See accompanying Notes to Condensed Consolidated Financial Statements (unaudited).

CONDENSED CONSOLIDATED STATEMENTS OF ~~OPERATIONS AND~~ COMPREHENSIVE ~~INCOME~~LOSS

See accompanying Notes to Condensed Consolidated Financial Statements (unaudited).

See accompanying Notes to Condensed Consolidated Financial Statements (unaudited)

~~CONDENSED~~CONDENDSED CONSOLIDATED STATEMENTS OF ~~CASH FLOWS~~STOCKHOLDERS’ EQUITY

See accompanying Notes to Condensed Consolidated Financial Statements (unaudited).

See accompanying Notes to Condensed Consolidated Financial Statements (unaudited)

The interim unaudited condensed consolidated financial statements included herein have been prepared by PDF Solutions, Inc. (the “Company”) pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”), including the instructions to the Quarterly Report on Form ~~10-Q~~10-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-K~~10-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.

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.

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):

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.

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.

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.

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

In August 2018, the FASB issued ASU No.2018-15, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The new guidance clarifies the accounting for implementation costs incurred to develop or obtain internal-use software in cloud computing arrangements. Further, the standard also requires entities to expense the capitalized implementation costs of a hosting arrangement over the term of the hosting arrangement. This standard 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.

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

The Company 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.

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 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 ~~portion~~judgement. Please refer to “Significant Judgements” section of ~~its Design-to-silicon-yield solutions~~this Note for further discussion.

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 service~~contracts.

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 contracts~~time, typically for ~~solution implementation services~~a fixed fee component paid on a set schedule, is recognized as services are performed using a percentage of completion method based on costs or labor-inputs, whichever is the most appropriate measure of the progress towards completion of the contract. Where there are distinct performance obligations, the Company allocates revenue to all deliverables based on their SSPs and allocates the transaction price of the contract ~~accounting~~to 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.

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:

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 contracts~~Due to the nature of the work performed in these arrangements, the estimation of percentage of completion method is complex, subject to many variables and requires significant judgment. Key factors reviewed by the Company to estimate costs to complete each contract are ~~recognized in~~future labor and product costs and expected productivity efficiencies. If circumstances arise that change the ~~period when they become probable. Revisions in profit~~original estimates of revenues, costs, or extent of progress toward completion, revisions to the estimates are made. These revisions may result in increases or decreases in estimated revenues or costs, and such revisions are reflected in revenue on a cumulative catch-up basis in the period in which the ~~conditions~~circumstances that ~~require~~gave rise to the ~~revisions~~revision 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”) system~~may use information such as ~~a separate component~~the 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 BESP~~customer and geographic region of the customer in determining the ~~allocation of arrangement consideration.~~SSP.

The Company ~~defers~~is required to record Gainshare royalty revenue in the same period in which the usage occurs. Because the Company generally does not receive the acknowledgment reports from its customers during a given quarter within the time frame necessary to adequately review the reports and include the actual amounts in quarterly results for such quarter, the Company accrues the related revenue based on estimates of 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.

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.

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 ~~cost~~costs of revenues, the timing of which is dependent upon ~~persuasive evidence~~identification 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 deferred~~There was no impairment loss in relation to the costs capitalized for the periods presented. 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 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.

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:

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.

There was no occurrence of any of the termination events as of the issuance of these condensed consolidated ~~balance sheets.~~financial statements.

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.

The Company also ~~licenses its software products separately from solution implementations. For software license arrangements that do not require significant modification~~entered 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 ~~customization~~combinations 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 under~~Company’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. VSOE~~cloud-based software solution for ~~maintenance~~Advantest’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 constitutes~~Company’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 unit~~statement of ~~accounting when~~work, 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 delivery~~Development 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 allow~~Costs 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 subscriptions~~three 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.

~~In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts~~The 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 Paragraphs~~Advantest. Pursuant to the ~~Staff Announcement at~~Commercial Agreement, the ~~July 20, 2017 EITF Meeting~~Company and ~~Rescission of Prior SEC Staff Announcement~~Advantest agreed to (i) commercialize and ~~Observer Comments. The new~~sell Integrated Products that are generated from the Development Agreement according to revenue ~~recognition standard provides a five-step analysis of transactions~~sharing 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 when~~time 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 evaluation~~support end customers’ use of the ~~impact of adopting this new accounting standard on its consolidated financial statements and footnote disclosures. The Company currently intends~~Integrated Products according to ~~adopt~~agreed-upon technical support sharing principles as set forth in the ~~standard using~~Commercial 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.

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 of~~Commercial Agreement with Advantest for the ~~ALPS software into the Company's Exensio platform~~three 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:

Accounts receivable include amounts that are unbilled at the end of the period that are expected to be billed and collected within ~~12-month~~a 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-month~~12-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, net ~~consists~~ consist of the following (in thousands):

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 $1.3~~DFI™ 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, 2017~~respectively.

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.

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):

The weighted average amortization period for acquired identifiable intangible assets was ~~6.96~~5.7 years as of September 30, ~~2017. For both the three months ended September 30, 2017 and 2016, intangible~~2020. Intangible asset amortization expense was ~~$0.2 million. For both~~$0.3 million during each of the ~~nine~~three months ended September 30, ~~2017~~ 2020 and ~~2016, intangible~~2019. 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):

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~~. STOCKHOLDERS’ EQUITY~~The 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 based~~Leases with an initial term of 12 months or less are not recorded on the ~~award’s fair value~~balance sheets, and ~~is recognized~~the Company recognizes lease expense for these leases on a straight-line basis over the ~~vesting periods, generally four years~~. ~~Stock-based compensation~~lease 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 taxes~~for lease payments is recognized

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

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.

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:

~~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:~~

~~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:~~

~~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-year~~ten-year Employee Stock Purchase Plan (as amended, the “Purchase Plan”) under which eligible employees can contribute up to 10% of their compensation, as defined in the Purchase Plan, towards the purchase of shares of PDF common stock at a price of 85% of the lower of the fair market value at the beginning of the offering period or the end of the purchase period. The Purchase Plan ~~consists of twenty-four-month~~provided for twenty-four-month offering periods with four ~~six-month~~six-month purchase periods in each offering period. Under the Purchase Plan, on January 1 of each year, starting with 2002, the number of shares reserved for issuance will automatically increase by the lesser of ~~(1)~~(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:

During the three months ended September 30, ~~2017~~ 2020 and ~~2016,~~2019, a total of ~~99,550~~approximately 93,000 and ~~88,543~~85,000 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, 4.3~~2020, 5.7 million shares were available for future issuance under the Purchase Plan.

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 ~~Board~~Company’s stockholders a number of ~~Directors adopted a program, effective immediately, to repurchase up to $25.0 million~~times 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 ~~both~~to 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 ~~open~~aggregate number of shares reserved under the 2011 Plan will be decreased at a rate of 1.33 shares issued pursuant to such awards. The exercise price for stock options must generally be at prices no less than the fair market value at the date of grant. Stock options generally expire ten years from the date of grant and ~~in privately negotiated transactions~~become vested and exercisable over a four-year period.

Stock options granted under the ~~next two years. During~~2001 Plan generally expire ten years from the ~~three~~date 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 565,903~~2011 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:

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):

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:

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:

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.

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):

Income tax ~~provision decreased $5.9~~benefit increased $2.6 million for the nine months ended September 30, ~~2017,~~ 2020, to ~~$2.2~~a $4.1 million income tax benefit as compared to an income tax ~~provision~~benefit 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 of~~a 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 ~~decrease~~Coronavirus 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 ~~decrease~~affect 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's~~Company’s effective tax rate. As of September 30, ~~2017,~~ 2020, the Company ~~had~~has 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 ~~statutes~~for audit, the federal and California statute of ~~limitation remain~~limitations remains open for all tax years ~~to the extent of the attributes carried forward into tax year 2002 for federal~~since 2000 and ~~California tax purposes.~~2002, respectively. The Company is not currently subject to an income tax ~~examinations~~examination or under audit in any ~~of its major foreign subsidiaries’ jurisdictions.~~jurisdiction.

