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 |
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| For the Quarterly Period ended September 30, |
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☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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| 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.) |
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(Address of Principal Executive Offices) | (Zip Code) |
(408) 280-7900
(Registrant’sRegistrant’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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”filer,” “smaller reporting company” and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act.
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| Emerging growth company | ☐ |
If an emerging growth company, indicate 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. ☐ 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 ☑
The number of
There were 36,629,905 shares outstanding of the Registrant’sRegistrant’s Common Stock outstanding as of October 30, 2017 was 31,947,582.31, 2020.
PART I — FINANCIAL INFORMATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(in thousands, except par value)
September 30, | December 31, | |||||||||||||||
September 30, 2017 | December 31, 2016 | 2020 | 2019 | |||||||||||||
ASSETS | ||||||||||||||||
Current assets: | ||||||||||||||||
Cash and cash equivalents | $ | 100,750 | $ | 116,787 | $ | 118,386 | $ | 97,605 | ||||||||
Accounts receivable, net of allowance of $324 and $200, respectively | 52,954 | 48,157 | ||||||||||||||
Short-term investments | 49,983 | 0 | ||||||||||||||
Accounts receivable, net of allowance for doubtful accounts of $963 in 2020 and $213 in 2019 | 40,388 | 40,651 | ||||||||||||||
Prepaid expenses and other current assets | 6,580 | 5,335 | 9,310 | 9,320 | ||||||||||||
Total current assets | 160,284 | 170,279 | 218,067 | 147,576 | ||||||||||||
Property and equipment, net | 23,604 | 19,341 | 39,487 | 40,798 | ||||||||||||
Operating lease right-of-use assets, net | 6,712 | 7,609 | ||||||||||||||
Goodwill | 1,923 | 215 | 2,293 | 2,293 | ||||||||||||
Intangible assets, net | 6,325 | 4,223 | 5,269 | 6,221 | ||||||||||||
Deferred tax assets | 18,522 | 15,640 | ||||||||||||||
Deferred tax assets, net | 30,498 | 25,327 | ||||||||||||||
Other non-current assets | 11,312 | 12,631 | 8,282 | 9,720 | ||||||||||||
Total assets | $ | 221,970 | $ | 222,329 | $ | 310,608 | $ | 239,544 | ||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||
Current liabilities: | ||||||||||||||||
Accounts payable | $ | 2,608 | $ | 2,206 | $ | 2,212 | $ | 7,636 | ||||||||
Accrued compensation and related benefits | 5,450 | 5,959 | 5,396 | 5,072 | ||||||||||||
Accrued and other current liabilities | 2,436 | 2,080 | 3,001 | 1,665 | ||||||||||||
Operating lease liabilities – current portion | 1,763 | 1,867 | ||||||||||||||
Deferred revenues – current portion | 7,624 | 8,189 | 19,074 | 10,639 | ||||||||||||
Billings in excess of recognized revenue | 289 | 88 | ||||||||||||||
Billings in excess of recognized revenues | 1,430 | 1,117 | ||||||||||||||
Total current liabilities | 18,407 | 18,522 | 32,876 | 27,996 | ||||||||||||
Long-term income taxes payable | 2,914 | 3,354 | 5,137 | 5,368 | ||||||||||||
Non-current operating lease liabilities | 6,764 | 7,677 | ||||||||||||||
Other non-current liabilities | 2,352 | 1,650 | 1,054 | 2,346 | ||||||||||||
Total liabilities | 23,673 | 23,526 | 45,831 | 43,387 | ||||||||||||
Commitments and contingencies (Note 9) | ||||||||||||||||
Stockholders’ equity: | ||||||||||||||||
Commitments and contingencies (Note 13) | ||||||||||||||||
Stockholders’ equity: | ||||||||||||||||
Preferred stock, $0.00015 par value, 5,000 shares authorized, no shares issued and outstanding | — | — | $ | 0 | $ | 0 | ||||||||||
Common stock, $0.00015 par value, 70,000 shares authorized: shares issued 39,506 and 38,514, respectively; shares outstanding 31,882 and 31,864, respectively | 5 | 5 | ||||||||||||||
Common stock, $0.00015 par value, 70,000 shares authorized; shares issued 46,117 and 41,797, respectively; shares outstanding 36,626 and 32,503, respectively | 5 | 5 | ||||||||||||||
Additional paid-in-capital | 294,359 | 281,423 | 403,450 | 325,197 | ||||||||||||
Treasury stock at cost, 7,625 and 6,650 shares, respectively | (70,739 | ) | (54,882 | ) | ||||||||||||
Treasury stock at cost, 9,491 and 9,294 shares, respectively | (94,992 | ) | (91,695 | ) | ||||||||||||
Accumulated deficit | (24,455 | ) | (25,752 | ) | (42,784 | ) | (35,870 | ) | ||||||||
Accumulated other comprehensive loss | (873 | ) | (1,991 | ) | (902 | ) | (1,480 | ) | ||||||||
Total stockholders’ equity | 198,297 | 198,803 | ||||||||||||||
Total liabilities and stockholders’ equity | $ | 221,970 | $ | 222,329 | ||||||||||||
Total stockholders’ equity | 264,777 | 196,157 | ||||||||||||||
Total liabilities and stockholders’ equity | $ | 310,608 | $ | 239,544 |
See accompanying Notes to Condensed Consolidated Financial Statements (unaudited).
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOMELOSS
(unaudited)
(in thousands, except per share amounts)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Revenues: | ||||||||||||||||
Design-to-silicon-yield solutions | $ | 19,229 | $ | 18,552 | $ | 55,426 | $ | 57,704 | ||||||||
Gainshare performance incentives | 7,288 | 8,707 | 19,668 | 21,324 | ||||||||||||
Total revenues | 26,517 | 27,259 | 75,094 | 79,028 | ||||||||||||
Costs of Design-to-silicon-yield solutions: | ||||||||||||||||
Direct costs of Design-to-silicon-yield solutions | 12,295 | 11,366 | 34,913 | 32,034 | ||||||||||||
Amortization of acquired technology | 136 | 86 | 327 | 278 | ||||||||||||
Total cost of Design-to-silicon-yield solutions | 12,431 | 11,452 | 35,240 | 32,312 | ||||||||||||
Gross profit | 14,086 | 15,807 | 39,854 | 46,716 | ||||||||||||
Operating expenses: | ||||||||||||||||
Research and development | 7,875 | 7,017 | 22,432 | 20,388 | ||||||||||||
Selling, general and administrative | 5,680 | 5,548 | 17,775 | 15,766 | ||||||||||||
Amortization of other acquired intangible assets | 107 | 106 | 291 | 340 | ||||||||||||
Total operating expenses | 13,662 | 12,671 | 40,498 | 36,494 | ||||||||||||
Income (loss) from operations | 424 | 3,136 | (644 | ) | 10,222 | |||||||||||
Interest and other expense, net | (104 | ) | (101 | ) | (305 | ) | (389 | ) | ||||||||
Income (loss) before income taxes | 320 | 3,035 | (949 | ) | 9,833 | |||||||||||
Income tax provision (benefit) | (270 | ) | 1,051 | (2,246 | ) | 3,655 | ||||||||||
Net income | $ | 590 | $ | 1,984 | $ | 1,297 | $ | 6,178 | ||||||||
Net income per share: | ||||||||||||||||
Basic | $ | 0.02 | $ | 0.06 | $ | 0.04 | $ | 0.20 | ||||||||
Diluted | $ | 0.02 | $ | 0.06 | $ | 0.04 | $ | 0.19 | ||||||||
Weighted average common shares: | ||||||||||||||||
Basic | 32,078 | 31,413 | 32,060 | 31,286 | ||||||||||||
Diluted | 32,969 | 32,578 | 33,317 | 32,144 | ||||||||||||
Net income | $ | 590 | $ | 1,984 | $ | 1,297 | $ | 6,178 | ||||||||
Other comprehensive income: | ||||||||||||||||
Foreign currency translation adjustments, net of tax | 409 | 157 | 1,117 | 331 | ||||||||||||
Comprehensive income | $ | 999 | $ | 2,141 | $ | 2,414 | $ | 6,509 |
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Revenues: | ||||||||||||||||
Analytics | $ | 14,346 | $ | 12,691 | $ | 42,766 | $ | 36,099 | ||||||||
Integrated Yield Ramp | 8,766 | 9,223 | 22,912 | 26,924 | ||||||||||||
Total revenues | 23,112 | 21,914 | 65,678 | 63,023 | ||||||||||||
Costs and Expenses: | ||||||||||||||||
Costs of revenues | 9,493 | 8,715 | 26,926 | 24,415 | ||||||||||||
Research and development | 8,328 | 8,435 | 24,672 | 23,993 | ||||||||||||
Selling, general and administrative | 8,420 | 5,990 | 24,052 | 19,940 | ||||||||||||
Amortization of other acquired intangible assets | 174 | 174 | 521 | 436 | ||||||||||||
Restructuring charges | 0 | 0 | 0 | 92 | ||||||||||||
Interest and other expense (income), net | 361 | (202 | ) | 530 | (307 | ) | ||||||||||
Loss before income taxes | (3,664 | ) | (1,198 | ) | (11,023 | ) | (5,546 | ) | ||||||||
Income tax benefit | (930 | ) | (511 | ) | (4,109 | ) | (1,458 | ) | ||||||||
Net loss | $ | (2,734 | ) | $ | (687 | ) | $ | (6,914 | ) | $ | (4,088 | ) | ||||
Other comprehensive income (loss): | ||||||||||||||||
Foreign currency translation adjustments, net of tax | $ | 540 | $ | (461 | ) | $ | 581 | $ | (477 | ) | ||||||
Change in unrealized losses related to available-for-sale debt securities, net of tax | (3 | ) | 0 | (3 | ) | 0 | ||||||||||
Total other comprehensive income (loss) | $ | 537 | $ | (461 | ) | $ | 578 | $ | (477 | ) | ||||||
Comprehensive loss | $ | (2,197 | ) | $ | (1,148 | ) | $ | (6,336 | ) | $ | (4,565 | ) | ||||
Net loss per share: | ||||||||||||||||
Basic | $ | (0.08 | ) | $ | (0.02 | ) | $ | (0.21 | ) | $ | (0.13 | ) | ||||
Diluted | $ | (0.08 | ) | $ | (0.02 | ) | $ | (0.21 | ) | $ | (0.13 | ) | ||||
Weighted average common shares: | ||||||||||||||||
Basic | 35,479 | 32,392 | 33,696 | 32,405 | ||||||||||||
Diluted | 35,479 | 32,392 | 33,696 | 32,405 |
See accompanying Notes to Condensed Consolidated Financial Statements (unaudited).
CONDENDSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(unaudited)
(in thousands)
Nine Months Ended September 30, 2020 | ||||||||||||||||||||||||||||||||
Accumulated | ||||||||||||||||||||||||||||||||
Additional | Other | Total | ||||||||||||||||||||||||||||||
Common Stock | Paid-In | Treasury Stock | Accumulated | Comprehensive | Stockholders’ | |||||||||||||||||||||||||||
Shares | Amount | Capital | Shares | Amount | Deficit | Loss | Equity | |||||||||||||||||||||||||
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 | 89 | 0 | 810 | 0 | 0 | 0 | 0 | 810 | ||||||||||||||||||||||||
Issuance of common stock in connection with exercise of options | 21 | 0 | 161 | 0 | 0 | 0 | 0 | 161 | ||||||||||||||||||||||||
Vesting of restricted stock units | 182 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||||||||
Purchases of treasury stock in connection with tax withholdings on restricted stock grants | 0 | 0 | 0 | 93 | (1,478 | ) | 0 | 0 | (1,478 | ) | ||||||||||||||||||||||
Stock-based compensation expense | - | 0 | 3,513 | - | 0 | 0 | 0 | 3,513 | ||||||||||||||||||||||||
Comprehensive loss | - | 0 | 0 | - | 0 | (528 | ) | (166 | ) | (694 | ) | |||||||||||||||||||||
Balances, March 31, 2020 | 32,795 | 5 | 329,681 | 9,387 | (93,173 | ) | (36,398 | ) | (1,646 | ) | 198,469 | |||||||||||||||||||||
Issuance of common stock in connection with exercise of options | 56 | 0 | 463 | 0 | 0 | 0 | 0 | 463 | ||||||||||||||||||||||||
Vesting of restricted stock units | 131 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||||||||
Purchases of treasury stock in connection with tax withholdings on restricted stock grants | 0 | 0 | 0 | 52 | (795 | ) | 0 | 0 | (795 | ) | ||||||||||||||||||||||
Stock-based compensation expense | - | 0 | 3,013 | - | 0 | 0 | 0 | 3,013 | ||||||||||||||||||||||||
Comprehensive income (loss) | - | 0 | 0 | - | 0 | (3,652 | ) | 207 | (3,445 | ) | ||||||||||||||||||||||
Balances, June 30, 2020 | 32,982 | 5 | 333,157 | 9,439 | (93,968 | ) | (40,050 | ) | (1,439 | ) | 197,705 | |||||||||||||||||||||
Issuance of common stock, net of issuance costs of $0.1 million | 3,307 | 0 | 65,077 | 0 | 0 | 0 | 0 | 65,077 | ||||||||||||||||||||||||
Issuance of common stock in connection with employee stock purchase plan | 93 | 0 | 860 | 0 | 0 | 0 | 0 | 860 | ||||||||||||||||||||||||
Issuance of common stock in connection with exercise of options | 101 | 0 | 1,210 | 0 | 0 | 0 | 0 | 1,210 | ||||||||||||||||||||||||
Vesting of restricted stock units | 143 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||||||||
Purchases of treasury stock in connection with tax withholdings on restricted stock grants | 0 | 0 | 0 | 52 | (1,024 | ) | 0 | 0 | (1,024 | ) | ||||||||||||||||||||||
Stock-based compensation expense | - | 0 | 3,146 | - | 0 | 0 | 0 | 3,146 | ||||||||||||||||||||||||
Comprehensive income (loss) | - | 0 | 0 | - | 0 | (2,734 | ) | 537 | (2,197 | ) | ||||||||||||||||||||||
Balances, September 30, 2020 | 36,626 | $ | 5 | $ | 403,450 | 9,491 | $ | (94,992 | ) | $ | (42,784 | ) | $ | (902 | ) | $ | 264,777 |
See accompanying Notes to Condensed Consolidated Financial Statements (unaudited)
PDF SOLUTIONS, INC.
