exercise price of the stock options in lieu of paying cash or fully utilizing the Company’s cashless exercise alternative. The shares were effectively repurchased by the Company at a market price of $12.63 a share.
37
~~Table of Contents~~
None.

I~~Item~~tem 3. Defaults Upon Senior Securities

None.

It~~Item~~em 4. Mine Safety Disclosures

None.

I~~Item~~tem 5. Other Information

None.

36
Table of Contents

I~~Item~~tem 6. Exhibits

Exhibit
Number


Description
10.1
Employment offer to Adnan Raza, dated January 23, 2020 (incorporated herein by reference to registrant's filing on Form 10-K filed on March 10, 2020).*
10.2 Amended and Restated Offer Letter Agreement between Christine Russell and PDF Solutions, Inc. dated March 9, 2020 (incorporated herein by reference to registrant's filing on Form 8-K/A filed on March 12, 2020).*

31.01

Certification of the principal executive officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of ~~2002.~~2002.†



31.02

Certification of the principal financial and accounting officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of ~~2002.~~2002.†



32.01

Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**



32.02

Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**



101.INS

XBRL Instance Document.†



101.SCH

XBRL Taxonomy Extension Schema Document.†



101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document.†



101.DEF

XBRL Taxonomy Extension Definition Linkbase Document.†



101.LAB

XBRL Taxonomy Extension Label Linkbase Document.†



101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document.†

__________________________

*
Indicates management contract or compensatory plan or arrangement.
†
Filed herewith.

***
Furnished, and not filed.

38
37
Table of Contents

SI~~SIGNATURES~~GNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


PDF SOLUTIONS, INC.








Date: ~~November 6, 2019~~May 7, 2020
By:
/s/ JOHN K. KIBARIAN



John K. Kibarian



President and Chief Executive Officer



(principal executive officer)


Date: ~~November 6, 2019~~May 7, 2020
By:
/s/ ~~CHRISTINE A. RUSSELL~~ADNAN RAZA



~~Christine A. Russell~~Adnan Raza



Executive Vice President, Finance and Chief Financial Officer



(principal financial and accounting officer)



39
38

	Nine Months Ended September 30, 2018
						Additional										Accumulated Other			Total
	Common Stock					Paid-In		Treasury Stock					Accumulated			Comprehensive			Stockholders’
	Shares			Amount		Capital		Shares		Amount			Deficit			Loss			Equity
Balances, December 31, 2017		32,112		$	5	$	297,950		7,688	$	(71,793	)	$	(27,089	)	$	(705	)	$	198,368
Cumulative-effect adjustment from adoption of ASU 2014-09		-			-		-		-		-			4,353			-			4,353
Issuance of common stock in connection with employee stock purchase plan		108			-		1,007		-		-			-			-			1,007
Issuance of common stock in connection with exercise of options		8			-		39		-		-			-			-			39
Vesting of restricted stock units		74			-		-		-		-			-			-			-
Purchases of treasury stock in connection with tax withholdings on restricted stock grants		-			-		-		36		(557	)		-			-			(557	)
Repurchases of common stock		(338	)		-		-		338		(4,123	)		-			-			(4,123	)
Stock-based compensation		-			-		2,871		-		-			-			-			2,871
Comprehensive income (loss)		-			-		-		-		-			(424	)		525			101
Balances, March 31, 2018		31,964			5		301,867		8,062		(76,473	)		(23,160	)		(180	)		202,059
Issuance of common stock in connection with exercise of options		51			-		377		-		-			-			-			377
Vesting of restricted stock units		159			-		-		-		-			-			-			-
Purchases of treasury stock in connection with tax withholdings on restricted stock grants		-			-		-		63		(819	)		-			-			(819	)
Repurchases of common stock		(99	)		-		-		99		(1,125	)		-			-			(1,125	)
Stock-based compensation		-			-		2,699		-		-			-			-			2,699
Comprehensive loss		-			-		-		-		-			(2,096	)		(771	)		(2,867	)
Balances, June 30, 2018		32,075			5		304,943		8,224		(78,417	)		(25,256	)		(951	)		200,324
Issuance of common stock in connection with employee stock purchase plan		92			-		824		-		-			-			-			824
Issuance of common stock in connection with exercise of options		9			-		53		-		-			-			-			53
Vesting of restricted stock units		81			-		-		-		-			-			-			-
Purchases of treasury stock in connection with tax withholdings on restricted stock grants		-			-		-		28		(334	)		-			-			(334	)
Stock-based compensation		-			-		2,278		-		-			-			-			2,278
Comprehensive loss		-			-		-		-		-			(2,082	)		(168	)		(2,250	)
Balances, September 30, 2018		32,257		$	5	$	308,098		8,252	$	(78,751	)	$	(27,338	)	$	(1,119	)	$	200,895