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

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 ~~income~~loss per share calculation above because to do so would be anti-dilutive for the periods indicated (in thousands):

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 ~~licensing~~provision of services for differentiated data and ~~implementation of yield improvement~~analytics 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:

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

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

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.

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):

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):

~~The~~From 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-party~~third-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 ~~gain~~loss 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 ~~gain~~loss 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 ~~one~~no 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.

~~Leases~~Strategic 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 million~~Operating 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 for~~discussion 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):~~

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

Purchase obligations — The Company has purchase obligations with certain suppliers for the purchase of goods and services entered in the ordinary course of business. As of September 30, ~~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.

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

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~~We offer products and services designed to empower engineers and data scientists across the semiconductor ecosystem to improve the yield, quality, and profitability of their products. We derive revenues from two sources: Analytics and Integrated Yield Ramp. Our 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 ~~Trend~~4.0 (i.e. the fourth industrial revolution, or the automation and data exchange in manufacturing technologies and processes) and cloud computing (i.e. the on-demand availability of computing resources and data storage without direct active management by the user) is driving increased innovation in semiconductor and electronics manufacturing and analytics, as well as in the organization of IT networks and computing at those same companies. First, the ubiquity of 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 with~~Other 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, we~~will likely continue to negatively impact our Integrated Yield Ramp business on these nodes. We expect ~~that the largest~~most 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 foundries~~are expected to continue to invest in new technologies such as memory, packaging, and multi-patterned and extreme ultraviolet lithography, as well as new innovations in process control and ~~3-D transistor architecture. In addition, China~~’svariability management. We expect China’s investment in semiconductors ~~should~~to 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 opportunities~~engage foreign suppliers. As a result of these market developments, we have chosen to ~~portentially increase~~focus 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 believe~~There 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 expect~~may 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 driving~~high-performance computing continues to drive technological innovation in the semiconductor industry as the need for products with greater performance, lower power consumption, reduced costs and smaller size continues to grow with each new product generation. In addition, advances in computing systems and mobile devices have fueled demand for higher capacity memory chips. To meet these demands, IC manufacturers and designers are constantly challenged to improve the overall performance of their ICs by designing and manufacturing ICs with more embedded applications to create greater functionality while lowering power and cost per transistor. As 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 continues~~these 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.

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 issues~~our Exensio platform; (iii) a 5-year cloud-based subscription for our Exensio analytics platform and related services; and (iv) the ~~semiconductor industry is facing today~~purchase of 3,306,924 shares of our common stock, for aggregate gross proceeds of $65.2 million. Concurrent with the share purchase, Advantest Corporation also entered into multi-year voting and ~~will face in the future.~~lock-up agreements.

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 for the three months ended September 30, ~~2017,~~2020, were as follows:

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 ~~$79.0 million for the nine months ended September 30, 2016. Design-to-silicon-yield solutions revenue for the nine months ended September 30,~~ 2017, was $55.4 million, a decrease of $2.3 million, or 4%, when compared to Design-to-silicon yield solutions revenue of $57.7 million for the nine months ended September 30, 2016. The decrease in Design-to-silicon-yield solutions was primarily due to the decrease in revenue from our yield ramp engagement not fully offset by the increase in revenue from our DFI solution and our Exensio big data solution. Gainshare performance incentives revenue for the nine months ended September 30, 2017, was $19.7 million, a decrease of $1.7 million, or 8%, compared to $21.3 million for the nine months ended September 30, 2016. The decrease in revenue from Gainshare performance incentives was primarily the result of the Gainshare period ending on an older 28nm node, partially offset by higher Gainshare revenues from a new 28nm customer and from the 14nm nodes.
•
~~Net income for~~ the nine months ended September 30, ~~2017,~~2019. Analytics revenue was ~~$1.3~~$42.8 million, which was an increase of $6.7 million, compared to ~~$6.2~~the nine months ended September 30, 2019. The increase in Analytics revenue was primarily driven by an $8.4 million increase in Exensio licenses and CV® services due to higher hours worked across multiple contracts and customers, partially offset by the expiration of an Exensio contract for a customer that ceased 7nm production in 2019 and a $1.7 million decrease in DFI™ revenue. Integrated Yield Ramp revenue decreased $4.0 million for the nine months ended September 30, ~~2016. The decrease in net income was~~2020, compared to the nine months ended September 30, 2019, due primarily ~~attributable~~ to a ~~$6.9~~$1.1 million decrease in ~~gross margin~~ ~~primarily due to the decrease in revenues,~~revenue from lower hours worked across multiple contracts and customers, and a ~~$4.0~~$3.3 million ~~increase~~ in ~~operating expense, primarily driven by~~nonrecurring revenue from a customer contract amendment recognized in the ~~continued activity related to our development~~first quarter of ~~our DFI solution,~~2019, partially offset by a ~~$5.9~~$0.5 million ~~decrease~~increase in ~~tax provision primarily due to~~Gainshare royalty from the ~~recognition of excess tax benefits related to employee stock compensation as a result of the adoption of ASU 2016-09 as well as the decrease in level of income.~~14nm technology node.
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•
~~Net income per basic and diluted share was $0.04~~Costs of revenues increased $2.5 million for the nine months ended September 30, ~~2017,~~2020, compared to ~~$0.20~~the nine months ended September 30, 2019, primarily due to (i) a $2.3 million increase in cloud-delivery related costs and ~~$0.19, respectively,~~depreciation expense of test equipment, (ii) a $0.8 million increase in direct costs related to third-party software royalty and licenses expense, equipment and hardware expense, and the timing of deferral of contract costs, and (iii) a $0.6 million increase in personnel-related costs, partially offset by a $1.2 million decrease in travel expenses resulting from reduced business travel due to the global COVID-19 pandemic.
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• Gross margin was 59%, compared to 61% for the nine months ended September 30, ~~2016.~~ 2019.
•
Net loss was $6.9 million, compared to $4.1 million for the nine months ended September 30, 2019. The increase in net loss was primarily attributable to (i) a $2.5 million increase in costs of revenues, (ii) a $4.8 million increase in operating expenses as we continued to make investments in research and development, sales and marketing activities, and due to an increase in general and administrative expenses related to subcontractor expenses, legal fees, and accounting and related fees, and (iii) a $0.8 million increase in interest and other expense (income), net, partially offset by a $2.7 million increase in revenues, and a $2.7 million increase in income tax benefit.

Critical Accounting Policies and Estimates

~~There were no significant~~See Note 1 of “Notes to Condensed Consolidated Financial Statements (Unaudited)” of this Quarterly Report on Form 10-Q for a description of recent accounting pronouncements and accounting changes, inincluding the expected dates of adoption and estimated effects, if any, on our ~~critical accounting policies. Please refer~~condensed consolidated financial statements, and to ~~Management~~’sManagement’s Discussion and Analysis of Financial Condition and Results of Operations contained in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, ~~2016.~~ 2019.
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 ~~based~~base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. The most significant estimates and assumptions relate to revenue recognition, ~~stock-based compensation~~valuation of long-lived assets including goodwill and intangible assets, and the realization of deferred tax assets. Actual amounts may differ from such estimates under different assumptions or conditions.

Revenue Recognition

We derive ~~revenues primarily~~revenue from two sources: ~~Design-to-silicon-yield Solutions~~Analytics and ~~Gainshare performance incentives.~~Integrated Yield Ramp.