CONDENSEDCONDENDSED CONSOLIDATED STATEMENTS OF CASH FLOWSSTOCKHOLDERS’ EQUITY
(unaudited)
(in thousands)
Nine Months Ended September 30, | ||||||||
2017 | 2016 | |||||||
Operating activities: | ||||||||
Net income | $ | 1,297 | $ | 6,178 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 3,549 | 2,584 | ||||||
Stock-based compensation expense | 8,737 | 7,935 | ||||||
Amortization of acquired intangible assets | 618 | 617 | ||||||
Deferred taxes | (3,514 | ) | 1,083 | |||||
Loss on disposal of property and equipment | 5 | 107 | ||||||
Provision for (reversal of) allowance for doubtful accounts | 124 | (99 | ) | |||||
Unrealized loss (gain) on foreign currency forward contract | (6 | ) | (54 | ) | ||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable, net of allowance | (4,921 | ) | (10,486 | ) | ||||
Prepaid expenses and other current assets | (1,142 | ) | (1,486 | ) | ||||
Accounts payable | 1,611 | 33 | ||||||
Accrued compensation and related benefits | (721 | ) | 277 | |||||
Accrued and other liabilities | (225 | ) | 139 | |||||
Deferred revenues | (682 | ) | 3,959 | |||||
Billings in excess of recognized revenues | 200 | (1,194 | ) | |||||
Other non-current assets | 1,331 | (7,764 | ) | |||||
Net cash provided by operating activities | 6,261 | 1,829 | ||||||
Investing activities: | ||||||||
Payments for business acquisitions, net of cash acquired | (3,841 | ) | - | |||||
Purchases of property and equipment | (6,942 | ) | (8,860 | ) | ||||
Net cash used in investing activities | (10,783 | ) | (8,860 | ) | ||||
Financing activities: | ||||||||
Proceeds from exercise of stock options | 2,304 | 1,132 | ||||||
Proceeds from employee stock purchase plan | 1,866 | 1,558 | ||||||
Repurchases of common stock | (13,418 | ) | (2,182 | ) | ||||
Payments for taxes related to net share settlement of equity awards | (2,439 | ) | (1,161 | ) | ||||
Net cash used in financing activities | (11,687 | ) | (653 | ) | ||||
Effect of exchange rate changes on cash and cash equivalents | 172 | 60 | ||||||
Net change in cash and cash equivalents | (16,037 | ) | (7,624 | ) | ||||
Cash and cash equivalents, beginning of period | 116,787 | 126,158 | ||||||
Cash and cash equivalents, end of period | $ | 100,750 | $ | 118,534 | ||||
Supplemental disclosure of cash flow information: | ||||||||
Cash paid during the period for: | ||||||||
Taxes | $ | 1,876 | $ | 2,616 | ||||
Property and equipment received and accrued in accounts payable and accrued and other liabilities | $ | 1,533 | $ | 913 |
Nine Months Ended September 30, 2019 | ||||||||||||||||||||||||||||||||
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 | 0 | 782 | 0 | 0 | 0 | 0 | 782 | ||||||||||||||||||||||||
Issuance of common stock in connection with exercise of options | 87 | 0 | 518 | 0 | 0 | 0 | 0 | 518 | ||||||||||||||||||||||||
Vesting of restricted stock units | 104 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||||||||
Purchases of treasury stock in connection with tax withholdings on restricted stock grants | 0 | 0 | 0 | 54 | (557 | ) | 0 | 0 | (557 | ) | ||||||||||||||||||||||
Repurchases of common stock | (314 | ) | 0 | 0 | 314 | (3,917 | ) | 0 | 0 | (3,917 | ) | |||||||||||||||||||||
Stock-based compensation expense | - | 0 | 3,469 | - | 0 | 0 | 0 | 3,469 | ||||||||||||||||||||||||
Comprehensive loss | - | 0 | 0 | - | 0 | (2,691 | ) | (52 | ) | (2,743 | ) | |||||||||||||||||||||
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 | 0 | 326 | 0 | 0 | 0 | 0 | 326 | ||||||||||||||||||||||||
Vesting of restricted stock units | 176 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||||||||
Purchases of treasury stock in connection with tax withholdings on restricted stock grants | 0 | 0 | 0 | 72 | (918 | ) | 0 | 0 | (918 | ) | ||||||||||||||||||||||
Repurchases of common stock | (300 | ) | 0 | 0 | 300 | (3,790 | ) | 0 | 0 | (3,790 | ) | |||||||||||||||||||||
Stock-based compensation expense | - | 0 | 2,601 | - | 0 | 0 | 0 | 2,601 | ||||||||||||||||||||||||
Comprehensive income (loss) | - | 0 | 0 | - | 0 | (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 | 0 | 751 | 0 | 0 | 0 | 0 | 751 | ||||||||||||||||||||||||
Issuance of common stock in connection with exercise of options | 53 | 0 | 267 | 0 | 0 | 0 | 0 | 267 | ||||||||||||||||||||||||
Vesting of restricted stock units | 92 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||||||||
Purchases of treasury stock in connection with tax withholdings on restricted stock grants and exercise of options | 0 | 0 | 0 | 40 | (524 | ) | 0 | 0 | (524 | ) | ||||||||||||||||||||||
Repurchases of common stock | (171 | ) | 0 | 0 | 171 | (2,060 | ) | 0 | 0 | (2,060 | ) | |||||||||||||||||||||
Stock-based compensation expense | - | 0 | 2,809 | - | 0 | 0 | 0 | 2,809 | ||||||||||||||||||||||||
Comprehensive loss | - | 0 | 0 | - | 0 | (687 | ) | (461 | ) | (1,148 | ) | |||||||||||||||||||||
Balances, September 30, 2019 | 32,350 | $ | 5 | $ | 322,183 | 9,246 | $ | (90,908 | ) | $ | (34,540 | ) | $ | (1,753 | ) | $ | 194,987 |
See accompanying Notes to Condensed Consolidated Financial Statements (unaudited).
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
Nine Months Ended September 30, | ||||||||
2020 | 2019 | |||||||
Cash flows from operating activities: | ||||||||
Net loss | $ | (6,914 | ) | $ | (4,088 | ) | ||
Adjustments to reconcile net loss to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 5,030 | 4,306 | ||||||
Stock-based compensation expense | 9,476 | 8,642 | ||||||
Amortization of acquired intangible assets | 952 | 867 | ||||||
Amortization of costs capitalized to obtain revenue contracts | 367 | 344 | ||||||
Adjustment to contingent consideration related to acquisition | 0 | 36 | ||||||
Provision (reversal of allowance) for doubtful accounts and write-off of accounts receivable | (50 | ) | 67 | |||||
Loss on disposal and write-down in carrying value of property and equipment | 321 | 130 | ||||||
Accretion of discount on short-term investments | (3 | ) | 0 | |||||
Deferred taxes | (5,309 | ) | (3,998 | ) | ||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | 313 | 16,946 | ||||||
Prepaid expenses and other current assets | 235 | (236 | ) | |||||
Operating lease right-of-use assets | 1,048 | 1,089 | ||||||
Other non-current assets | 1,442 | (2,937 | ) | |||||
Accounts payable | (3,900 | ) | (191 | ) | ||||
Accrued compensation and related benefits | 227 | (431 | ) | |||||
Accrued and other liabilities | 1,568 | 1,393 | ||||||
Deferred revenues | 6,928 | 1,482 | ||||||
Billings in excess of recognized revenues | 313 | 584 | ||||||
Operating lease liabilities | (1,168 | ) | (994 | ) | ||||
Net cash provided by operating activities | 10,876 | 23,011 | ||||||
Cash flows from investing activities: | ||||||||
Purchases of short-term investments | (49,983 | ) | 0 | |||||
Purchases of property and equipment | (4,786 | ) | (6,841 | ) | ||||
Prepayment for the purchase of property and equipment | (579 | ) | 0 | |||||
Payment for business acquisition | 0 | (2,660 | ) | |||||
Cash used in investing activities | (55,348 | ) | (9,501 | ) | ||||
Cash flows from financing activities: | ||||||||
Proceeds from issuance of common stock, net of issuance costs paid | 64,995 | 0 | ||||||
Proceeds from exercise of stock options | 1,834 | 983 | ||||||
Proceeds from employee stock purchase plan | 1,670 | 1,534 | ||||||
Payments for taxes related to net share settlement of equity awards | (3,297 | ) | (1,898 | ) | ||||
Repurchases of common stock | 0 | (9,639 | ) | |||||
Repurchases of contingent consideration related to acquisition | 0 | (206 | ) | |||||
Net cash provided by (used in) financing activities | 65,202 | (9,226 | ) | |||||
Effect of exchange rate changes on cash and cash equivalents | 51 | (114 | ) | |||||
Net change in cash and cash equivalents | 20,781 | 4,170 | ||||||
Cash and cash equivalents, beginning of period | 97,605 | 96,089 | ||||||
Cash and cash equivalents, end of period | $ | 118,386 | $ | 100,259 |
Continued on next page.
PDF SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(unaudited)
(in thousands)
Nine Months Ended September 30, | ||||||||
2020 | 2019 | |||||||
Supplemental disclosure of cash flow information: | ||||||||
Cash paid during the period for taxes | $ | 2,188 | $ | 2,454 | ||||
Cash paid for amounts included in the measurement of operating lease liabilities | $ | 1,598 | $ | 1,268 | ||||
Supplemental disclosure of noncash information: | ||||||||
Stock-based compensation capitalized as software development costs | $ | 190 | $ | 244 | ||||
Property and equipment received and accrued in accounts payable and accrued and other liabilities | $ | 161 | $ | 1,340 | ||||
Advances for purchase of fixed assets transferred from prepaid assets to property and equipment | $ | 0 | $ | 1,416 | ||||
Operating lease liabilities arising from obtaining right-of-use assets | $ | 151 | $ | 0 | ||||
Issuance costs for common stock included in accounts payable and accrued and other liabilities | $ | 82 | $ | 0 | ||||
Common shares repurchased from a cashless exercise of stock options | $ | 0 | $ | 128 |
See accompanying Notes to Condensed Consolidated Financial Statements (unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. BASIS OF PRESENTATION
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-Q10-Q and Article 10 of Regulation S-X.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 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’sCompany’s Annual Report on Form 10-K10-K for the year ended December 31, 2016.2019.
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, 2016,2019, 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 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 provided by operating activities.
Change in Presentation
In the fourth quarter of 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.
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):
Three Months Ended September 30, 2019 | Nine Months Ended September 30, 2019 | |||||||||||||||||||||||
Change in | Change in | |||||||||||||||||||||||
Previously | Presentation | Current | Previously | Presentation | Current | |||||||||||||||||||
Reported | Reclassification | Presentation | Reported | Reclassification | Presentation | |||||||||||||||||||
Revenues: | ||||||||||||||||||||||||
Solutions | $ | 16,208 | $ | (16,208 | ) | N/A | $ | 46,298 | $ | (46,298 | ) | N/A | ||||||||||||
Gainshare performance incentives | 5,706 | (5,706 | ) | N/A | 16,725 | (16,725 | ) | N/A | ||||||||||||||||
Analytics | N/A | 12,691 | $ | 12,691 | N/A | 36,099 | $ | 36,099 | ||||||||||||||||
Integrated Yield Ramp | N/A | 9,223 | 9,223 | N/A | 26,924 | 26,924 | ||||||||||||||||||
Total revenues | $ | 21,914 | $ | 0 | $ | 21,914 | $ | 63,023 | $ | 0 | $ | 63,023 |
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 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”) 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, assumptions made in analysis of allowance for fixed-price solution implementation service contracts,doubtful accounts, impairment of goodwill and long-lived assets, realization of deferred tax assets, and accounting for goodwill and intangible assets,lease obligations, stock-based compensation expense, and accounting for income taxes. Actual results could differ from those estimates.
The global COVID-19 pandemic has impacted the operations and purchasing decisions of 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 able to provide uninterrupted access to its products and services due to its globally distributed workforce, many of whom are working remotely, and its pre-existing infrastructure that supports secure access to the Company’s internal systems. If, however, the COVID-19 pandemic has a substantial impact on the productivity of the Company’s employees or 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.