	(in thousands)			Amortization period (years)
Finite-lived intangible assets:
Developed technology	$	1,640			9
Customer relationship		700			9
Deferred revenue		(50	)
Net asset acquired	$	2,290
Goodwill		370
Purchase consideration	$	2,660

	Number of Options (in thousands)			Weighted Average Exercise Price per Share		Weighted Average Remaining Contractual Term (years)		Aggregate Intrinsic Value (in thousands)
Outstanding, January 1, 2019		1,027		$	9.75
Granted (weighted average fair value of $4.61 per share)		66		$	12.35
Exercised		(217	)	$	5.13
Canceled		(75	)	$	14.53
Expired		(55	)	$	16.09
Outstanding, September 30, 2019		746		$	9.79		4.54	$	2,521
Vested and expected to vest, September 30, 2019		732		$	10.33		4.45	$	2,502
Exercisable, September 30, 2019		582		$	9.79		3.33	$	2,291

						Weighted
				Weighted		Average
				Average		Remaining		Aggregate
	Number of			Exercise		Contractual		Intrinsic
	Options			Price per		Term		Value
	(in thousands)			Share		(years)		(in thousands)
Outstanding, January 1, 2020		745		$	10.64
Granted (weighted average fair value of $5.21 per share)		13		$	15.76
Exercised		(21	)	$	7.68
Canceled		(2	)	$	10.66
Expired		(9	)	$	8.86
Outstanding, March 31, 2020		726		$	10.84		4.44	$	1,566
Vested and expected to vest, March 31, 2020		713		$	10.79		4.35	$	1,560
Exercisable, March 31, 2020		562		$	10.10		3.18	$	1,484

	For the Three Months Ended March 31, 2019
			Change in
	Previously		Presentation			Current
	Reported		Reclassification			Presentation
Revenues:
Design-to-silicon-yield solutions	$	16,661	$	(16,661	)		N/A
Gainshare performance incentives		3,880		(3,880	)		N/A
Analytics		N/A		11,434		$	11,434
Integrated Yield Ramp		N/A		9,107			9,107
Total revenues	$	20,541	$	—		$	20,541

	Three Months Ended September 30,						Change						Nine Months Ended September 30,						Change
	2019			2018			$			%			2019			2018			$			%
(Dollars in thousands)
Solutions	$	16,208		$	13,976		$	2,232			16	%	$	46,298		$	47,431		$	(1,133	)		(2	)%
Gainshare performance incentives		5,706			6,237			(531	)		(9	)%		16,725			18,638			(1,913	)		(10	)%
Total revenues	$	21,914		$	20,213		$	1,701			8	%	$	63,023		$	66,069		$	(3,046	)		(5	)%
Solutions revenue as a percentage of total revenues		74	%		69	%								73	%		72	%
Gainshare performance incentives as a percentage of total revenues		26	%		31	%								27	%		28	%

	Three Months Ended March 31,						Change
	2020			2019			$			%
(Dollars in thousands)
Revenues:
Analytics	$	13,248		$	11,434		$	1,814			16	%
Integrated Yield Ramp		7,910			9,107			(1,197	)		(13	)%
Total revenues	$	21,158		$	20,541		$	617			3	%
Costs of revenues		8,487			7,867			620			8	%
Gross profit	$	12,671		$	12,674		$	(3	)		—	%
Gross margin		60	%		62	%

Analytics revenue as a percentage of total revenues		63	%		56	%
Integrated Yield Ramp revenue as a percentage of total revenues		37	%		44	%

	Three Months Ended September 30,						Change						Nine Months Ended September 30,						Change
	2019			2018			$			%			2019			2018			$		%
(Dollars in thousands)
Income tax benefit	$	(511	)	$	(535	)	$	(24	)		(4	)%	$	(1,458	)	$	(1,355	)	$	103		8	%

	●	Accounts receivable decreased by ~~$16.9~~$3.3 million, ~~for the nine months ended September 30, 2019~~ primarily due to increased collection ~~of significant past~~and lower invoicing activity due to the decline in revenue during the quarter, partially offset by increase in unbilled accounts receivables ~~from three customers in Asia.~~due to timing of billing and revenue recognition.