~~Design-to-silicon-yield solutions~~ ~~— Revenues that are~~Analytics Revenue
Analytics revenue is derived from ~~Design-to-silicon-yield solutions come from~~the following primary offerings: licenses and services for Exensio® Software, Exensio SaaS, DFI™ and ~~software and hardware licenses. We recognize revenue for each element of Design-to-silicon-yield solutions as follows:~~CV® systems that do not include performance incentives based on customers’ yield achievement.

~~We generate a significant portion of our Design-to-silicon-yield solutions revenue~~Revenue from fixed-price solution implementation service contracts 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 contracts for solution implementation services~~standalone Exensio Software is recognized ~~as services are performed using percentage of completion method of contract accounting based~~depending on ~~costs~~whether the license is perpetual or ~~labor-hours input method, whichever~~time-based. Perpetual (one-time charge) license software is recognized at the ~~most appropriate measure~~time of the ~~progress towards completion~~inception of the ~~contract. Losses on fixed-price solution implementation contracts are recognized in~~arrangement when control transfers to the ~~period when they become probable. Revisions in profit estimates are reflected in~~customers, if the ~~period in which the conditions that require the revisions become known and can be estimated. Revenue under time and materials contracts for solution implementation services are recognized as~~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 ~~performed.~~
On occasion, we license our software products as a component of our fixed-price service contracts. In such instances, the software products are licensed to customers over a specified term of the agreement withproviding (i) support and ~~maintenance to be provided, if applicable,~~(ii) unspecified software updates on a when-and-if available basis over the ~~license~~contract 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, our determination of the fair value of each deliverable. In general, vendor-specific objective evidence of selling price (“VSOE”) does not exist for our solution implementation services andRevenue from time-based-licensed software products and because our services and products include our unique technology, we are not able to determine third-party evidence of selling price (“TPE”). Therefore, in such circumstances we use best estimated selling prices (“BESP”) in the allocation of arrangement consideration. In determining BESP, we apply significant judgment as we weigh a variety of factors, based on the facts and circumstances of the arrangement. We typically arrive 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~~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 ~~solution implementation services are~~customers, with the post-contract support component recognized ~~using~~ratably over the ~~percentage~~committed term of ~~completion method~~the contract. For contracts with any combination of ~~contract accounting. Fees allocated to software and related~~licenses, support, and ~~maintenance~~other services, distinct performance obligations are ~~recognized under software revenue recognition guidance.~~
~~In some instances,~~accounted for separately. For contracts with multiple performance obligations, we ~~also license our DFI system as~~allocate the transaction price of the contract to each performance obligation on a ~~separate component of fixed-price service contracts. We allocate revenue~~relative basis using standalone selling price (or SSP) attributed to ~~all deliverables based on their relative selling prices. We currently do not have VSOE for our DFI system, thus we use either TPE or BESP in the allocation of arrangement consideration.~~each performance obligation.

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We defer 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. We recognize such costs as a component of cost of revenues, the timing of which is dependent upon persuasive evidence of contract arrangement assuming all other revenue recognition criteria are met. We also defer costs from arrangements that required us to defer the revenues, typically due to revenue recognition from multi-element arrangements or from contracts subject to customer acceptance. These costs are recognized in proportion to the related revenue. At the end of reporting period, we evaluate its deferred costs for their probable recoverability. We recognize impairment of deferred costs when it is determined that the costs no longer have future benefits and are no longer recoverable.
We also license our software products separately from solution implementations. For software license arrangements that do not require significant modification or customization of the underlying software, software license revenue is recognized under 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 our fixed price solution implementations), installation, and training, revenue is allocated to each element of a transaction based upon its fair value as determined by our VSOE and such services are recorded as services revenue. VSOE for maintenance is generally established based upon negotiated renewal rates while VSOE for consulting, installation, and training services is established based upon the our 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. We are unable to establish VSOE of fair value for maintenance services that are generally bundled with term licenses. In these cases, we recognize 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 constitutes a separate unit of accounting when the delivered item has standalone value and delivery of the undelivered element is probable and within our control. For multiple-element arrangements that contain both software and non-software elements, we allocate revenue to software or software-related elements as a group and 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.

Revenue from ~~software-as-a-service (or SaaS) that~~Exensio SaaS arrangements, which allow for the use of a ~~hosted~~cloud-based software product or service over a contractually determined period of time without taking possession of software, ~~are~~is accounted for as subscriptions and is recognized as revenue ratably, on a straight-line basis, over the ~~coverage~~subscription period beginning on the date the service is first made available to customers.
Revenue ~~for software licenses~~from DFI™ and CV® systems that do not include performance incentives based on customers’ yield achievement is recognized primarily as services are performed. Where there are distinct performance obligations, we allocate revenue to all deliverables based on their SSPs. For these contracts with ~~extended payment terms~~multiple performance obligations, we allocate the transaction price of the contract to each performance obligation on a relative basis using SSP attributed to each performance obligation. Where there are not discrete performance obligations, historically, revenue is ~~not~~primarily recognized ~~in excess~~as services are performed using a percentage of ~~amounts due. For software license arrangements~~completion method based on costs or labor-hours inputs, whichever is the most appropriate measure of the progress towards completion of the contract. The estimation of percentage of completion method is complex and subject to many variables that require significant ~~modification~~judgement.
Integrated Yield Ramp Revenue
Integrated Yield Ramp revenue is derived from our yield ramp engagements, which include Gainshare or ~~customization~~other performance incentives based on customers’ yield achievement.
Revenue under these project–based contracts, which are delivered over a specific period of ~~the underlying software, the software license revenue~~time typically for a fixed fee component paid on a set schedule, is recognized as services are performed using ~~the~~a percentage of completion method based on costs or labor-inputs, whichever is the most appropriate measure of the progress towards completion of the contract. Where there are distinct performance obligations, we allocate revenue to all deliverables based on their SSPs and allocate the transaction price of the contract ~~accounting,~~to each performance obligation on a relative basis using SSP. Similar to the services provided in connection with DFI™ and ~~such~~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 ~~recorded as services revenue.~~complex and subject to many variables that require significant judgement.

~~Deferred revenues consist substantially of amounts invoiced~~The Gainshare royalty contained in ~~advance of revenue recognition and~~yield ramp contracts 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.
~~Gainshare Performance Incentives~~ ~~— When we enter into~~ a contract to provide yield improvement services, the contract usually includes two components: (1) a fixed fee for performance by us 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~~related to continued usage of our IP after the ~~fixed fee~~fixed-fee service period ~~has ended.~~ends, based on the customers’ yield achievement. Revenue derived from Gainshare ~~performance incentives represents profit sharing and performance incentives earned~~is contingent upon our customers reaching certain defined ~~operational levels established in related solution implementation service contracts.~~production yield levels. Gainshare ~~performance incentives~~royalty periods are ~~usually~~generally subsequent to the delivery of all contractual services and ~~therefore have virtually no cost to us. Due to~~performance obligations. We record Gainshare as a usage-based royalty derived from customers’ usage of intellectual property and record it in the ~~uncertainties surrounding attainment of such operational levels, we recognize Gainshare performance incentives revenue (to~~same period in which 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.  usage occurs.