Cash and Cash Equivalents and Short-term Investments
The Company considers all highly liquid investments with an original maturity of 90 days or less or investments with a remaining maturity of 90 days or less at the time of purchase to be cash equivalents, and those investments with original maturities greater than 90 days and less than one year to be short-term investments. The Company classifies securities with readily determinable market values as available-for-sale. Short-term investments include available-for-sale securities and are carried at estimated fair value, with the unrealized gains and losses deemed temporary in nature, net of tax, reported as a component of accumulated other comprehensive loss in stockholders’ equity. Realized gains and losses and declines in value determined to be other than temporary are based on the specific identification method and are included as a component of other expense, net in the Condensed Consolidated Statements of Operations and Comprehensive Loss.
The Company periodically reviews short-term investments for impairment. In the event a decline in value is determined to be other-than-temporary, an impairment loss is recognized. When determining if a decline in value is other-than-temporary, the Company takes into consideration the current market conditions, the duration and severity of and the reason for the decline, and the likelihood that it would need to sell the security prior to a recovery of par value.
As of September 30, 2020, short-term investments consisted solely of about $50.0 million of U.S. Treasury bills. The cost of these securities approximated fair value and there was 0 material gross realized or unrealized gains or losses as of September 30, 2020. As of December 31, 2019, the Company held 0 short-term investments. There were also no impairments in the investments’ value in the three and nine months ended September 30, 2020. Refer to Note 12 “Fair Value Measurements” for further discussion on the Company’s investments.
Recently Adopted Accounting Standards
Intangibles – Goodwill and Other
In January 2017, the Financial Accounting Standards Board (or FASB) issued Accounting Standards Update (ASU) No.2017-04, Intangibles – Goodwill and Other (Topic 350). This standard eliminates step 2 from the annual goodwill impairment test. This update was effective for the Company beginning in the first quarter of 2020. The Company adopted this standard on January 1, 2020, and it did not have a material impact on its condensed consolidated financial statements and footnote disclosures.
Revenue RecognitionCustomer’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 was effective for the Company beginning in the first quarter of 2020. 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 September 30, 2020, the implementation costs capitalized by the Company pertaining to a cloud computing arrangement, which related to sales order and customer relation management, amounted to $0.2 million. 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 nine months ended September 30, 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 the period covered by an option to extend the arrangement that is reasonably certain of being exercised. The amortization expense related to these assets for the three and nine months ended September 30, 2020 was immaterial.
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.
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 internal information, 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, 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 continues 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 ASU to have a material impact on its condensed consolidated financial statements or the related 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 condensed 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 August 2020, the FASB issued ASU No.2020-16, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 8150-20): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which is intended to simplify the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. The guidance allows for either full retrospective adoption or modified retrospective adoption. Additionally, the ASU will require entities to use the “if-converted” method when calculating diluted earnings per share for convertible instruments. The ASU will be effective for annual reporting periods beginning after December 15, 2023 for SRCs and interim periods within those annual periods. Early adoption is permitted. 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.
2. REVENUE FROM CONTRACTS WITH CUSTOMERS
The Company derives revenue from two sources: Design-to-silicon-yield solutionsAnalytics revenue and Gainshare performance incentives.
Design-to-silicon-yield solutions — Revenues that are derived from Design-to-silicon-yield solutions come from services and software and hardware licenses. The Company recognizes revenue for each element of Design-to-silicon-yield solutions as follows:Integrated Yield Ramp revenue.
The Company generatesrecognizes 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 on a relative basis using standalone selling price.
Analytics Revenue
Analytics revenue is derived from the following primary offerings: licenses and services for Exensio Software, Exensio SaaS, DFI™ and 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 the time of the inception of the arrangement when control transfers to the customers, if the software license is distinct from the services offered by us. Revenue from post-contract support is recognized over the contract term on a straight-line basis, because we are providing (i) support and (ii) unspecified software updates on a when-and-if available basis over the contract term. Revenue from time-based-licensed software is allocated to each performance obligation and is recognized either at a point in time or over time as follows. The license component is recognized at the time when control transfers to the customer, with the post-contract support component recognized ratably over the committed term of the contract. For contracts with any combination of licenses, support, and other services, distinct performance obligations are accounted for separately. For contracts with multiple performance obligations, we allocate the transaction price of the contract to each performance obligation on a relative basis using standalone selling price (or SSP) attributed to each performance obligation.
Revenue from Exensio SaaS arrangements, which allow for the use of a cloud-based software product or service over a contractually determined period of time without taking possession of software, is accounted for as subscriptions and is recognized as revenue ratably, on a straight-line basis, over the subscription period beginning on the date the service is first made available to customers.
Revenue from DFI™ and CV® systems that do not include performance incentives based on customers’ yield achievement is recognized primarily as services are performed. Where there are distinct performance obligations, the Company allocates revenue to all deliverables based on their SSPs. For these contracts with multiple performance obligations, the Company allocate the transaction price of the contract to each performance obligation on a relative basis using SSP attributed to each performance obligation. Where there are not discrete performance obligations, historically, revenue is primarily recognized as services are performed using a percentage of completion method based on costs or labor-hours inputs, whichever is the most appropriate measure of the progress made towards completion of the contract. The estimation of percentage of completion method is complex and subject to many variables that require significant portionjudgement. Please refer to “Significant Judgements” section of its Design-to-silicon-yield solutionsthis Note for further discussion.
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 solution implementation servicecontracts.
Revenue under these project–based contracts, which are delivered over a specific period of time. These contracts require reliable estimation of costs to perform obligations and the overall scope of each engagement. Revenue under project–based contractstime, typically for solution implementation servicesa fixed fee component paid on a set schedule, is recognized as services are performed using a percentage of completion method based on costs or labor-inputs, whichever is the most appropriate measure of the progress towards completion of the contract. Where there are distinct performance obligations, the Company allocates revenue to all deliverables based on their SSPs and allocates the transaction price of the contract accountingto each performance obligation on a relative basis using SSP. Similar to the services provided in connection with DFI™ and CV® systems that are contributing to Analytics revenue, due to the nature of the work performed in these arrangements, the estimation of percentage of completion method is complex and subject to many variables that require significant judgement. Please refer to “Significant Judgments” section of this Note for further discussion.
The Gainshare royalty contained in IYR contracts is a variable fee related to continued usage of the Company’s intellectual property after the fixed-fee service period ends, based on the customers’ yield achievement. Revenue derived from Gainshare is contingent upon the Company’s customers reaching certain defined production yield levels. Gainshare royalty periods are generally subsequent to the delivery of all contractual services and performance obligations. The Company records Gainshare as a usage-based royalty derived from customers’ usage of intellectual property and records it in the same period in which the usage occurs.
Disaggregation of Revenue
The Company disaggregates revenue from contracts with customers into the timing of the transfer of goods and 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 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, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Over time | 55 | % | 70 | % | 56 | % | 67 | % | ||||||||
Point-in-time | 45 | % | 30 | % | 44 | % | 33 | % | ||||||||
Total | 100 | % | 100 | % | 100 | % | 100 | % |
International revenues accounted for approximately 67% and 60% of our total revenues for the three and nine months ended September 30, 2020, respectively, compared to 66% and 60% of our total revenues for the three and nine months ended September 30, 2019, respectively. See Note 11. Customer and Geographic Information.
Significant Judgments
Judgments and estimates are required under ASC 606. Due to the complexity of certain contracts, the actual revenue recognition treatment required under ASC 606 for the Company’s arrangements may be dependent on contract-specific terms and may vary in some instances.
For revenue under project-based contracts for fixed-price 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. Losses on fixed-price solution implementation contractsDue 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 recognized infuture labor and product costs and expected productivity efficiencies. If circumstances arise that change the period when they become probable. Revisions in profitoriginal 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 conditionscircumstances that requiregave rise to the revisionsrevision become known and can be estimated (cumulative catch-up method). Revenue under time and materials contracts for solution implementation services are recognized as the services are performed.
On occasion, the Company licenses its software products as a component of its fixed-price service contracts. In such instances, the software products are licensed to customers over a specified term of the agreement with support and maintenance to be provided, if applicable, over the license term. The amount of product and service revenue recognized in a given period is affected by the Company’s judgment as to whether an arrangement includes multiple deliverables and, if so, the Company’s determination of the fair value of each deliverable. In general, vendor-specific objective evidence of selling price (“VSOE”) does not exist for the Company’s solution implementation services and software products and because the Company’s services and products include our unique technology, the Company is not able to determine third-party evidence of selling price (“TPE”). Therefore, in such circumstances the Company uses best estimated selling prices (“BESP”) in the allocation of arrangement consideration. In determining BESP, the Company applies significant judgment as the Company’s weighs a variety of factors, based on the facts and circumstances of the arrangement. The Company typically arrives at BESP for a product or service that is not sold separately by considering company-specific factors such as geographies, internal costs, gross margin objectives, pricing practices used to establish bundled pricing, and existing portfolio pricing and discounting. After fair value is established for each deliverable, the total transaction amount is allocated to each deliverable based upon its relative selling price. Fees allocated to solution implementation services are recognized using the percentage of completion method of contract accounting. Fees allocated to software and related support and maintenance are recognized under software revenue recognition guidance. 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 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 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 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 also licenses its Design-For-Inspection (“DFI”) systemmay use information such as a separate componentthe size of fixed-price service contracts. The Company allocates revenue to all deliverables based on their relative selling prices. The Company currently does not have VSOE for its DFI system, thus the Company uses either TPE or BESPcustomer and geographic region of the customer in determining the allocation of arrangement consideration.SSP.
The Company defersis 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 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.
Contract Balances
The Company performs its obligations under a contract with a customer by 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 software or services transferred to a 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 service contracts when the revenue recognized exceeds the amount billed to the 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, 2020 and December 31, 2019, contract assets of $3.8 million and $3.6 million, respectively, are included in prepaid expenses and other current assets in the Condensed Consolidated Balance Sheets. The Company did not record any asset impairment charges related to contract assets for the periods presented.
Deferred revenues consist substantially of amounts invoiced in advance of revenue recognition and are 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 in the other non-current liabilities in the Condensed Consolidated Balance Sheets. At September 30, 2020 and December 31, 2019, the non-current portion of deferred revenues included in non-current liabilities was $0.8 million and $2.3 million, respectively. Revenue recognized for the three months ended September 30, 2020 and 2019, that was included in deferred revenues and billings in excess of recognized revenues balances at the beginning of each reporting period was $4.7 million and $4.4 million, respectively. Revenue recognized for the nine months ended September 30, 2020, and 2019, that was included in deferred revenues and billings in excess of recognized revenues balances at the beginning of each reporting period was $9.5 million and $13.0 million, respectively.
At September 30, 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 $113.2 million. Given the applicable contract terms, the majority of this amount is expected to be recognized as revenue over the next three years, with the remainder in the following two years. This amount does not include contracts to which the customer is not committed, 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.
The adjustment to revenue recognized in the three months ended September 30, 2020 and 2019 from performance obligations satisfied (or partially satisfied) in previous periods was a decrease of $1.2 million and an increase of $0.3 million, respectively. The adjustment to revenue recognized in the nine months ended September 30, 2020 and 2019 from performance obligations satisfied (or partially satisfied) in previous periods was an increase of $0.4 million and an increase of $0.1 million, respectively. These amounts primarily represent changes in estimated percentage-of-completion based contracts and changes in estimated Gainshare royalty for those customers that reported actual Gainshare revenue with some time lag.
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. Amortization expense related to these capitalized costs is recognized over the period associated with the revenue from which the 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, 2020 and December 31, 2019 were $0.4 million. Total capitalized direct sales commission costs included in other non-current assets in the accompanying Condensed Consolidated Balance Sheets as of September 30, 2020 and December 31, 2019 were $1.2 million and $0.4 million, respectively. Amortization of these assets during each of the three months ended September 30, 2020 and 2019 was $0.1 million. Amortization of these assets for the nine months ended September 30, 2020 and 2019was $0.4 million and $0.3 million, respectively. 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 customer of the services to which the asset relates and recorded as a component of cost of revenues. The Company also incurs certain pre-contract costs incurred for specific anticipated contracts. Deferred costs consist primarily of direct costs to provide solution implementation services in relation to the specific anticipated contracts. The Company recognizes such costs as a component of costcosts of revenues, the timing of which is dependent upon persuasive evidenceidentification of a contract arrangement assuming all other revenue recognition criteria are met.arrangement. The Company also defers costs from arrangements that required usit to defer the revenues, typically due to revenue recognition from multi-element arrangements or from contracts subject to customer acceptance.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. The deferredThere was no impairment loss in relation to the costs capitalized for the periods presented. Deferred costs balancewas $0.6 million and $0.5 million as of September 30, 2017 and December 31, 2016, respectively. The balance was included in prepaid expenses and other current assets in the accompanying Condensed Consolidated Balance Sheetswas immaterial as of September 30, 2020 and was $0.3 million as of December 31, 2019.Deferred costs balance included in other non-current assets in the accompanying Condensed Consolidated Balance Sheets was immaterial as of September 30, 2020 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 and nine months ended September 30, 2020 and 2019.
3. STRATEGIC PARTNERSHIP AGREEMENT WITH ADVANTEST AND RELATED PARTY TRANSACTIONS
On July 29, 2020, the Company entered into a long-term strategic partnership with Advantest Corporation through its wholly-owned subsidiary, Advantest America, Inc. (collectively referred to herein as “Advantest”) that includes:
i. Securities Purchase Agreement and Stockholder Agreement
Pursuant to the Securities Purchase Agreement (“SPA”), the Company issued an aggregate of 3,306,924 shares of its common stock, par value $0.00015 per share (the “SPA Shares”), at a purchase price equal to $19.7085 per share to Advantest for aggregate gross proceeds of $65.2 million.