	●	Prepaid and other current assets increased by $1.9 million, primarily due to increase in income tax receivable, partially offset by decrease in contract assets due to timing of billing and revenue recognition related to our fixed-price service contracts.

	●	Other noncurrent assets decreased by $1.9 million, primarily due to decrease in noncurrent portion of unbilled receivables due to timing of billing and revenue recognition.

	●	~~Other noncurrent assets~~Deferred revenues increased by $1.0 million, primarily due to ~~an increase in unbilled receivables resulting from increase in solutions revenue recognized during the third quarter of fiscal 2019.~~

●	~~Deferred revenue increased by $1.5 million primarily due to the~~ timing of billing and revenue recognition.

	Payments Due by Period
Contractual Obligations	2019 (remaining three months)		2020		2021		2022		2023		2024 and thereafter		Total
Operating lease obligations(1)	$	388	$	1,842	$	1,693	$	1,510	$	1,152	$	3,673	$	10,258
Purchase obligations(2)		6,612		7,259		1,005		62		3		‒		14,941
Total(3)	$	7,000	$	9,101	$	2,698	$	1,572	$	1,155	$	3,673	$	25,199

	Payments Due by Period
	2020
	(remaining										2025 and
Contractual Obligations	nine months)		2021		2022		2023		2024		thereafter		Total
Operating lease obligations(1)	$	1,529	$	1,776	$	1,567	$	1,108	$	806	$	2,976	$	9,762
Purchase obligations(2)		8,422		2,905		447		364		320		321		12,779
Total(3)	$	9,951	$	4,681	$	2,014	$	1,472	$	1,126	$	3,297	$	22,541

	(1)	Refer to Note 54, Leases of ~~“Notes~~the Notes to Condensed Consolidated Financial Statements ~~(Unaudited)”~~ (Item 1 of Part I 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 ~~$2.8~~$2.6 million, which are not practicable to assign to any particular years, due to the inherent uncertainty of the tax positions. See Note 98 of “Notes to Condensed Consolidated Financial ~~Statements (Unaudited)” (Item 1 of Part I of this Report)~~Statements” for further discussion.

Period	Total Number of Shares Purchased (in thousands) (1)			Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Programs (in thousands) (1)			Approximate Dollar Value of Shares that May Yet Be Purchased Under Programs (in thousands) (1)
July 1, 2019 through July 31, 2019		—		$	—		—		$	17,293
August 1, 2019 through August 31, 2019		76		$	11.62		76		$	16,410
September 1, 2019 through September 30, 2019		95	(2)	$	12.37		95	(2)	$	15,233
Total		171		$	12.04		171

Exhibit Number		Description
10.1		Employment offer to Adnan Raza, dated January 23, 2020 (incorporated herein by reference to registrant's filing on Form 10-K filed on March 10, 2020).*

10.2		Amended and Restated Offer Letter Agreement between Christine Russell and PDF Solutions, Inc. dated March 9, 2020 (incorporated herein by reference to registrant's filing on Form 8-K/A filed on March 12, 2020).*

31.01		Certification of the principal executive officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of ~~2002.~~2002.†

31.02		Certification of the principal financial and accounting officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of ~~2002.~~2002.†

32.01		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**

32.02		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**

101.INS		XBRL Instance Document.†

101.SCH		XBRL Taxonomy Extension Schema Document.†

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document.†

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document.†

101.LAB		XBRL Taxonomy Extension Label Linkbase Document.†

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document.†

*	Indicates management contract or compensatory plan or arrangement.
†	Filed herewith.
	***	Furnished, and not filed.

	PDF SOLUTIONS, INC.


Date: ~~November 6, 2019~~May 7, 2020	By:	/s/ JOHN K. KIBARIAN
		John K. Kibarian
		President and Chief Executive Officer
		(principal executive officer)

Date: ~~November 6, 2019~~May 7, 2020	By:	/s/ ~~CHRISTINE A. RUSSELL~~ADNAN RAZA
		~~Christine A. Russell~~Adnan Raza
		Executive Vice President, Finance and Chief Financial Officer
		(principal financial and accounting officer)