~~Stock-Based Compensation~~
~~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. As stock-based compensation expense recognized is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
We have elected to use the Black-Scholes-Merton option-pricing model, which incorporates various assumptions including volatility, expected life and interest rates. The expected volatility is based on the historical volatility of our common stock over the most recent period commensurate with the estimated expected life of stock options. The expected life of an award is based on historical experience and on the terms and conditions of the stock awards granted to employees. The interest rate assumption is based upon observed Treasury yield curve rates appropriate for the expected life of stock options.
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Income Taxes

We are required to assess ~~the likelihood~~whether it is “more-likely-than-not” that we will realize our deferred tax ~~assets will be recovered from future taxable income and if~~assets. If we believe that they are not likely to be fully realizable before the expiration dates applicable to such assets, then to the extent we believe that recovery is not likely, we must establish a valuation allowance. ~~Changes in the net deferred tax assets, less offsetting valuation allowance, in a period are recorded through the income tax provision (benefit)~~ ~~in the condensed consolidated statements of operations.~~ 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 (NOLs) related to an acquisition that we currently do not believe to be ~~more likely than not~~“more-likely-than-not” to be ultimately realized. If we conclude at a future financial reporting period that there has been a change in our ability to realize our California R&D credit and net operating loss carry forward deferred tax assets, and it is at such time ~~no longer “more–likely-than-not”~~“more-likely-than-not” that we will realize the tax credits before applicable expiration dates, our tax provision will ~~increase~~decrease in the period in which we make such determination.
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.
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Table of Contents

Our income tax calculations are based on application of ~~the respective~~applicable U.S. federal, state, or foreign tax law. Our tax filings, however, are subject to audit by the respective tax authorities. Accordingly, we recognize tax liabilities based upon our estimate of whether, and the extent to which, additional taxes will be due when such estimates are more-likely-than-not to be sustained. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. To the extent the final tax liabilities are different than the amounts originally accrued, the increases or decreases are recorded as income tax expense or benefit in the ~~consolidated statements~~Condensed Consolidated Statements of ~~operations.~~Comprehensive Loss. At September 30, ~~2017,~~2020, no deferred taxes have been provided on undistributed earnings from our international subsidiaries. We intend to reinvest the earnings of ~~approximately $6.7~~its non-U.S. subsidiaries in those operations indefinitely. As such, we have not provided for any foreign withholding taxes on the earnings of foreign subsidiaries as of September 30, 2020. The earnings of our foreign subsidiaries are taxable in the U.S. in the year earned under the Global Intangible Low-Taxed Income rules implemented under 2017 Tax Cuts and Jobs Act.
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 Company’s international subsidiaries since these earnings have been, and under current plans will continue to be, permanently reinvested outside the United States. It is not practicable to determine the amountcarryback of ~~the unrecognized tax liability at this time.~~
��
~~Software Development Costs~~
Internally developed software includes software developed to meet our internal needs to provide solution implementation services to our end-customers. These capitalized costs consist of internal compensation related costs and external direct costs incurredfederal NOLs during the application development stage and are amortized over their useful lives, generally six years. The costs to develop software that is marketed externally have not been capitalized as we believe our current software development process is essentially completed concurrent with the establishment of technological feasibility. As such, all related software development costs are expensed as incurred and included in research and development expense in our consolidated statements of operations.
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 ~~further testing is required, we perform a two-step process. The first step involves comparing the fair value of its reporting unit to its carrying value, including goodwill. If~~ the carrying ~~value of the reporting unit~~amount exceeds its fair value, an impairment loss would be recognized equal to the ~~second step~~amount of excess, limited to the ~~test is performed by comparing the carrying value~~amount of the goodwill in the reporting unit to its implied fair value. An impairment charge is recognized for the excess of the carrying value of goodwill over its implied fair value. For the purpose of impairment testing, we have determined that we have one reporting unit.total goodwill. There was no goodwill impairment ~~of goodwill~~ for the ~~period~~three and nine months ended September 30, ~~2017.~~2020.

Our long-lived assets, excluding goodwill, consist of property and equipment and intangible assets. We periodically review our long-lived assets for impairment. For assets to be held and used, we initiate our review whenever events or changes in circumstances indicate that the carrying amount of a long-lived asset group may not be recoverable. Recoverability of an asset group is measured by comparison of its carrying amount to the expected future undiscounted cash flows that the asset group is expected to generate. 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. ~~During~~There was no impairment of long-lived assets for the three and nine months ended September 30, ~~2017, there was no impairment related to our long-lived assets.~~2020.
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Recent Accounting Pronouncements and Accounting Changes

See Note 21 of “Notes to Condensed Consolidated Financial Statements (Unaudited)” of this Quarterly Report on Form 10-Q for a description of recent accounting pronouncements and accounting changes, including the expected dates of adoption and estimated effects, if any, on our ~~consolidated financial statements.~~   Condensed Consolidated Financial Statements.

Results of Operations
~~The following table sets forth, for the periods indicated, the percentage of total revenues represented by the line items reflected in our condensed consolidated statements of operations:~~

Three Months Ended
September 30,

Nine Months Ended
September 30,

2017

2016

2017

2016

Revenues:

Design-to-silicon-yield solutions
72
%
68
%
74
%
73
%
Gainshare performance incentives
28 32 26 27
Total revenues
100
%
100
%
100
%
100
%

Costs of design-to-silicon-yield solutions
47 42 47 41
Amortization of acquired technology
— — — —
Total cost of design-to-silicon-yield solutions
47 42 47 41
Gross profit
53 58 53 59
Operating expenses:

Research and development
30 26 30 26
Selling, general and administrative
22 21 24 20
Amoritization of other acquired intangible assets
— — — —
Total operating expenses
52 47 54 46
Income (loss) from operations
1 11 (1
)
13
Interest and other income (expense), net
— — — —
Income (loss) before taxes
1 11 (1
)
13
Income tax provision (benefit)
(1
)
4 (3
)
5
Net income
2
%
7
%
2
%
8
%

~~Comparison~~Income Statement Presentation
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.
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Table of Contents
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):

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 $ — $ 21,914 $ 63,023 $ — $ 63,023
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 ~~30, 2017~~, 2020 and ~~2016~~2019

Three Months Ended
September 30,

%

Revenues

2017

2016

Change

Change

(in thousands, except for percentages)

Design-to-silicon-yield solutions
$ 19,229 $ 18,552 $ 677 4
%
Gainshare performance incentives
7,288 8,707 (1,419
)
(16
)%
Total revenues
$ 26,517 $ 27,259 $ (742
)
(3
)%
Revenues, Costs of Revenues, and Gross Margin

Three Months Ended September 30,

Change

Nine Months Ended September 30,

Change

2020

2019

$

%

2020

2019

$

%

(Dollars in thousands)

Revenues:

Analytics
$ 14,346 $ 12,691 $ 1,655 13 % $ 42,766 $ 36,099 $ 6,667 18 %
Integrated Yield Ramp
8,766 9,223 (457 ) (5 )% 22,912 26,924 (4,012 ) (15 )%
Total revenues
$ 23,112 $ 21,914 $ 1,198 5 % $ 65,678 $ 63,023 $ 2,655 4 %
Costs of revenues
9,493 8,715 778 9 % 26,926 24,415 2,511 10 %
Gross profit
$ 13,619 $ 13,199 $ 420 3 % $ 38,752 $ 38,608 $ 144 0 %
Gross margin
59 % 60 % 59 % 61 %

Analytics revenue as a percentage of total revenues
62 % 58 % 65 % 57 %
Integrated Yield Ramp revenue as a percentage of total revenues
38 % 42 % 35 % 43 %

~~Design-to-silicon-yield solutions~~Analytics Revenue. Design-to-silicon-yield solutions revenue is derived from services (including services from yield solutions, design for inspection solutions, software support and maintenance, consulting, and training) and software and or system licenses, provided during our customer engagements as well as during solution product sales. Design-to-silicon-yield solutions
Analytics revenue increased ~~$0.7~~$1.7 million for the three months ended September 30, ~~2017,~~2020, compared to the three months ended September 30, ~~2016.~~2019. The increase in ~~Design-to-silicon-yield solutions~~Analytics revenue was primarily driven by a $2.1 million increase in Exensio licenses and CV® services due to anhigher hours worked across multiple contracts and customers, partially offset by a $0.4 million decrease in DFI™ revenue.
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 ~~the~~Analytics revenue ~~from our Design-For-Inspection solution~~was primarily driven by an $8.4 million increase in Exensio licenses and ~~from our Exensio big data solution,~~CV® services due to higher hours worked across multiple contracts and customers, partially offset by the expiration of an Exensio contract for a customer that ceased 7nm production in 2019 and a $1.7 million decrease in the revenue from our yield ramp solution. Our Design-to-silicon-yield solutions revenue may fluctuate in the future and is dependent on a number of factors, including the semiconductor industry’s continued acceptance of our solutions, the timing of purchases by existing and new customers, 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 due to adverse changes in their own business or, in the case of a time and materials contract, may take advantage of contractual provisions that permit the suspension of contracted work for a period if their business experiences a financial hardship. DFI™ revenue.