In connection with the SPA, the Company entered into a Stockholder Agreement (the “Stockholder Agreement”) with Advantest on July 30, 2020. Pursuant to the Stockholder Agreement, Advantest agreed that the Shares will be subject to a five-year lock-up period and Advantest will be subject to a five-year standstill period. The lock-up periods shall terminate upon occurrence of certain events (“Termination Event”) stipulated in the Stockholder Agreement. Advantest is permitted to sell, transfer or dispose of the SPA Shares at any time to an affiliate or in order to maintain Advantest’s equivalent percentage beneficial ownership at 9.9% of the Company’s outstanding shares of common stock. Prior to the expiration of the lock-up period, upon the occurrence of certain events, for so long as the SPA Shares constitute at least 2.0% of the Company’s outstanding shares of common stock, if Advantest proposes to sell, transfer or dispose of any SPA Shares, the SPA Shares can be repurchased by the Company in its sole option at a repurchase price to be determined pursuant to the SPA.
Pursuant to the Stockholder Agreement, for so long as a Termination Event has not occurred, Advantest agreed to vote the SPA Shares in the manner recommended by the Board of Directors as reflected in any Company proxy statement, except on matters of: (i) the issuance of Company securities subject to Nasdaq Rule 5635(b), (ii) the approval of any merger, consolidation, or amalgamation (or similar business combination) of the Company, (iii) an amendment of the Company’s Certificate of Incorporation that would disproportionately and adversely affect Advantest, or (iv) any voluntary or involuntary bankruptcy, dissolution, insolvency, reorganization, rehabilitation or similar event of the Company.
There was no occurrence of any of the termination events as of the issuance of these condensed consolidated balance sheets.financial statements.
ii. Amendment #1 to Software License & Related Services Agreement
The Company entered into Amendment #1 to that certain Software License and Related Services Agreement (“SLA”), dated as of March 25, 2020 (“Amendment #1 to SLA”) with Advantest. Amendment #1 to SLA provides for an exclusive commercial arrangement in which the Company and Advantest will collaborate on, and the Company will initially host, develop and maintain, an Advantest-specific cloud layer on the Exensio platform. Amendment #1 to SLA provides for a renewable five-year cloud-based subscription by Advantest to the Company’s Exensio analytics platform and related services to be provided by the Company for an aggregate subscription price of over $50.0 million over the initial five-year term, subject to the achievement of certain milestones and the Company’s standard warranty and service level commitments.
Revenue recognized from this agreement during the three and nine months ended September 30, 2020 was $1.0 million. Accounts receivable from Advantest, comprised of billed and unbilled accounts receivable, amounted to $9.0 million, and Deferred revenue amounted to $8.0 million as of September 30, 2020.
iii. Development Agreement
The Company also licenses its software products separately from solution implementations. For software license arrangements that do not require significant modificationentered into a multi-year Amended and Restated Master Development Agreement (the “Development Agreement”) with Advantest, pursuant to which the Company and Advantest agreed to collaborate on extensions to or customizationcombinations of both of their existing technology and new technology to address mutual customers’ needs (the “Integrated Products”) through one or more development phases subject to certain conditions as set forth therein. The Development Agreement includes the underlying software, software license revenue is recognized underCompany’s assistance in the residual method when (l) persuasive evidence of an arrangement exists, (2) delivery has occurred, (3) the fee is fixed or determinable, (4) collectability is probable, and (5) the arrangement does not require services that are essential to the functionality of the software. When arrangements include multiple elements such as support and maintenance, consulting (other than for fixed price solution implementations), installation, and training, revenue is allocated to each elementdevelopment of a transaction based upon its fair value as determined by the Company's VSOE and such services are recorded as services revenue. VSOEcloud-based software solution for maintenanceAdvantest’s customers that is generally established based upon negotiated renewal rates while VSOE for consulting, installation, and training services is established based upon the Company's customary pricing for such services when sold separately. When software is licensed for a specified term, fees for support and maintenance are generally bundled with the license fee over the entire term of the contract. The Company is unable to establish VSOE of fair value for maintenance services that are generally bundled with term licenses. In these cases, the Company recognizes revenue ratably over the term of the contract. For multiple-element arrangements containing non-software services, the Company: (1) determines whether each element constitutes a separate unit of accounting; (2) determines the fair value of each element using the selling price hierarchy of VSOE, TPE or BESP, as applicable; and (3) allocates the total price to each separate unit of accounting based on the relative selling price method. An element constitutesCompany’s Exensio software analytics platform for both Advantest’s internal use as well as use by Advantest’s customers. Except as may be separately set forth in a separate unitstatement of accounting whenwork, each party will bear its own costs and expenses incurred in connection with its development thereunder. Either party may terminate the delivered item has standalone value and deliveryDevelopment Agreement or any statement of the undelivered element is probable and within our control. For multiple-element arrangements that contain both software and non-software elements, the Company allocates revenue to software or software-related elements as a group andwork thereunder at any non-software elements separately based on the selling price hierarchy of VSOE, TPE or BESP. Once revenue is allocated to software or software-related elements as a group, we recognize revenue in conformance with software revenue accounting guidance. Revenue is recognized when revenue recognition criteria are met for each element.time upon thirty (30) days’ prior written notice.
Revenue from software-as-a-service (SaaS) that allowCosts and expenses incurred related to the Development Agreement have not been significant for the use of a hosted software product or service over a contractually determined period of time without taking possession of software are accounted for as subscriptionsthree and recognized as revenue ratably over the coverage period beginning on the date the service is made available to customers. Revenue for software licenses with extended payment terms is not recognized in excess of amounts due. For software license arrangements that require significant modification or customization of the underlying software, the software license revenue is recognized as services are performed using the percentage of completion method of contract accounting, and such revenue is recorded as services revenue.
Deferred revenues consist substantially of amounts invoiced in advance of revenue recognition and is recognized as the revenue recognition criteria are met. Deferred revenues that will be recognized during the succeeding 12 month period is recorded as current deferred revenues and the remaining portion is recorded as non- current deferred revenues. Non-current portion of deferred revenue was $1.6 million and $1.5 million, respectively, as of nine months ended September 30, 2017 and December 31, 2016. This balance was recorded in the other non-current liabilities in the accompanying consolidated balance sheets.
Gainshare Performance Incentives — When the Company enters into a contract to provide yield improvement services, 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 may pay a contingent variable fee, usually after the fixed fee period has ended. Revenue derived from Gainshare performance incentives represents profit sharing and performance incentives earned contingent upon the Company’s customers reaching certain defined operational levels established in related solution implementation service contracts. Gainshare performance incentives periods are usually subsequent to the delivery of all contractual services and therefore have virtually no cost to the Company. Due to the uncertainties surrounding attainment of such operational levels, the Company recognizes Gainshare performance incentives revenue (to the extent of completion of the related solution implementation contract) upon receipt of performance reports or other related information from the customer supporting the determination of amounts and probability of collection. 2020.
2. RECENT ACCOUNTING PRONOUNCEMENTS
In May 2014, the FASB issued ASU No. 2014-09, Revenue from ContractsThe Company also entered into a multi-year Master Commercial Terms and Support Services Agreement (the “Commercial Agreement”) with Customers (Topic 606) as modified by ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, ASU No. 2016-11, Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815), ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, ASU 2016-20, Revenue from Contracts with Customers (Topic 606): Technical Corrections and Improvements, and ASU 2017-13, Revenue Recognition (Topic 605), Leases (Topic 840), and Leases (Topic 842): Amendments to SEC ParagraphsAdvantest. Pursuant to the Staff Announcement atCommercial Agreement, the July 20, 2017 EITF MeetingCompany and Rescission of Prior SEC Staff AnnouncementAdvantest agreed to (i) commercialize and Observer Comments. The newsell Integrated Products that are generated from the Development Agreement according to revenue recognition standard provides a five-step analysis of transactionssharing for each Integrated Product (as defined in the Commercial Agreement) as generally set forth in the Commercial Agreement and Integrated-Product specific revenue sharing and other terms agreed by the parties from time to determine whentime in addenda entered into thereunder; and how revenue is recognized. The core principle is that a company should recognize revenue to reflect the transfer of promised goods or(ii) provide technical services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This new standard is effective for annual periods beginning after December 15, 2017, including interim periods within that reporting period. The new standard also permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the modified retrospective method). The Company is finalizing evaluationsupport end customers’ use of the impact of adopting this new accounting standard on its consolidated financial statements and footnote disclosures. The Company currently intendsIntegrated Products according to adoptagreed-upon technical support sharing principles as set forth in the standard usingCommercial Agreement. Either party may terminate the modified retrospective method.Commercial Agreement at any time upon ninety (90) days’ prior written notice. Notwithstanding the foregoing, each party agreed to provide continuing technical support services for Integrated Products sold prior to termination as generally set forth in the Commercial Agreement.
In February 2016, the Financial Accounting Standards Board (or FASB) issued ASU No. 2016-02, Leases (Topic 842). The update requires that most leases, including operating leases, be recorded on the balance sheet as an assetNo costs and a liability, initially measured at the present value of the lease payments. Subsequently, the lease asset 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. The amendments in this update are effective for public companies’ financial statements issued for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is still in the process of evaluating the impact of adopting this new accounting standard on its consolidated financial statements and footnote disclosures.
In August 2016, the FASB issued ASU No. 2016-15, Classification of Certain Cash Receipts and Cash Payments. The purpose of this standard is to clarify the treatment of several cash flow categories. This update is effective for annual periods beginning after December 15, 2017, and interim periods within those fiscal years, with early adoption permitted, including adoption in an interim period. The adoption of this standard is not expected to have a material impact on our financial statements and footnote disclosures.
In January 2017, the FASB issued ASU No. 2017-01, Business Combinations: Clarifying the Definition of a Business, which narrows the existing definition of a business and provides a framework for evaluating whether a transaction should be accounted for as an acquisition (or disposal) of assets or a business. The guidance is effective for fiscal years beginning after December 15, 2017, with early adoption permitted.The Company does not anticipate that the adoption of this standard will have a significant impact on our consolidated financial statements or the related disclosures.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350) (“ASU No. 2017-04”). ASU No. 2017-04 eliminates step 2 from the annual goodwill impairment test. This update is effective for annual periods 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. The Company does not anticipate that the adoption of this standard will have a significant impact on our consolidated financial statements or the related disclosures.
In May 2017, the FASB issued ASU No. 2017-09, Compensation-Stock Compensation (Topic 718) Scope of Modification Accounting (“ASU No. 2017-09”). ASU No. 2017-09 clarifies which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. The standard is effective for interim and annual reporting periods beginning after December 15, 2017, with early adoption permitted. The adoption of this standard will impact modifications that happen after the adoption date.
3. BUSINESS COMBINATIONS
On July 11, 2017 (the "Acquisition Date"), the Company completed a transaction to acquire certain assets from Realtime Performance Europe B.V. (formerly doing business as Kinesys Software). Pursuant to the terms of an asset purchase agreement, the Company acquired the ALPS and GEMbox software products and certain related liabilities for the purpose of adding device traceability and process data collection through assembly and test to the software products it licenses.
The total purchase price was $4.3 million, of which $0.5 million was classified and recorded as the fair value of the contingent consideration on the balance sheet as of Acquisition Date. The Company may pay the contingent consideration through July 11, 2019, with a maximum potential payment amount of up to $0.6 million, depending on the completion of certain milestonesexpenses incurred related to the integration ofCommercial Agreement with Advantest for the ALPS software into the Company's Exensio platformthree and licenses thereof. The fair value of the contingent consideration liability was determined as of the Acquisition Date using unobservable inputs. These inputs include the probability of meeting the milestones related to the integration and license of the ALPS software and a risk-adjusted discount rate to adjust the probability-weighted cash flows to present value. nine months ended September 30, 2020.
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 realizing from optimizing resources and new and expanded sales opportunities that extend the Company's footprint throughout the entire systems value chain. The amount of goodwill expected to be deductible for tax purposes is $1.7 million. Pro forma results of operations have not been presented because the effect of the acquisition was not material to our financial results.carries out transactions with Advantest on customary terms.
Intangible assets consist of developed technology, customer relationships, and trademarks. 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 purchase consideration transferred to the fair value of the tangible and intangible assets acquired and liabilities assumed as of the acquisition date:
(in thousands) | Amortization period (years) | |||||||
Finite-lived intangible assets: | ||||||||
Developed technology | 1,720 | 9 | ||||||
Customer relationship | 820 | 9 | ||||||
Tradename | 180 | 7 | ||||||
Deferred revenue | (190 | ) | ||||||
Other receivables | 53 |
| ||||||
Net asset acquired | 2,583 | |||||||
Goodwill | 1,708 | |||||||
Purchase consideration | $ | 4,291 |
4.4. BALANCE SHEET COMPONENTS
Accounts receivable
Accounts receivable include amounts that are unbilled at the end of the period that are expected to be billed and collected within 12-montha 12-month period. Unbilled accounts receivable are primarily determined on an individual contract basis. Unbilled accounts receivable, included in accounts receivable, totaled $20.7$6.6 million and $20.8$7.4 million as of September 30, 2017 2020, and December 31, 2016, 2019, respectively. Unbilled accounts receivable that are not expected to be billed and collected during the succeeding 12-month12-month period are recorded in other non-current assets and totaled $9.1$2.3 million and $9.8$4.1 million as of September 30, 2017 2020, and December 31, 2016, 2019, respectively. Deferred costs balance was $0.6 million and $0.5 million as of September 30, 2017 and December 31, 2016, respectively. The balance was included in prepaid expense and other current assets and other non-current assets in the accompanying balance sheets.
Property and equipment
Property and equipment, net consists consist of the following (in thousands):
September 30, 2017 | December 31, 2016 | September 30, | December 31, | |||||||||||||
Property and equipment, net: | ||||||||||||||||
2020 | 2019 | |||||||||||||||
Computer equipment | $ | 10,756 | $ | 10,642 | $ | 11,385 | $ | 10,880 | ||||||||
Software | 3,359 | 1,679 | 5,035 | 4,690 | ||||||||||||
Furniture, fixtures and equipment | 1,927 | 1,185 | 2,433 | 2,395 | ||||||||||||
Leasehold improvements | 1,983 | 1,132 | 6,149 | 6,095 | ||||||||||||
DFI test equipment | 5,341 | 3,367 | ||||||||||||||
Other test equipment | 8,191 | 8,356 | ||||||||||||||
Laboratory and other equipment | 5,013 | 4,933 | ||||||||||||||
Test equipment | 24,118 | 22,980 | ||||||||||||||
Construction-in-progress | 11,837 | 9,550 | 19,874 | 18,245 | ||||||||||||
43,394 | 35,911 | 74,007 | 70,218 | |||||||||||||
Less: accumulated depreciation | (19,790 | ) | (16,570 | ) | ||||||||||||
Less: accumulated depreciation and amortization | (34,520 | ) | (29,420 | ) | ||||||||||||
Total | $ | 23,604 | $ | 19,341 | $ | 39,487 | $ | 40,798 |
Test equipment includes DFI™ assets at customer sites that are contributing to DFI™ revenues. The construction-in-progress balance as of September 30, 2017 and December 31, 2016 was primarily related to construction of DFI assets. Depreciation and amortization expense was $1.3DFI™ assets totaled $18.5 million and $1.0$16.6 million for the three months ended as of September 30, 2017 2020 and 2016, December 31, 2019, respectively. Depreciation and amortization expense was $3.5$1.7 million during each of the three months ended September 30, 2020 and 2019. Depreciation and amortization expense for the nine months ended September 30, 2020 and 2019 was $5.0 million and $2.6$4.3 million, for the nine months ended September 30, 2017respectively.
Goodwill and 2016, respectively.Intangible Assets
As ofSeptember 30, 2017 2020, and December 31, 2016, 2019, the carrying amount of goodwill was $1.9 million and $0.2 million, respectively. The following is a rollforward of the Company's goodwill balance (in thousands):$2.3 million.
September 30, 2017 | ||||
Balance as of December 31, 2016 | $ | 215 | ||
Add: Goodwill from acquisition | 1,708 | |||
Adjustment | — | |||
Balance as of September 30, 2017 | $ | 1,923 |
Intangible assets balance was $6.4$5.3 million and $4.2$6.2 million as of September 30, 2017 2020 and December 31, 2016, 2019, respectively. Intangible assets as of September 30, 2017 2020 and December 31, 2016 2019 consist of the following (in thousands):
September 30, 2017 | December 31, 2016 | ||||||||||||||||||||||||||||
Amortization Period (Years) | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | |||||||||||||||||||||||
Acquired identifiable intangibles: | |||||||||||||||||||||||||||||
Customer relationships | 1 | - | 9 | $ | 6,740 | $ | (4,054 | ) | $ | 2,686 | $ | 5,920 | $ | (3,825 | ) | $ | 2,095 | ||||||||||||
Developed technology | 4 | - | 6 | 15,820 | (12,686 | ) | 3,134 | 14,100 | (12,359 | ) | 1,741 | ||||||||||||||||||
Tradename | 2 | - | 4 | 790 | (615 | ) | 175 | 610 | (583 | ) | 27 | ||||||||||||||||||
Backlog | 1 | 100 | (100 | ) | - | 100 | (100 | ) | - | ||||||||||||||||||||
Patent | 7 | - | 10 | 1,800 | (1,470 | ) | 330 | 1,800 | (1,440 | ) | 360 | ||||||||||||||||||
Other acquired intangibles | 4 | 255 | (255 | ) | - | 255 | (255 | ) | - | ||||||||||||||||||||
Total | $ | 25,505 | $ | (19,180 | ) | $ | 6,325 | $ | 22,785 | $ | (18,562 | ) | $ | 4,223 |
September 30, 2020 | December 31, 2019 | ||||||||||||||||||||||||||
Amortization | Gross | Net | Gross | Net | |||||||||||||||||||||||
Period | Carrying | Accumulated | Carrying | Carrying | Accumulated | Carrying | |||||||||||||||||||||
(Years) | Amount | Amortization | Amount | Amount | Amortization | Amount | |||||||||||||||||||||
Acquired identifiable intangibles: | |||||||||||||||||||||||||||
Customer relationships | 1 ‒ 9 | $ | 7,440 | $ | (5,270 | ) | $ | 2,170 | $ | 7,440 | $ | (4,935 | ) | $ | 2,505 | ||||||||||||
Developed technology | 4 ‒ 9 | 17,460 | (14,669 | ) | 2,791 | 17,460 | (14,101 | ) | 3,359 | ||||||||||||||||||
Tradename | 2 ‒ 7 | 790 | (692 | ) | 98 | 790 | (673 | ) | 117 | ||||||||||||||||||
Patent | 7 ‒ 10 | 1,800 | (1,590 | ) | 210 | 1,800 | (1,560 | ) | 240 | ||||||||||||||||||
Total | $ | 27,490 | $ | (22,221 | ) | $ | 5,269 | $ | 27,490 | $ | (21,269 | ) | $ | 6,221 |
The weighted average amortization period for acquired identifiable intangible assets was 6.965.7 years as of September 30, 2017. For both the three months ended September 30, 2017 and 2016, intangible2020. Intangible asset amortization expense was $0.2 million. For both$0.3 million during each of the ninethree months ended September 30, 2017 2020 and 2016, intangible2019. Intangible asset amortization expense for the nine months ended September 30, 2020 and 2019was $0.6 million.$1.0 million and $0.9 million, respectively. The Company expects annual amortization of acquired identifiable intangible assets to be as follows (in thousands):
Period Ending September 30, | ||||
2017 (remaining 3 months) | $ | 251 | ||
2018 | 1,009 | |||
2019 | 1,009 | |||
2020 | 1,009 | |||
2021 | 833 | |||
2022 and thereafter | 2,214 | |||
Total future amortization expense | $ | 6,325 |
Year Ending December 31, | Amount | |||
2020 (remaining three months) | $ | 317 | ||
2021 | 1,093 | |||
2022 | 886 | |||
2023 | 886 | |||
2024 | 747 | |||
2025 and thereafter | 1,340 | |||
Total future amortization expense | $ | 5,269 |
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, 2017, 2020, there were no0 indicators of impairment related to the Company’s intangible assets.
5. LEASES
5. STOCKHOLDERS’ EQUITYThe Company leases administrative and sales offices and certain equipment under 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, 2020 and December 31, 2019.
Stock-based compensation is estimated at the grant date basedLeases with an initial term of 12 months or less are not recorded on the award’s fair valuebalance sheets, and is recognizedthe Company recognizes lease expense for these leases on a straight-line basis over the vesting periods, generally four years. Stock-based compensationlease term. Long-term operating leases are included in operating lease right-of-used (ROU) assets and operating lease liabilities in the Company’s 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. 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. Operating lease expense before taxesfor 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 was comprised of the following (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Operating lease expense | $ | 455 | $ | 463 | $ | 1,362 | $ | 1,402 | ||||||||
Short-term lease and variable lease expense | 127 | 130 | 401 | 333 | ||||||||||||
Total lease expense | $ | 582 | $ | 593 | $ | 1,763 | $ | 1,735 |
Supplemental balance sheets information related to the Company’s stock plans and employee stock purchase planleases was allocatedas follows:
September 30, | December 31, | |||||||
2020 | 2019 | |||||||
Weighted average remaining lease term under operating ROU leases (in years) | 6.7 | 7.2 | ||||||
Weighted average discount rate for operating lease liabilities | 5.24 | % | 5.25 | % | ||||
Operating lease ROU assets obtained (in thousands) | $ | 151 | $ | 333 |
Maturity of operating lease liabilities as of September 30, 2020, are as follows (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Cost of design-to-silicon yield-solutions | $ | 1,184 | $ | 1,191 | $ | 3,445 | $ | 3,232 | ||||||||
Research and development | 877 | 894 | 2,558 | 2,251 | ||||||||||||
Selling, general and administrative | 888 | 892 | 2,734 | 2,452 | ||||||||||||
Stock-based compensation expenses | $ | 2,949 | $ | 2,977 | $ | 8,737 | $ | 7,935 |
Year Ending December 31, | Amount(a) | |||
2020 (remaining three months) | $ | 392 | ||
2021 | 1,876 | |||
2022 | 1,626 | |||
2023 | 1,368 | |||
2024 | 1,073 | |||
2025 and thereafter | 3,791 | |||
Total future minimum lease payments | $ | 10,126 | ||
Less: Interest(b) | (1,599 | ) | ||
Present value of future minimum lease payments operating lease liabilities(c) | $ | 8,527 |
(a) | As of September 30, 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. | |
(b) | Calculated using incremental borrowing interest rate for each lease. | |
(c) | Includes the current portion of operating lease liabilities of $1.8 million as of September 30, 2020. |
6. STOCKHOLDERS’ EQUITY
Issuance of Common Stok
On July 30, 2020, the Company issued 3,306,924 shares of common stock, at a purchase price of $19.7085 per share, for aggregate gross proceeds of $65.2 million pursuant to a Securities Purchase Agreement with Advantest dated July 29, 2020. Issuance costs related to this private placement aggregated $0.1 million. See Note 3, Securities Purchase Agreement with Advantest, for further details.
Stock Repurchase Program
On May 28, 2020, the Company’s 2018 stock repurchase program (the “2018 Program”) that was originally adopted on May 29, 2018, expired. On June 4, 2020, the Company’s Board of Directors adopted a new stock repurchase program (the “2020 Program”) to repurchase up to $25.0 million of the Company’s common stock both on the open market and in privately negotiated transactions, including through Rule 10b5-1 plans, over the next two years. During the three and nine months ended September 30, 2017, 2020, 0 shares were repurchased under the 2020 and 2018 programs. During the three and nine months ended September 30, 2019, Company repurchased approximately 171,000 shares and 785,000 shares, respectively, under the 2018 Program. As of May 28, 2020, approximately 786,000 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.
7. EMPLOYEE BENEFIT PLANS
On September 30, 2020, the Company had the following stock-based compensation plans:
Employee Stock Plans — Purchase PlanAt the annual meeting of stockholders on November 16, 2011, the Company’s stockholders approved the 2011 Stock Incentive Plan (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 9,050,000 shares, plus up to 3,500,000 shares previously issued under the 2001 Plan that are forfeited or 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, the aggregate number of shares reserved under the 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, the Company adopted a 2001 Stock Plan (the “2001 Plan”). 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 2001Plan and the IDS Plans expired in 2011. Stock options granted under the 2001 and IDS Plans 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 or IDS Plans, awards made under the 2001 and IDS Plans that are currently outstanding remain subject to the terms of each such plan, respectively.
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 September 30, | Nine Months Ended September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Expected life (in years) | 4.41 | 4.42 | 4.41 | 4.42 | ||||||||||||
Volatility | 41.49 | % | 42.97 | % | 41.53 | % | 43.82 | % | ||||||||
Risk-free interest rate | 1.65 | % | 1.10 | % | 1.69 | % | 1.20 | % | ||||||||
Expected dividend | — | — | — | — | ||||||||||||
Weighted average fair value per share of options granted during the period | $ | 5.78 | $ | 5.52 | $ | 6.14 | $ | 4.82 |
As of September 30, 2017, 9.6 million shares of common stock were reserved to cover stock-based awards under the 2011 Plan, of which 3.9 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 adoption of the 2011 Plan through September 30, 2017. As of September 30, 2017, there were no outstanding awards that had been granted outside of the 2011 Plan, 2001 Plan or the IDS Plan (collectively, the “ Stock Plans” ).
Stock option activity under the Company’s Stock Plans during the nine months ended September 30, 2017, 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, 2017 | 1,364 | $ | 8.00 | |||||||||||||
Granted (weighted average fair value of $6.14 per share) | 100 | $ | 16.97 | |||||||||||||
Exercised | (366 | ) | $ | 6.43 | ||||||||||||
Canceled | (16 | ) | $ | 15.63 | ||||||||||||
Expired | (1 | ) | $ | 18.10 | ||||||||||||
Outstanding, September 30, 2017 | 1,081 | $ | 9.23 | 4.73 | $ | 7,133 | ||||||||||
Vested and expected to vest, September 30, 2017 | 1,065 | $ | 9.13 | 4.66 | $ | 7,124 | ||||||||||
Exercisable, September 30, 2017 | 893 | $ | 7.82 | 3.82 | $ | 6,966 |
The aggregate intrinsic value in the table above represents the total intrinsic value based on the Company’s closing stock price of $15.49 per share as of September 30, 2017. The total intrinsic value of options exercised during the nine months ended September 30, 2017, was $4.6 million.