23
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Table of Contents

~~Gainshare Performance Incentives~~Integrated Yield Ramp Revenue. Gainshare performance incentives revenues represent profit sharing and performance incentives earned contingent upon our customers reaching certain defined operational levels. Revenue derived from Gainshare performance incentives
Integrated Yield Ramp revenue decreased ~~$1.4~~$0.5 million for the three months ended September 30, ~~2017,~~2020, compared to the three months ended September 30, ~~2016.  The~~2019, due primarily to decrease ~~was~~in Gainshare royalty from the 14nm and 28nm technology nodes.
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 ~~result~~first quarter of 2019, partially offset by a $0.5 million increase in Gainshare royalty from the ~~Gainshare period ending on an older 28nm~~14nm technology node.
Our ~~Gainshare performance incentives~~Integrated Yield Ramp revenue may continue to fluctuate from period to ~~period.~~period primarily due to the contribution of Gainshare ~~performance incentives revenue~~royalty, which is dependent on many factors that are outside our control, including among others, continued production of ICs by our customers at facilities at which we generate Gainshare, sustained yield improvements by our customers, and our ability to enter into new ~~Design-to-silicon-yield solutions~~ contracts containing ~~Gainshare performance incentives.~~  Gainshare.

Three Months Ended
September 30,

%

Costs of Design-to-silicon-yield solutions

2017

2016

Change

Change

(in thousands, except for percentages)

Direct costs of Design-to-silicon-yield solutions
$ 12,295 $ 11,366 $ 929 8
%
Amortization of acquired technology
136 86 50 58
%
Total costs of Design-to-silicon-yield solutions
$ 12,431 $ 11,452 $ 979 9
%
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 ~~Design-to-silicon-yield solutions~~Revenues.
Costs of ~~Design-to-silicon-yield solutions~~revenues consist of costs incurred to provide and support our services, costs recognized in connection with licensing our software, and amortization of acquired technology. ~~Direct costs of Design-to-silicon-yield solutions consist of service and software licenses costs. Service~~Services costs consist of material, employee compensation and related benefits, overhead costs, travel and allocated facilities-related costs. Software license costs consist of costs associated with licensing third-party software used by ~~the Company~~us in providing services to our customers in solution engagements, or sold in conjunction with our software products. ~~Direct~~
The increase in costs of ~~Design-to-silicon-yield solutions increased $0.9~~revenues of $0.8 million for the three months ended September 30, ~~2017,~~2020, compared to the three months ended September 30, ~~2016,~~2019, was primarily due to (i) a $1.0 million increase in labor or personnel-related costs, (ii) a $0.7 million increase in cloud-delivery related costs, and (iii) a $0.1 million increase in subcontractor expenses, partially offset by (i) a $0.5 million ~~net change~~decrease in direct costs due mainly to to hardware expense, shipping costs and the ~~deferred cost related to~~ timing of ~~completion~~deferral of contract costs, and (ii) a $0.5 million decrease in travel expenses resulting from reduced business travel due to the ~~contract signature process,~~global COVID-19 pandemic.
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 ~~$0.3~~$2.3 million increase in ~~personnel-related cost driven by world-wide merit increases,~~cloud-delivery related costs and ~~a $0.3 million increase in~~ depreciation expense of test equipment, (ii) a $0.8 million increase in direct costs related to third-party software royalty and licenses expense, equipment and hardware expense, and the timing of deferral of contract costs, and (iii) a $0.6 million increase in personnel-related costs, partially offset by a ~~$0.2~~$1.2 million decrease in ~~subcontractor expense. Amortization of acquired technology~~travel expenses resulting from reduced business travel due to the global COVID-19 pandemic.
Gross Margin
Gross margin for the three months ended September 30, ~~2017 and 2016 slightly increased~~2020 was 59% compared to 60% for the year-ago period. Gross margin for the nine months ended September 30, 2020 was 59% compared to 61% for the year-ago period, or a decrease of 2%. The higher gross margin during nine months ended September 30, 2019 was primarily due to ~~the amortization of acquired technology~~$3.3 million in nonrecurring revenue from ~~the Kinesys acquisition.~~ a customer contract amendment.

Three Months Ended

September 30

%

Research and Development

2017

2016

Change

Change

(in thousands, except for percentages)

Research and development
$ 7,875 $ 7,017 $ 858 12
%
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Table of Contents

Operating Expenses:
Research and ~~Development.~~ Development

Three Months Ended September 30,

Change

Nine Months Ended September 30,

Change

(Dollars in thousands)

2020

2019

$

%

2020

2019

$

%

Research and development
$ 8,328 $ 8,435 $ (107 ) (1 )% $ 24,672 $ 23,993 $ 679 3 %
As a percentage of total revenues
36 % 38 % 38 % 38 %
Research and development expenses consist primarily of personnel-related costs to support product development activities, including compensation and benefits, outside development services, travel, facilities cost allocations, and stock-based compensation charges.
Research and development expenses ~~increased $0.9 million~~decreased for the three months ended September 30, ~~2017,~~2020, compared to the ~~three~~year-ago period, primarily due to (i) a $0.1 million decrease in personnel-related costs, and (ii) a $0.2 million decrease in travel expenses resulting from reduced business travel due to the global COVID-19 pandemic, partially offset by a $0.2 million increase in subcontractor expenses that is primarily related to our DFI™ and Exensio solutions.
Research and development expenses increased for the nine months ended September 30, ~~2016,~~2020, compared to the year-ago period, primarily due to (i) a ~~$0.1 million increase in personnel-related expense due to world-wide merit increases, a $0.1 million increase in facilities expense, and a $0.6~~$0.4 million increase in subcontractor ~~expense. The increased investment in research and development~~expenses that is primarily ~~driven by continued development activity~~ related to our ~~DFI solution.~~ DFI™ and Exensio solutions, (ii) a $0.4 million increase in depreciation expense, and (iii) a $0.3 million increase in software licenses and maintenance expense, partially offset by a $0.4 million decrease in travel expenses resulting from reduced business travel due to the global COVID-19 pandemic.
We anticipate our expenses in research and development will fluctuate in absolute dollars from period to period ~~as a result of cost control initiatives and~~due to the timing of product development ~~projects and revenue generating activity requirements.~~ projects.

Three Months Ended

September 30,

$

%

Selling, General and Administrative

2017

2016

Change

Change

(in thousands, except for percentages)

Selling, general and administrative
$ 5,680 $ 5,548 $ 132 2
%

Selling, General and Administrative.