As of September 30, 2017, there was $1.0 million of total unrecognized compensation cost related to unvested stock options. That cost is expected to be recognized over a weighted average period of 3.3 years. The total fair value of shares vested during the nine months ended September 30, 2017, was $0.2 million.
Nonvested restricted stock units activity during the nine months ended September 30, 2017, was as follows:
Shares (in thousands) | Weighted Average Grant Date Fair Value Per Share | |||||||
Nonvested, January 1, 2017 | 1,542 | $ | 15.50 | |||||
Granted | 793 | $ | 16.53 | |||||
Vested | (431 | ) | $ | 15.78 | ||||
Forfeited | (99 | ) | $ | 15.93 | ||||
Nonvested, September 30, 2017 | 1,805 | $ | 15.86 |
As of September 30, 2017, there was $23.3 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 years. Restricted stock units do not have rights to dividends prior to vesting.
Employee Stock Purchase Plan — In July 2001, the Company adopted a ten-yearten-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-monthprovided for twenty-four-month offering periods with four six-monthsix-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)(1) 675,000 shares, (2)(2) 2% of the Company’s outstanding common stock on the last day of the immediately preceding year, or (3)(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. The Company’s proposal to extend the Purchase Plan through June 22, 2030 was not ratified by the Company’s stockholders and hence, the Purchase Plan expired on May 17, 2020. After the Purchase Plan expired, no new offering periods will commence under the Purchase Plan; however, existing offering periods will continue until they expire in accordance with their terms, and participation in such offering periods will continue through the applicable expiration date. The final offering period under the Purchase Plan is expected to expire on January 31, 2022.
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, | Nine Months Ended September 30, | |||||||||||||||
2017 | 2016 | 2020 | 2019 | |||||||||||||
Expected life (in years) | 1.25 | 1.25 | 1.25 | 1.25 | ||||||||||||
Volatility | 40.63 | % | 44.00 | % | 34.25 | % | 42.45 | % | ||||||||
Risk-free interest rate | 1.25 | % | 0.50 | % | 1.43 | % | 2.24 | % | ||||||||
Expected dividend | — | — | 0 | 0 | ||||||||||||
Weighted average fair value per share of options granted during the period | $ | 5.22 | $ | 3.70 | ||||||||||||
Weighted average fair value of purchase rights granted during the period | $ | 4.83 | $ | 4.08 |
During the three months ended September 30, 2017 2020 and 2016,2019, a total of 99,550approximately 93,000 and 88,54385,000 shares, respectively issued under the Purchase Plan. During the nine months ended September 30, 2020 and 2019, a total of approximately 183,000 and 172,000 shares, respectively, were issued at a weighted-average purchase price of $9.53$9.12 and $8.81 per share. During the nine months ended September 30, 2017 and 2016, a total of 199,827 and 173,001 shares, respectively, were issued at a weighted-average purchase price of $9.33 and $9.00$8.92 per share, respectively. As of September 30, 2017, 2020, there was $0.5$0.3 million of unrecognized compensation cost related to the Purchase Plan. That cost is expected to be recognized over a weighted average period of 1.24 years.0.6 year. As of September 30, 2017, 4.32020, 5.7 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 2011Stock Repurchase Program —On October 25, 2016,Incentive Plan, which has been amended and restated and approved by the BoardCompany’s stockholders a number of Directors adopted a program, effective immediately, to repurchase up to $25.0 milliontimes since then (as amended, the “2011 Plan”). Under the 2011 Plan, the Company may award stock options, stock appreciation rights (“SARs”), stock grants or stock units covering shares of the Company’s common stock bothto employees, directors, non-employee directors and contractors. The aggregate number of shares reserved for awards under this plan is 11,550,000 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 either (i) forfeited or (ii) repurchased by the Company or are 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 SARs, the openaggregate 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 in privately negotiated transactionsbecome vested and exercisable over a four-year period.
Stock options granted under the next two years. During2001 Plan generally expire ten years from the threedate of grant and nine months ended become vested and exercisable over a four-year period. Although no new awards may be granted under the 2001 Plan, awards made under the 2001 Plan that are currently outstanding remain subject to the terms of each such plan.
As of September 30, 2017,2020, 12.1 million shares of common stock were reserved to cover stock-based awards under the Company repurchased 565,9032011 Plan, of which 4.1 million shares and 842,182 shares under this program. As of September 30, 2017, 842,182 shares had been repurchased at an average price of $15.93 per share under this program for a total purchase of $13.4 million, and $11.6 million remainedwere available for future repurchases. 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, 2020. As of September 30, 2020, there were no outstanding awards that had been granted outside of the 2011 or 2001 Plans (collectively, the “Stock Plans”).
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 September 30, | Nine Months Ended September 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Expected life (in years) | 4.45 | 4.46 | 4.45 | 4.46 | ||||||||||||
Volatility | 43.92 | % | 39.93 | % | 40.90 | % | 42.61 | % | ||||||||
Risk-free interest rate | 0.23 | % | 1.40 | % | 0.60 | % | 1.99 | % | ||||||||
Expected dividend | 0 | 0 | 0 | 0 | ||||||||||||
Weighted average fair value per share of options granted during the period | $ | 6.92 | $ | 4.70 | $ | 5.75 | $ | 4.61 |
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, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Costs of revenues | $ | 790 | $ | 745 | $ | 2,582 | $ | 2,404 | ||||||||
Research and development | 1,148 | 1,062 | 3,613 | 3,681 | ||||||||||||
Selling, general and administrative | 1,192 | 925 | 3,281 | 2,557 | ||||||||||||
Stock-based compensation expenses | $ | 3,130 | $ | 2,732 | $ | 9,476 | $ | 8,642 |
The stock-based compensation expense in the table above includes immaterial expense or credit adjustments related to cash-settled 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. SARs were fully exercised as of September 30, 2020. There was 0 stock-based compensation capitalized for the three months ended September 30, 2020. Stock-based compensation capitalized in the capitalized software development costs included in property and equipment, net, was approximately $0.2 million for the nine months ended September 30, 2020. Stock-based compensation capitalized in the capitalized software development costs included in property and equipment, net, was approximately $0.2 million during the three and nine months ended September 30, 2019.
Additional information with respect to options under the Stock Plans during the nine months ended September 30, 2020, was as follows:
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 $5.75 per share) | 24 | $ | 16.72 | |||||||||||||
Exercised | (177 | ) | $ | 10.33 | ||||||||||||
Canceled | (43 | ) | $ | 10.69 | ||||||||||||
Expired | (10 | ) | $ | 10.06 | ||||||||||||
Outstanding, September 30, 2020 | 539 | $ | 11.02 | 3.56 | $ | 4,188 | ||||||||||
Vested and expected to vest, September 30, 2020 | 531 | $ | 10.96 | 3.48 | $ | 4,158 | ||||||||||
Exercisable, September 30, 2020 | 433 | $ | 10.08 | 2.32 | $ | 3,779 |
The aggregate intrinsic value in the table above represents the total intrinsic value based on the Company’s closing stock price of $18.71 per share as of September 30, 2020. The total intrinsic value of options exercised during the nine months ended September 30, 2020, was $1.5 million.
As of September 30, 2020, there was $0.5 million of total unrecognized compensation cost related to unvested stock options. That cost is expected to be recognized over a weighted average period of 2.7 years. The total fair value of shares vested during the nine months ended September 30, 2020, was $0.2 million.
Nonvested restricted stock units activity during the nine months ended September 30, 2020, was as follows:
Weighted | ||||||||
Average Grant | ||||||||
Shares | Date Fair Value | |||||||
(in thousands) | Per Share | |||||||
Nonvested, January 1, 2020 | 1,887 | $ | 12.30 | |||||
Granted | 864 | $ | 21.28 | |||||
Vested | (652 | ) | $ | 13.33 | ||||
Forfeited | (101 | ) | $ | 12.61 | ||||
Nonvested, September 30, 2020 | 1,998 | $ | 15.83 |
As of September 30, 2020, there was $25.1 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 2.7 years. Restricted stock units do not have rights to dividends prior to vesting.
68. 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, 2020, the Company has recorded restructuring charges of $0.7 million, primarily consisting of employee separation charges. As of September 30, 2020, the Company has substantially completed the implementation of 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 September 30, | Nine Months Ended September 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Beginning balance | $ | 0 | $ | 0 | $ | 0 | $ | 244 | ||||||||
Restructuring charges | 0 | 0 | 0 | 92 | ||||||||||||
Cash payments | 0 | 0 | 0 | (336 | ) | |||||||||||
Ending balance | $ | 0 | $ | 0 | $ | 0 | $ | 0 |
9. INCOME TAXES
Income tax provision decreased $5.9benefit increased $2.6 million for the nine months ended September 30, 2017, 2020, to $2.2a $4.1 million income tax benefit as compared to an income tax provisionbenefit of $3.7$1.5 million for the nine months ended September 30, 2016. 2019. The Company’s effective tax rate benefit was 236.7%37% and 37.3%26% for the nine months ended September 30, 2017 2020 and 2016,2019, respectively. The Company’s effective tax rate benefit increased in the nine months ended September 30, 2017, 2020, as compared to the same period in 2016,2019, primarily due to the recognition ofa favorable increase in excess tax benefits related to employee stock compensation and an income tax benefit recorded to carryback net operating losses (“NOLs”), pursuant to the provisions of $1.6 million as well as the decreaseCoronavirus Aid, Relief, and Economic Security Act (“CARES Act”) passed on March 27, 2020, which allows any federal net operating losses generated in income. 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 prior periods.
The Company’sCompany’s total amount of unrecognized tax benefits, excluding interest and penalties, as of September 30, 2017, 2020, was $12.7$14.1 million, of which $7.6$8.0 million, if recognized, would decreaseaffect the Company’s effective tax rate. The Company’s total amount of unrecognized tax benefits, excluding interest and penalties, as of December 31, 2016, 2019, was $11.9$13.6 million, of which $7.2$7.9 million, if recognized, would affect the Company'sCompany’s effective tax rate. As of September 30, 2017, 2020, the Company hadhas recorded unrecognized tax benefits of $2.9$2.8 million, including interest and penalties of $0.8 million, as long-term taxes payable in its condensed consolidated balance sheet.Condensed Consolidated Balance Sheet. The remaining $9.8$12.0 million has been recorded net of our deferred tax assets, of which $5.1$6.1 million is subject to a full valuation allowance.
The valuation allowance was approximately $7.5$11.2 million and $6.8$10.5 million as of September 30, 2017 2020, and December 31, 2016, 2019, respectively, which was related to California R&D tax credits and California net operating losses related to our acquisition of Syntricity that we currently do not believe are more likely than not to be ultimately realized.
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 statutesfor audit, the federal and California statute of limitation remainlimitations remains open for all tax years to the extent of the attributes carried forward into tax year 2002 for federalsince 2000 and California tax purposes.2002, respectively. The Company is not currently subject to an income tax examinationsexamination or under audit in any of its major foreign subsidiaries’ jurisdictions.jurisdiction.
710. NET INCOMELOSS PER SHARE
Basic net incomeloss per share is computed by dividing net incomeloss by weighted average number of common shares outstanding for the period (excluding outstanding stock options and shares subject to repurchase). Diluted net incomeloss 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 incomeloss per share (in thousands except per share amount):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Numerator: | ||||||||||||||||
Net income | $ | 590 | $ | 1,984 | $ | 1,297 | $ | 6,178 | ||||||||
Denominator: | ||||||||||||||||
Basic weighted average common shares outstanding | 32,078 | 31,413 | 32,060 | 31,286 | ||||||||||||
Dilutive effect of equity incentive plans | 891 | 1,165 | 1,257 | 858 | ||||||||||||
Diluted weighted average common shares outstanding | 32,969 | 32,578 | 33,317 | 32,144 | ||||||||||||
Net income per share: | ||||||||||||||||
Basic | $ | 0.02 | $ | 0.06 | $ | 0.04 | $ | 0.20 | ||||||||
Diluted | $ | 0.02 | $ | 0.06 | $ | 0.04 | $ | 0.19 |
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Numerator: | ||||||||||||||||
Net loss | $ | (2,734 | ) | $ | (687 | ) | $ | (6,914 | ) | $ | (4,088 | ) | ||||
Denominator: | ||||||||||||||||
Basic weighted-average shares outstanding | 35,479 | 32,392 | 33,696 | 32,405 | ||||||||||||
Effect of dilutive options and restricted stock units | 0 | 0 | 0 | 0 | ||||||||||||
Diluted weighted average shares outstanding | 35,479 | 32,392 | 33,696 | 32,405 | ||||||||||||
Net loss per share ‒ Basic | $ | (0.08 | ) | $ | (0.02 | ) | $ | (0.21 | ) | $ | (0.13 | ) | ||||
Net loss per share ‒ Diluted | $ | (0.08 | ) | $ | (0.02 | ) | $ | (0.21 | ) | $ | (0.13 | ) |
For the three and nine months ended September 30, 2020 and 2019, 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.
The following table sets forth potential shares of common stock that are not included in the diluted net incomeloss 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 September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||||
Outstanding options | 211 | 119 | 109 | 188 | 310 | 525 | 362 | 584 | ||||||||||||||||||||||||
Nonvested restricted stock units | 15 | 226 | 12 | 389 | 1,084 | 1,394 | 820 | 985 | ||||||||||||||||||||||||
Employee Stock Purchase Plan | 68 | 25 | 42 | 162 | 190 | 53 | 146 | 150 | ||||||||||||||||||||||||
Total | 294 | 370 | 163 | 739 | 1,584 | 1,972 | 1,328 | 1,719 |
811. 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’sCompany’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 licensingprovision of services for differentiated data and implementation of yield improvementanalytics solutions for integrated circuits manufacturers. to the semiconductor and electronics industries.
The Company had revenues from individual customers in excess of 10% of total revenues as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||
Customer | 2017 | 2016 | 2017 | 2016 | 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||||||
A | 38 | % | 38 | % | 41 | % | 42 | % | 18 | % | 22 | % | 23 | % | 30 | % | ||||||||||||||||
B | * | % | 12 | % | * | % | 12 | % | * | % | 16 | % | * | % | * | % | ||||||||||||||||
E | 15 | % | * | % | * | % | * | % |
__________________________
* represents less than 10% |
|
The Company had gross accounts receivable from individual customers in excess of 10% of gross accounts receivable as follows:
September 30, | December 31, | |||||||||||||||
Customer | September 30, 2017 | December 31, 2016 | 2020 | 2019 | ||||||||||||
A | 44 | % | 42 | % | 11 | % | 27 | % | ||||||||
B | * | % | 14 | % | ||||||||||||
C | 15 | % | 13 | % | 10 | % | 12 | % | ||||||||
D | 21 | % | * | % |
__________________________
* represents less than 10% |
|
Revenues from customers by geographic area based on the location of the customers’customers’ work sites are as follows (in(amounts in thousands):
Three Months Ended September 30, | ||||||||||||||||||||||||||||||||
Three Months Ended September 30, | 2020 | 2019 | ||||||||||||||||||||||||||||||
2017 | 2016 | Percentage | Percentage | |||||||||||||||||||||||||||||
Revenues | Percentage of Revenues | Revenues | Percentage of Revenues | Revenues | of Revenues | Revenues | of Revenues | |||||||||||||||||||||||||
United States | $ | 9,750 | 37 | % | $ | 8,680 | 32 | % | $ | 7,710 | 33 | % | $ | 7,341 | 34 | % | ||||||||||||||||
China | 6,452 | 24 | 2,907 | 11 | 6,747 | 29 | 5,118 | 23 | ||||||||||||||||||||||||
Germany | 2,729 | 10 | 4,896 | 18 | ||||||||||||||||||||||||||||
Taiwan | 2,414 | 9 | 4,079 | 15 | ||||||||||||||||||||||||||||
South Korea | 1,539 | 6 | 3,027 | 11 | ||||||||||||||||||||||||||||
Japan | 1,113 | 5 | 2,423 | 11 | ||||||||||||||||||||||||||||
Rest of the world | 3,633 | 14 | 3,670 | 13 | 7,542 | 33 | 7,032 | 32 | ||||||||||||||||||||||||
Total revenue | $ | 26,517 | 100 | % | $ | 27,259 | 100 | % | $ | 23,112 | 100 | % | $ | 21,914 | 100 | % |
Nine Months Ended September 30, | ||||||||||||||||
2017 | 2016 | |||||||||||||||
Revenues | Percentage of Revenues | Revenues | Percentage of Revenues | |||||||||||||
United States | $ | 30,610 | 41 | % | $ | 30,320 | 38 | % | ||||||||
China | 12,891 | 17 | 5,506 | 7 | ||||||||||||
Taiwan | 9,894 | 13 | 11,988 | 15 | ||||||||||||
Germany | 6,831 | 9 | 11,924 | 15 | ||||||||||||
South Korea | 5,159 | 7 | 8,523 | 11 | ||||||||||||
Rest of the world | 9,709 | 13 | 10,767 | 14 | ||||||||||||
Total revenue | $ | 75,094 | 100 | % | $ | 79,028 | 100 | % |
Nine Months Ended September 30, | ||||||||||||||||
2020 | 2019 | |||||||||||||||
Percentage | Percentage | |||||||||||||||
Revenues | of Revenues | Revenues | of Revenues | |||||||||||||
United States | $ | 26,242 | 40 | % | $ | 25,203 | 40 | % | ||||||||
China | 10,200 | 16 | 11,369 | 18 | ||||||||||||
Taiwan | 8,038 | 12 | 6,041 | 10 | ||||||||||||
Rest of the world | 21,198 | 32 | 20,410 | 32 | ||||||||||||
Total revenue | $ | 65,678 | 100 | % | $ | 63,023 | 100 | % |
Long-lived assets, net by geographic area are as follows (in thousands):
September 30, | December 31, | |||||||||||||||
September 30, 2017 | December 31, 2016 | 2020 | 2019 | |||||||||||||
United States | $ | 23,117 | $ | 18,818 | $ | 44,140 | $ | 46,000 | ||||||||
Rest of the world | 487 | 523 | 2,059 | 2,407 | ||||||||||||
Total long-lived assets, net | $ | 23,604 | $ | 19,341 | $ | 46,199 | $ | 48,407 |
912. 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’sentity’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. |
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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. |
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Level 3 - | Inputs are derived from valuation techniques in which one or more significant inputs or |
The following table represents the Company’sCompany’s assets measured at fair value on a recurring basis as of September 30, 2017, 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) | ||||||||||||||||||||||||
Cash equivalents | ||||||||||||||||||||||||||||||||
Money market mutual funds | $ | 26,577 | $ | 26,577 | $ | — | $ | — | $ | 102,977 | $ | 102,977 | $ | 0 | $ | 0 | ||||||||||||||||
Short-term investments (available-for-sale debt securities) | ||||||||||||||||||||||||||||||||
U.S. Treasury bills (1) | 49,983 | 49,983 | 0 | 0 | ||||||||||||||||||||||||||||
Total | $ | 152,960 | $ | 152,960 | $ | 0 | $ | 0 |
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(1) | The carrying amount of the Company’s investments in U.S. Treasury bills approximate fair value due to their short-term maturities, and there have been no events or changes in circumstances that would have had a significant effect on the fair value of these securities at September 30, 2020. |
The following table represents the Company’sCompany’s assets measured at fair value on a recurring basis as of December 31, 2016, 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) | ||||||||||||||||||||||||
Cash equivalents | ||||||||||||||||||||||||||||||||
Money market mutual funds | $ | 26,456 | $ | 26,456 | $ | — | $ | — | $ | 27,644 | $ | 27,644 | $ | 0 | $ | 0 |
TheFrom time to time, the Company enters into foreign currency forward contracts to reduce the exposure to foreign currency exchange rate fluctuations on certain foreign currency denominated monetary assets and liabilities, primarily on third-partythird-party accounts payables and intercompany balances. The primary objective of the Company’sCompany’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 large global 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.
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.net in the Company’s Condensed Consolidated Statements of Operations and Comprehensive Loss. For the three months ended September 30, 2017 and 2016, 2020, there was no realized gain or loss from foreign currency forward contracts. For the three months ended September 30, 2019, the Company recognized a realized gainloss of $0.2$0.4 million and $37,000 on the contracts, respectively, which was recorded in other income (expense), net in the Company’s Statements of Operations and Comprehensive Income.contract. For the nine months ended September 30, 2017 2020 and 2016,2019, the Company recognized a realized gainloss of $0.7$0.2 million and a realized gain of $45,000$0.7 million on the contracts, respectively, which was recorded in other income (expense), net in the Company’s Statement of Operations and Comprehensive Income. respectively.
The Company carries these derivatives financial instruments on its Condensed Consolidated Balance Sheets at their fair values. The Company’sCompany’s foreign currency forward contracts are classified as Level 2 because it is they are not actively traded and the valuation inputs are based on quoted prices and market observable data of similar instruments. As of September 30, 2017, 2020 and December 31, 2019, the Company had oneno outstanding forward contract with a notional amount of $8.0 million and recorded $10,000 other current liabilities associated with this outstanding forward contract. As of December 31, 2016, the Company had one outstanding forward contract with a notional amount of $6.9 million and had recorded $15,000 other current liabilities associated with the outstanding forward contract. contracts.
1013. COMMITMENTS AND CONTINGENCIES
LeasesStrategic Partnership with Advantest — See Note 3 for the discussion about the Company’s commitments under the strategic partnership with Advantest.
The Company leases administrative and sales offices and certain equipment under noncancelable 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 2024. Rent expense was $0.6 millionOperating Leases— Refer to Note 5, Leases, for the both three months ended September 30, 2017 and 2016, respectively. Rent expense was $1.6 million and $1.7 million fordiscussion about the nine months ended September 30, 2017 and 2016.Company’s lease commitments.
Future minimum lease payments under noncancelable operating leases at September 30, 2017, are as follows (in thousands):
Period Ending September 30, | Amount | |||
2017 (remaining three months) | $ | 544 | ||
2018 | 1,757 | |||
2019 | 532 | |||
2020 | 444 | |||
2021 | 360 | |||
2022 and thereafter | 126 | |||
Total future minimum lease payments | $ | 3,763 |
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-partythird-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, 2017, 2020, total outstanding purchase obligations were $8.3$15.1 million, the majority of which are primarily due within the next 1215 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’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.
LitigationLegal 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, 2017, 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.
Item 2. Management’sManagement’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, prospects, or prospects,the time required of our executive management for, and expenses related to, as well as the success of the our strategic growth opportunities and partnerships, including our partnership with Advantest Corporation, 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, 2016,2019, filed with the Securities and Exchange Commission on March 8, 2017.10, 2020. All references to “we”, “us”, “our”, “PDF”, “PDF Solutions” or “the Company” refer to PDF Solutions, Inc.
Overview
OverviewWe 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 offerings combine proprietary software, physical intellectual property (or IP) for Integrated Circuits (or IC) designs, electrical measurement hardware tools, proven methodologies, and professional services. We primarily monetize our offerings through time-based license fees, contract revenue for professional services, and increasingly recently, software as a service (or SaaS). In some cases, especially on our historical integrated yield ramp (or IYR) engagements, we also receive a value-based royalty that we call Gainshare. Our products, services, and 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.
We analyze our customers’ IC design and manufacturing processes to identify, quantify, and correct the issues that cause yield loss to improve our customers’ profitability by improving time-to-market, increasing yield and reducing total design and manufacturing costs. We package our solutions in various ways to meet our customers’ specific business and budgetary needs, each of which provides us various revenue streams. We receive a mix of fixed fees and variable, performance-based fees for the vast majority of our yield improvement solutions. The fixed fees are typically reflective of the length of time and the resources needed to characterize a customer’s manufacturing process and receive preliminary results of proposed yield improvement suggestions. The variable fee, or what we call Gainshare, usually depends on our achieving certain yield targets by a deadline. Variable fees are currently typically tied to wafer volume on the node size of the manufacturing facility where we performed the yield improvement solutions. We receive license fees and service fees for related installation, integration, training, and maintenance and support services for our software that we license on a stand-alone basis.Industry Trend
The global COVID-19 pandemic has impacted the operations and purchasing decisions of companies worldwide. While the full potential economic impact brought by the COVID-19 pandemic may be difficult to assess or predict, the pandemic has resulted in significant disruption of global financial markets and on June 8, 2020, the National Bureau of Economic Research announced that the U.S. was in a recession. The COVID-19 pandemic has significantly affected how we and our customers are operating our business. For example, most U.S. states and countries worldwide have imposed and may continue to impose from time-to-time for the foreseeable future, restrictions on the physical movement of our employees, partners, and customers to limit the spread of COVID-19, including travel restrictions and shelter-in-place orders. As a result, our Shanghai office was temporarily shut down and the restrictions limited the ability of our local employees to travel to customer sites or visit our other offices from January to April 2020. Several other impacted locations were temporarily closed but our US R&D facility partially reopened in June 2020, and our offices in Canada, France, Korea and Japan have reopened on various dates during the second and third quarter of 2020. Our corporate headquarters in the United States partially reopened in the fourth quarter of 2020. We are closely monitoring the COVID-19 situation and currently preparing plans to reopen our other offices with focused on our employees’ safety. In addition, our personnel worldwide are subject to various country to country travel restrictions, which limit our ability to provide services to customers at their facilities. 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.
Certain general business trends may affect our Analytics revenue. In particular, the confluence of Industry Trend4.0 (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 connectivity and sensor technology enables any manufacturing company to augment its factories and visualize its entire production line. In parallel, the cost per terabyte of data storage has continually decreased year to year. The combination of these two trends means that more data is collected and stored than ever before. Semiconductor companies are striving to analyze these very large data sets in real-time to make rapid decisions that measurably improve manufacturing efficiency and quality. In parallel, the traditional practice of on-site data storage, even for highly sensitive data, is changing. The ability to cost-effectively and securely store, analyze, and retrieve massive quantities of data from the cloud versus on-premise enables data to be utilized across a much broader population of users, frequently resulting in greater demands on analytics programs. The combination of these two trends means that cloud-based, analytic programs that effectively manage identity management, physical security and data protection are increasingly in demand for insights and efficiencies across the organizations of these companies. We believe that all these trends will continue for the next few years, and the challenges involved in adopting Industry 4.0 and secure cloud computing will create opportunities for companies that have a combination of advanced analytics capabilities, proven and established data infrastructures, and professional services to optimize their environment to customers’ specialized needs.