Three Months Ended September 30,

Change

Nine Months Ended September 30,

Change

(Dollars in thousands)

2020

2019

$

%

2020

2019

$

%

Selling, general and administrative
$ 8,420 $ 5,990 $ 2,430 41 % $ 24,052 $ 19,940 $ 4,112 21 %
As a percentage of total revenues
36 % 27 % 37 % 32 %
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 ~~$0.1 million~~ for the three months ended September 30, ~~2017,~~2020, compared to the ~~three months ended September 30, 2016,~~year-ago period, primarily due to (i) a ~~$0.1~~$1.0 million increase in legal fees, primarily related to fees for legal services, including the Advantest partnership, and for the arbitration proceeding over a disputed customer contract,  (ii) a $0.7 million increase in personnel-related ~~expense due to world-wide merit increases and hiring of an executive,~~costs, (iii) a ~~$0.1~~$0.5 million increase in subcontractor expenses, (iv) a $0.3 million increase in accounting and ~~legal expense,~~related fees, and (v) a $0.2 million increase in cloud-services related costs, partially offset by a $0.1 million decrease in travel expenses.
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Table of Contents
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 ~~expense.~~ expenses, (ii) a $1.8 million increase in fees for legal services, including the Advantest partnership, and for the arbitration proceeding over a disputed customer contract, (iii) a $0.9 million increase in personnel-related costs, (iv) a $0.2 million increase in accounting and related fees, (v) a $0.4 million increase in cloud-services related costs, and (vi) a $0.2 million increase from a write-down of equipment, partially offset by (i) a $0.4 million decrease in travel expenses, and (ii) a $0.1 million decrease in depreciation expenses.
We anticipate our selling, general and administrative expenses will fluctuate in absolute dollars from period to period as a result of cost control initiatives and to support ~~increased~~our selling efforts in the future.
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~~Table of Contents~~

Amortization of Other Acquired Intangible Assets.

Three Months Ended September 30,

Change

Nine Months Ended September 30,

Change

(Dollars in thousands)

2020

2019

$

%

2020

2019

$

%

Amortization of other acquired intangible assets
$ 174 $ 174 $ — — % $ 521 $ 436 $ 85 19 %
Amortization of other acquired intangible assets consists of amortization of intangibles acquired as a result of certain business ~~combinations. The amortization~~combination.
Interest and Other Expense (Income), Net

Three Months Ended September 30,

Change

Nine Months Ended September 30,

Change

(Dollars in thousands)

2020

2019

$

%

2020

2019

$

%

Interest and other expense (income), net
$ 361 $ (202 ) $ 563 279 % $ 530 $ (307 ) $ 837 273 %
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 ~~acquired intangible assets~~expense (income), net increased for the three and nine months ended September 30, 2020, compared to the year-ago periods, primarily due to a decrease in interest income due to lower interest rates, and a higher net unfavorable fluctuations in foreign exchange rates, partially offset by a decrease in loss related to foreign currency forward contracts, and an increase in other income.
Income Tax Benefit

Three Months Ended September 30,

Change

Nine Months Ended September 30,

Change

(Dollars in thousands)

2020

2019

$

%

2020

2019

$

%

Income tax benefit
$ (930 ) $ (511 ) $ (419 ) 82 % $ (4,109 ) $ (1,458 ) $ (2,651 ) 182 %
Income tax benefit increased for the three months ended September 30, ~~2017 remained flat at $0.1 million~~2020, compared to the ~~three~~year-ago period, primarily due to the results of changes in the excess tax benefit from employee stock compensation expense and the tax benefit from forecasted operating losses.
Income tax benefit increased for the nine months ended September 30, ~~2016.~~
~~Interest and Other Income (expense), net~~~~. The interest and other income (expense) for the three months ended September 30, 2017 remained flat at $0.1 million expense~~2020, compared to the ~~three months ended September 30, 2016.~~

Three Months Ended

September 30,

$

%

Income Tax Provision (benefit)

2017

2016

Change

Change

(in thousands, except for percentages)

Income tax provision (benefit)
$ (270
)
$ 1,051 $ (1,321
)
(126
)%
~~Income Tax Provision (benefit).~~ ~~The decrease in income tax provision (benefit) from $1.1 million expense for the three months ended September 30, 2016 to $0.3 million benefit for the three months ended September 30, 2017 was~~year-ago period, primarily due to ~~the~~favorable increase in excess tax benefits related to employee stock compensation expense and as ~~well as the decrease in income.~~
~~Comparison~~a result of the ~~Nine~~ ~~Months Ended~~ ~~September~~ ~~30, 2017 and 2016~~

Nine Months Ended

September 30,

$

%

Revenues

2017

2016

Change

Change

(In thousands, except for percentages)

Design-to-silicon-yield solutions
$ 55,426 $ 57,704 $ (2,278
)
(4
)%
Gainshare performance incentives
19,668 21,324 (1,656
)
(8
)%
Total
$ 75,094 $ 79,028 $ (3,934
)
(5
)%
~~Design-to-Silicon-Yield Solutions~~~~. Design-to-silicon-yield solutions revenue decreased $2.3 million for~~provisions of the CARES Act. During the nine months ended September 30, ~~2017 compared~~2020, we recorded an income tax benefit of $2.2 million from the carryback of federal NOLs pursuant to the ~~nine months ended September 30, 2016, due to the decrease in revenue from our yield ramp solution not fully offset by the increase in revenue from our DFI solution and our Exensio big data solution.~~
~~Gainshare Performance Incentives~~. Revenue derived from Gainshare performance incentives decreased $1.7 million for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016, was primarily the resultprovisions of the ~~Gainshare period ending on an older 28nm node, partially offset by higher Gainshare revenues from a new 28nm customer and from the 14nm nodes.~~CARES Act.

Nine Months Ended
September 30,

$

%

Costs of Design-to-silicon-yield solutions

2017

2016

Change

Change

(in thousands, except for percentages)

Direct costs of Design-to-silicon-yield solutions
$ 34,913 $ 32,034 $ 2,879 9
%
Amortization of acquired technology
327 278 49 18
%
Total costs of Design-to-silicon-yield solutions
$ 35,240 $ 32,312 $ 2,928 9
%
~~Costs of Design-to-Silicon-Yield Solutions.~~  Costs of Design-to-silicon-yield solutions increased $2.9 million for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016. The increase was primarily due to a $1.5 million increase in personnel-related costs, primarily due to the increase in headcount in Asia, a $0.3 million increase in equipment cost, a $0.2 million net change in the deferred cost related to timing of completion of the contract signature process, a $0.8 million increase in depreciation expense which was primarily due to increased depreciation expense related to our DFI test equipment, and a $0.1 million increase in subcontractor expense. Amortization of acquired technology for the nine months ended September 30, 2017 and 2016 slightly increased due to the amortization of acquired technology from the Kinesys acquisition.

Nine Months Ended

September 30,

$

%

Research and Development

2017

2016

Change

Change

(In thousands, except for percentages)

Research and development
$ 22,432 $ 20,388 $ 2,044 10
%

25
39
Table of Contents

~~Research and Development.~~ Research and development expenses increased $2.0 million for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016, primarily due to a $0.7 million increase in personnel-related expense, a $1.0 million increase in subcontractor expenses, and a $0.3 million increase in depreciation expense. The increased investment in research and development is primarily driven by continued development activity related to our DFI solution.

Nine Months Ended

September 30,

$

%

Selling, General and Administrative

2017

2016

Change

Change

(In thousands, except for percentages)

Selling, general and administrative
$ 17,775 $ 15,766 $ 2,009 13
%
~~Selling, General and Administrative~~. Selling, general and administrative expenses increased $2.0 million for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016, primarily due to a $0.6 million increase in personnel-related expense as a result of world-wide merit increases and hiring of an executive, a $0.8 million increase in accounting and legal expense primarily as a result of the new accounting system implementation and increased legal activities related to the Kinesys transaction, a $0.2 million increase in subcontractor expense, a $0.1 million increase in facility expense, a $0.2 million increase in allowance for doubtful account due to an increase in accounts receivable balance, and a $0.2 million increase in travel expense, partially offset by a $0.1 million decrease in depreciation expense.
~~Amortization of other acquired intangible for the~~ ~~nine months ended September 30, 2017 decreased slightly compared to amortization for the nine months ended September 30, 2016.~~
~~Interest and Other Income (Expense), Net~~.   The decrease in interest and other income (expense), net from a $0.4 million expense for the nine months ended September 30, 2016 to a $0.3 million expense for the nine months ended September 30, 2017 was primarily due to foreign exchange rate movements.