Consistent withOther business trends may continue to affect our 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 since 2010, wewill likely continue to negatively impact our Integrated Yield Ramp business on these nodes. We expect that the largestmost logic foundries will continue to invest significantly 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 and capacity throughout 2018. Leading foundriesare expected to continue to invest in new technologies such as memory, packaging, and multi-patterned and extreme ultraviolet lithography, as well as new innovations in process control and 3-D transistor architecture. In addition, China’svariability management. We expect China’s investment in semiconductors shouldto 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 increase the industry production capacity over the next few years. These provide opportunitiesengage foreign suppliers. As a result of these market developments, we have chosen to portentially increasefocus our business.resources and investments in products, services, and solutions for analytics.
Capacity utilization for 28nm logic thus far in 2017 has been lower overall, and mixed across foundries. We believeThere are other general business trends that industry 28nm utilization will increase during the coming quarters. 14nm logic production is also expected to increase during the coming quarters. We expectmay affect our Gainshare results to be consistent with those general market trends. Gainshare revenue will continue to fluctuate quarter to quarter despite these utilization trends as our Gainshare revenue depends on many factors, including the average selling price of wafers subject to Gainshare and volume.
Generally,business opportunities. For instance, the demand for consumer electronics, communications devices, and datacenters, are drivinghigh-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 a result, both logic and memory manufacturers have migrated to more and more advanced manufacturing nodes, capable of integrating more devices with higher performance, higher density, and lower power. 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 as volume production of deep submicron ICs continuesthese difficulties will continue to grow, the difficulties of integrating IC designs with their respective processes and ramping new manufacturing processes will create a greater need for all types of products and services like ours that address the yield loss across the IC product life cycle.
Our Strategic Partnership with Advantest
On July 29, 2020, we entered into a strategic partnership with Advantest Corporation through its wholly-owned subsidiary, Advantest America, Inc., (collectively, “Advantest”) that includes: (i) a significant agreement for our assistance in development of cloud-based applications for Advantest tools that leverage our Exensio software analytics platform; (ii) a commercial agreement providing for the license to third parties of solutions that result from the development work that combine Advantest’s testing applications and escalating cost issuesour Exensio platform; (iii) a 5-year cloud-based subscription for our Exensio analytics platform and related services; and (iv) the semiconductor industry is facing todaypurchase of 3,306,924 shares of our common stock, for aggregate gross proceeds of $65.2 million. Concurrent with the share purchase, Advantest Corporation also entered into multi-year voting and will face in the future.lock-up agreements.
Customer Contracts
Although a substantial portion of our total revenues are concentrated in a small number of customers, the total revenues for each of these customers in any period is the result of Design-to-silicon-yield solutions and Gainshare performance incentives revenues recognized in the period under multiple, separate contracts, with no interdependent performance obligations. These contracts were all entered into in the ordinary course of our business and contain general terms and conditions that are standard across most of our yield improvement solutions customers, including providing services typically targeted to one manufacturing process node, for example the 28 or 20 nanometer node. Fluctuations in future results may occur if any of these customers renegotiate pre-existing contractual commitments due to adverse changes in their own business. See the additional discussion in Part I, Item 1, “Customers,” on page 9 of our Annual Report on Form 10-K for the year ended December 31, 2016, and in Item 1A, “Risk Factors,” on pages 13 through 20 of our Annual Report on Form 10-K for the year ended December 31, 2016, for related information on the risks associated with customer concentration and Gainshare performance incentives revenue.
Financial Highlights
Financial highlights for the three months ended September 30, 2017,2020, were as follows:
• | Total revenues | ||
• | Costs of | ||
• | Gross margin was 59%, compared to 60% for the three months ended September 30, | ||
• | Net loss was | ||
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Financial highlights for the nine months ended September 30, 2017,2020, were as follows:
Total revenues for the nine months ended September 30, 2017, were $75.1 million, a decrease of $3.9 million, or 5%
• | Total revenues were $65.7 million, which was an increase of $2.7 million, or 4%, compared to
Critical Accounting Policies and Estimates
During the third quarter of 2020, we added an accounting policy disclosure for our short-term investments in Note 1 of “Notes to Condensed Consolidated Financial Statements (Unaudited)” of this Quarterly Report on Form 10-Q. Other than the aforementioned additional disclosure, there were no material changes during the nine months ended September 30, 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 year ended December 31, 2019. 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
Revenue Recognition
We derive
Analytics revenue is derived from
33
Revenue from Revenue Integrated Yield Ramp Revenue Integrated Yield Ramp revenue is derived from our yield ramp engagements, which include Gainshare or Revenue under these project–based contracts, which are delivered over a specific period of
Income Taxes
We are required to assess We evaluate our deferred tax assets for realizability considering both positive and negative evidence, including our historical financial performance, projections of future taxable income, future reversals of existing taxable temporary differences, tax planning strategies and any carryback availability. In evaluating the need for a valuation allowance, we estimate future taxable income based on management approved business plans. This process involves significant management judgment about assumptions that are subject to change from period to period based on changes in tax laws or variances between future projected operating performance and actual results. Changes in the net deferred tax assets, less offsetting valuation allowance, in a period are recorded through the income tax provision and could have a material impact on the Condensed Consolidated Statements of Comprehensive Loss.
Our income tax calculations are based on application of On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted. The CARES Act includes, among other things, refundable payroll tax credits, deferment of some employer FICA taxes, allowance of net operating loss carrybacks for up to five years, alternative minimum tax credit refunds, and technical amendments regarding the income tax depreciation of qualified improvement property placed in service after December 31, 2017. The removal of certain limitations on the utilization of NOLs resulted in our recognition of an income tax benefit of $2.2 million from the
nine months ended September 30, 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
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.
Recent Accounting Pronouncements and Accounting Changes
See Note
Results of Operations
In the fourth quarter of 2019, in order to enhance the transparency of our revenue reporting, we updated our Condensed Consolidated Statements of Comprehensive Loss to change our historical presentation of revenue categories. Previously, we presented revenue on two lines: Solutions and Gainshare performance incentives. Included within Solutions, was revenue from software and related revenue, SaaS solutions, DFI™ licenses, and fixed-price project-based solution implementation services. The previous Gainshare performance incentive category included only revenue from performance incentive programs. We now present revenue in the following categories: Analytics and Integrated Yield Ramp. Integrated Yield Ramp revenue is comprised of all revenue from our 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 our licenses and services for Exensio Software, Exensio SaaS, DFI™ and CV® systems that do not include performance incentives based on customers’ yield achievement. The change in presentation of revenue does not change our net revenues or total cost of net revenues. The following table shows reclassified amounts to conform to the current period’s presentation (in thousands):
Since certain costs of revenues are attributed to both Analytics and Integrated Yield Ramp revenue categories, we believe it is more appropriate and meaningful to present the Condensed Consolidated Statements of Comprehensive Loss under a one-step presentation format that excludes any measure of gross margin. In the fourth quarter of 2019, we elected to change our 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. Discussion of Financial Data for the Three and Nine Months Ended September 30
Revenues, Costs of Revenues, and Gross Margin
Analytics revenue increased Analytics revenue increased $6.7 million for the nine months ended September 30, 2020, compared to the nine months ended September 30, 2019. The increase in
Integrated Yield Ramp revenue decreased Integrated Yield Ramp revenue decreased $4.0 million for the nine months ended September 30, 2020, compared to the nine months ended September 30, 2019, due primarily to a $1.1 million decrease in revenue from lower hours worked across multiple contracts and customers, and a $3.3 million in nonrecurring revenue from a customer contract amendment recognized in the Our
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.
Costs of Costs of The increase in costs of The increase in costs of revenues of $2.5 million the nine months ended September 30, 2020, compared to the nine months ended September 30, 2019, was primarily due to (i) a Gross Margin Gross margin for the three months ended September 30,
Operating Expenses: Research and
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 Research and development expenses increased for the nine months ended September 30, We anticipate our expenses in research and development will fluctuate in absolute dollars from period to period
Selling, General and Administrative
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. Selling, general and administrative expenses increased Selling, general and administrative expenses increased for the nine months ended September 30, 2020, compared to the year-ago period, primarily due to (i) a $1.2 million increase in subcontractor We anticipate our selling, general and administrative expenses will fluctuate in absolute dollars from period to period as a result of cost control initiatives and to support
Amortization of Other Acquired Intangible Assets
Amortization of other acquired intangible assets consists of amortization of intangibles acquired as a result of certain business Interest and Other Expense (Income), Net
Interest and other expense (income), net, primarily consists of interest income, gains and losses from foreign currency forward contracts, and foreign currency transaction exchange gains and losses. Interest and other Income Tax Benefit
Income tax benefit increased for the three months ended September 30, Income tax benefit increased for the nine months ended September 30,
Liquidity and Capital Resources
As of September 30,
Private Placement On July 29, 2020,we entered into a strategic partnership with Advantest, which includes, among others, a Securities Purchase Agreement wherein we issued and sold to Advantest America, Inc., an aggregate of 3,306,924 shares of our common stock, at a purchase price of $19.7085 per share, for aggregate gross proceeds of $65.2 million on July 30, 2020. All of the shares were offered and sold by us pursuant to an exemption from the registration requirements of the Securities Act 1933, as amended, provided by Section 4(a)(2) as a transaction with an accredited investor not involving a public offering. The increase in the combined balance of our cash and cash equivalents, and short-term investments during the nine months ended September 30, Cash Flow Data
Net Cash Flows Provided by Operating Activities Cash flow from operating activities
Cash Cash Net Cash Flows Provided by (Used in) Financing Activities Net cash provided by financing activities
Related Party Transactions Refer to Note 3, Strategic Partnership Agreement with Advantest and Related Party Transactions of the Notes to Condensed Consolidated Financial Statements (Item 1 of Part I of this Report) for a discussion on related party transactions between the Company and Advantest. Off-Balance Sheet Agreements
We do not have any off-balance sheet arrangements, investments in special purpose entities or undisclosed borrowings or debt.
Contractual Obligations
The following table summarizes our known contractual obligations (in thousands) as of September 30,
Item 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 and Credit Risk. As of September 30, federally insured limits. We limit the amount of credit exposure with any one financial institution by evaluating the creditworthiness of the financial institutions with which we invest.
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.
Item 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
Changes in Internal Control over Financial Reporting
There were no changes in the
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, 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.
Item 1A, “Risk Factors,” on pages We may not realize the benefits of our strategic partnership with Advantest, which could have an adverse effect on our business and results of operations. On July 29, 2020, we entered into a strategic partnership with Advantest Corporation through its wholly-owned subsidiary, Advantest America, Inc. (collectively, “Advantest”), that includes: (i) a significant agreement for our assistance in development of cloud-based applications for Advantest tools that leverage our Exensio software analytics platform; (ii) a commercial agreement providing for the license to third parties of solutions that result from the development work that combine Advantest’s testing applications and our Exensio platform; (iii) a 5-year cloud-based subscription for our Exensio analytics platform and related services; and (iv) the purchase of 3,306,924 shares of our common stock, for aggregate gross proceeds of $65.2 million. This strategic partnership is in the early stages of development, and the full extent of its future impact on our financial condition and results of operations is currently unknown and the failure to reap the anticipated benefits of Advantest’s financial resources, technology, customer relationships, and global footprint and/or develop successful joint solutions could have an adverse effect on our business and results of operations. The COVID-19 pandemic has significantly affected how we and our customers are operating our business and the duration and extent to which this will impact our future results of operations and overall financial performance remains uncertain. The COVID-19 pandemic has significantly affected how we and our customers are operating our business. For example, most U.S. states and countries worldwide have imposed and may continue to impose from time-to-time for the foreseeable future, restrictions on the physical movement of our employees, partners, and customers to limit the spread of COVID-19, including travel restrictions and shelter-in-place orders. As a result, our Shanghai office was temporarily shut down and the restrictions limited the ability of our local employees to travel to customer sites or visit our other offices from January to April 2020. Our 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 country to country travel restrictions, which limit our ability to provide services to customers at their facilities. These impacts have disrupted our normal operations. If the COVID-19 pandemic has a substantial impact on our employees’ productivity, our results of operations and overall financial performance may be harmed. Moreover, the conditions caused by the COVID-19 pandemic could adversely affect our customers’ ability or willingness to purchase our products or services, delay prospective customers’ purchasing decisions, adversely impact our ability to provide or deliver products and on-site services to our customers, delay the provisioning of our offerings, lengthen payment terms, reduce the value or duration of their subscriptions, or affect attrition rates, all of which could adversely affect our future sales, operating results and overall financial performance. While the potential economic impact brought by the COVID-19 pandemic may be difficult to assess or predict, the pandemic has resulted in significant disruption of global financial markets and on June 8, 2020, the National Bureau of Economic Research announced that the U.S. was in a recession. A long-term recession or long-term market downturn resulting from the spread of COVID-19 could materially impact the value of our common stock, impact our access to capital and affect our business in the near and long-term.
The duration and extent of the impact from the COVID-19 pandemic depends on future developments that cannot be accurately predicted at this time, such as the severity and transmission rate of the virus, 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, or if the macroeconomic conditions of the general economy continue to worsen or the industries in which we operate are negatively impacted over the long-term, our business, operating results, financial condition and cash flows could be adversely affected.
Item 2. UnregisteredSales of Equity Securities and Use of Proceeds
The
that paragraph.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
None.
None.
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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.
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