Nine Months Ended

September 30,

$

%

Income Tax Provision

2017

2016

Change

Change

(In thousands, except for percentages)

Income tax provision
$ (2,246
)
$ 3,655 $ (5,901
)
(161
)%
~~Income Tax Provision (benefit).~~ The decrease in income tax provision (benefit) from a $3.7 million expense for the nine months ended September 30, 2016 to a $2.2 million benefit for the nine months ended September 30, 2017 was primarily due to the increase in excess tax benefits related to employee stock compensation as well as the decrease in income.
Liquidity and Capital Resources

As of September 30, ~~2017,~~2020, our working capital, defined as total current assets less total current liabilities, was ~~$141.7~~$185.2 million, compared to ~~$151.8~~$119.6 million as of December 31, ~~2016. Cash~~2019. Total cash and cash equivalents, and short-term investments were ~~$100.8~~$168.4 million as of September 30, ~~2017,~~2020, compared to ~~$116.8~~cash and cash equivalents of $97.6 million as of December 31, ~~2016.~~2019. As of September 30, ~~2017~~2020, and December 31, ~~2016,~~2019, cash and cash equivalents held by our foreign subsidiaries were ~~$2.5~~$2.2 million and ~~$3.4~~$3.8 million, respectively. We believe that our existing cash resources and anticipated funds from operations will satisfy our cash requirements to fund our operating activities, capital expenditures, and other obligations for at least the next twelve months.

~~During~~ There has been no significant impact in respect to Liquidity and Capital Resources from the global COVID-19 pandemic. For risk discussion about the potential impact of global COVID-19 pandemic on our operations or demand for our products, refer to Item 1A, Risk Factors on Part II of this Report.
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, ~~2017, cash provided~~2020 was primarily driven by the proceeds from the issuance of our common stock.
Cash Flow Data

Nine Months Ended September 30,

2020

2019

$ Change

(In thousands)

Net cash flows provided by (used in):

Operating activities $ 10,876 $ 23,011 $ (12,135 )
Investing activities
(55,348 ) (9,501 ) (45,847 )
Financing activities
65,202 (9,226 ) 74,428
Effect of exchange rate changes on cash and cash equivalents
51 (114 ) 165
Net increase in cash and cash equivalents $ 20,781 $ 4,170 $ 16,611
Net Cash Flows Provided by Operating Activities
Cash flow from operating activities ~~of $6.3 million was a result of $1.3 million~~during the nine months ended September 30, 2020 were consisted of net ~~income,~~loss, adjusted for certain non-cash items which primarily consisted of depreciation and amortization, share-based compensation expense and deferred tax assets, and net change in operating assets and liabilities. The $12.1 million decrease in cash flows from operating activities for the nine months ended September 30, 2020, compared to the year-ago period, was driven primarily by a $9.7 million decrease in net change from operating assets and liabilities, and a $2.8 million increase in net loss, partially offset by a $0.4 million increase in non-cash adjustments to net ~~income~~loss, which was primarily due to (i) an increase in deferred tax assets of ~~$9.5~~1.3 million, partially offset by an increase in depreciation and amortization of $0.7 million, and ~~a cash decrease~~an increase in share-based compensation expense of $0.8 million. The major contributors to the net change in operating assets and liabilities for the nine months ended September 30, 2020 were as follows:
●
Other noncurrent assets decreased by $1.4 million, primarily due to a decrease in the noncurrent portion of unbilled receivables due to the timing of billing and revenue recognition.
●
Accounts payable decreased by $3.9 million primarily due to the timing of payments of invoices and payment of an invoice for a multi-year licensing and distribution agreement related to our Exensio software.
● Accrued and other liabilities increased by $1.6 million primarily due to increase in accrued legal fees and accrued cloud-services related costs.
●
Deferred revenues increased by a total of $6.9 million primarily due to timing of billing and revenue recognition.
40
Table of $4.5 million. Non-cash charges consisted primarily of stock-based compensation of $8.7 million, depreciation and amortization of $3.5 million, amortization of acquired intangible assets of $0.6 million, and a provision for doubtful accounts of $0.1 million, partially offset by deferred taxes of $3.5 million. Contents
Cash ~~flow decreases resulting from the net change~~Flows Used in operating assets and liabilities primarily consisted of a $4.9 million increase in accounts receivable, mainly due to the slow payments from Asia customers, a $1.1 million increase in prepaid expense and other current assets, a $0.7 million decrease in accrued compensation and related benefits, a $0.2 million of decrease in accrued and other liabilities, and a $0.7 million decrease in deferred revenue, partially offset by a $1.6 million increase in accounts payable, a $1.3 million decrease in other non-current assets, and a $0.2 million increase in billing in excess of recognized revenue. Investing Activities
Cash ~~flows~~ used in investing activities ~~of $10.8~~increased by $45.8 million for the nine months ended September 30, ~~2017, consisted~~2020 compared to the year-ago period. For the nine months ended September 30, 2020, cash used in investing activities primarily related to purchases of ~~$6.9~~about $50.0 million ~~payments~~short-term investments and property and a $5.4 million equipment purchased and prepayment for ~~capital expenditures, primarily DFI test equipment and $3.8 million payments for business acquisitions, net~~our DFI™ solution, including construction of additional eProbe tools. For the nine months ended September 30, 2019, cash ~~acquired. Cash~~ flows used in investing activities related to (i) a $6.8 million property and equipment purchased primarily related to the construction of our DFI™ solution and expansion of our research and development laboratory and clean room, and (ii) a $2.7 million payment for a business acquisition that closed in the second quarter of 2019.
Net Cash Flows Provided by (Used in) Financing Activities
Net cash provided by financing activities ~~of $11.7~~increased by $74.4 million for the nine months ended September 30, ~~2017,~~2020 compared to the year-ago period. For the nine months ended September 30, 2020, net cash provided by financing activities primarily consisted of ~~$13.4~~$65.0 million net proceeds from issuance of common stock in connection with the Securities Purchase Agreement with Advantest, and $3.5 million of proceeds from our Employee Stock Purchase Plan and exercise of stock options, partially offset by $3.3 million in cash payments for taxes related to net share settlement of equity awards. For the nine months ended September 30, 2019, net cash used in financing activities primarily consisted of $9.6 million in cash used to ~~purchase~~repurchase shares of our common stock, ~~$2.4~~and $1.9 million in cash payments for taxes related to net share settlement of equity awards, partially offset by ~~$2.3 million of proceeds from the exercise of stock options and $1.9~~$2.5 million of proceeds from our Employee Stock Purchase ~~Plan.~~
26
~~Table of Contents~~
During the nine months ended September 30, 2016, cash generated from operating activities of $1.8 million was a result of $6.2 million of net income, an adjustment of $12.2 million for non-cash chargesPlan and a cash decrease of $16.5 million reflected in the net change of operating assets and liabilities. Non-cash charges consisted primarily of stock-based compensation of $7.9 million, depreciation and amortization of $2.6 million, amortization of acquired intangible assets of $0.6 million, a loss on disposal of property and equipment of $0.1 million and deferred taxes of $1.1 million, partially offset by a $0.1 million reversal of allowance for doubtful accounts and $0.1 million unrealized gain from foreign currency forward contract. Cash flow decreases resulting from the net change in operating assets and liabilities primarily consisted of a $10.5 million increase in accounts receivable, mainly due to the slow payments from Asia customers, a $1.5 million increase in prepaid expense and other assets, a $1.2 million decrease in billing in excess of recognized revenues, and a $7.8 million increase in other non-current assets, partially offset by a $3.9 million increase in deferred revenue, a $0.3 million increase in accrued compensation and related benefits and a $0.1 million increase in accrued and other liabilities. Cash flows used in investing activities of for the nine months ended September 30, 2016 consisted of $8.9 million payment for capital expenditures, primarily related to our DFI test equipment. Cash flows used in financing activities of $0.7 million for the nine months ended September 30, 2016, consisted of $2.2 million of cash used to purchase shares of our common stock, $1.2 million cash payments for taxes related to net share settlement of equity awards, partially offset by $1.1 million of proceeds from the exercise of stock ~~options and $1.6 million of proceeds from our Employee Stock Purchase Plan.~~
options.

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, ~~2017:~~2020:

Payments Due by Period

Contractual Obligations

2017 (remaining
three months)

2018

2019

2020

2021

2022 and thereafter

Total

Operating lease obligations
$ 544 $ 1,757 $ 532 $ 444 $ 360 $ 126 $ 3,763
Purchase obligations(1)
6,491 974 368 222 222 — 8,277
Total(2)
$ 7,035 $ 2,731 $ 900 $ 666 $ 582 $ 126 $ 12,040

Payments Due by Period

2020

(remaining

2025

three

and

Contractual Obligations

months)

2021

2022

2023

2024

thereafter

Total

Operating lease obligations(1)
$ 392 $ 1,876 $ 1,626 $ 1,127 $ 809 $ 2,979 $ 8,809
Purchase obligations(2)
6,559 6,796 700 365 321 321 15,062
Total(3)
$ 6,951 $ 8,672 $ 2,326 $ 1,492 $ 1,130 $ 3,300 $ 23,871

(1)
Refer to Note 5, Leases of the Notes to Condensed Consolidated Financial Statements (Item 1 of Part I of this Report)

~~(1)~~
(2)
Purchase obligations consist of agreements to purchase goods and services entered in the ordinary course of business.

~~(2)~~
(3)
The contractual obligation table above excludes liabilities for uncertain tax positions of ~~$2.9~~$2.8 million, which are not practicable to assign to any particular years, due to the inherent uncertainty of the tax positions. See Note 59 of “Notes to Condensed Consolidated Financial Statements” for further discussion.

41
Table of Contents
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, ~~2017,~~2020, we had cash and cash equivalents and short-term investments of ~~$100.8~~$168.4 million. Cash and cash equivalents consisted of cash and highly liquid money market ~~instruments.~~instruments, and short-term investments consisted of U.S. Treasury bills. We would not expect our operating results or cash flows to be affected to any significant degree by the effect of a sudden change in market interest on our portfolio. A hypothetical increase in market interest rates of 100 basis points from the market rates in effect at September 30, ~~2017,~~2020, would cause the fair value of these investments to decrease by an immaterial amount, which would not have significantly impacted our financial position or results of operations. ~~Declines in interest rates over time will result in lower interest income and interest expense.~~

27
~~Table~~
At September 30, 2020 and periodically throughout the year, we have maintained cash balances in various operating accounts in excess of ~~Contents~~
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. WeFrom time to time, we enter into foreign currency forward contracts to reduce the exposure to foreign currency exchange rate fluctuations on certain foreign currency denominated monetary assets and liabilities. We do not use foreign currency forward contracts for speculative or trading purposes. We record these forward contracts at fair value. The counterparty to these foreign currency forward contracts is a ~~large global~~ financial institution that we believe is creditworthy, and therefore, we believe the credit risk of counterparty non-performance is not significant. The change in fair value of these contracts is recorded into earnings as a component of other income (expense), net and offsets the change in fair value of foreign currency denominated monetary assets and liabilities, which is also recorded in other income (expense), net. As of September 30, ~~2017,~~2020, we had ~~one~~no outstanding forward contract with a notional amount of $8.0 million. The foreign currency exchange rate movement of plus-or-minus 10% will result in the change in fair value of this contract of plus-or-minus $0.8 million. contracts.

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 ~~“disclosure~~"disclosure controls and ~~procedures”~~procedures" as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) as of September 30, ~~2017,~~2020, in connection with the filing of this Quarterly Report on Form 10-Q. Based on that evaluation as of September 30, ~~2017,~~2020, our principal executive officer and principal financial and accounting officer concluded that our disclosure controls and procedures were effective to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in rules and forms of the SEC and accumulated and communicated to our management as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There were no changes in the ~~Company's~~Company’s internal control over financial reporting during the three months ended September 30, ~~2017,~~2020, that have materially affected, or are reasonably likely to materially affect, the ~~Company's~~Company’s internal control over financial reporting.
42
Table of Contents

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

From time to time, we are subject to various claims and legal proceedings that arise in the ordinary course of business. We accrue for losses related to litigation when a potential loss is probable and the loss can be reasonably estimated in accordance with FASB requirements. During the reported period, we were not a party to any material legal proceedings, thus no loss was probable and no amount was accrued at September 30, ~~2017.~~2020.
On May 6, 2020, we initiated an arbitration proceeding with the Hong Kong International Arbitration Center against SMIC New Technology Research & Development (Shanghai) Corporation (“SMIC”) due to SMIC’s failure to pay fees due to PDF under a series of contracts. We seek to recover the unpaid fees, a declaration requiring SMIC to pay fees under the contracts in the future, and costs associated with bringing the arbitration proceeding.

Item 1A. Risk Factors

Item 1A, “Risk Factors,” on pages 1312 through 20 of the ~~Company~~’sCompany’s Annual Report on Form 10-K for the year ended December 31, ~~2016,~~2019, provides information on the significant risks associated with our business. ~~There~~Except as set forth below, there have been no subsequent material changes to these risks.
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.

28
43
Table of Contents
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 ~~table below sets forth~~information required to be disclosed by paragraph (a) of Item 2 to Form 10-Q has been included in a current report on Form 8-K and, therefore, is not furnished herein, pursuant to the ~~information with respect to purchases made by or on behalf of the Company or any “affiliated purchaser” (as the term is defined~~last sentence in ~~Rule 10b-18(a)(3) under the Exchange Act) of our common stock during the three months ended~~ ~~September 30, 2017 (in thousands except per share amounts):~~
~~ISSUER PURCHASES OF EQUITY SECURITIES~~
Period

Total
Number of
Shares
Purchased
(1)

Average
Price Paid
Per Share

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

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

Month #7 (July 1, 2017 through July 31, 2017)
— $ — — $ 20,230
Month #8 (August 1, 2017 through August 31, 2017)
566 $ 15.28 566 $ 11,582
Month #9 (September 1, 2017 through September 30, 2017)
— $ — — $ 11,582
Total
566 $ 15.28 566
~~(1)~~
~~On October 25, 2016, the Board of Directors adopted a new program, effective immediately, to repurchase up to $25.0 million of the Company’s common stock both on the open market and in privately negotiated transactions over the next two years.~~
that paragraph.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

None.

Item 5. Other Information

None.

29
44
Table of Contents

Item 6. Exhibits

Exhibit
Number


Description
4.1 Securities Purchase Agreement by and between PDF Solutions, Inc. and Advantest America, Inc. dated July 29, 2020.†
4.2 Stockholder Agreement by and between PDF Solutions, Inc. and Advantest America, Inc. dated July 29, 2020.†
10.1
Software License and Related Services Agreement by and between PDF Solutions, Inc. and Advantest America, Inc. dated March 25, 2020 and Amendment No.1 thereto dated July 29, 2020.† +

10.2 Amended and Restated Master Development Agreement by and between PDF Solutions, Inc. and Advantest America, Inc. dated July 29, 2020.† +
10.3 Master Commercial Terms and Support Services Agreement by and between PDF Solutions, Inc. and Advantest America, Inc. dated July 29, 2020.† +
31.01

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



31.02

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



32.01

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



32.02

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



~~101.INS~~ 101

~~XBRL Instance Document.~~The following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2020, formatted in Inline XBRL: (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Comprehensive Loss, (iii) Condensed Consolidated Statements of Stockholders’ Equity, (iv) Condensed Consolidated Statements of Cash Flows and (v) Notes to Condensed Consolidated Financial Statements, tagged as blocks of text and including detailed tags.†



~~101.SCH~~    104

Cover Page Interactive Data File (formatted as Inline XBRL ~~Taxonomy Extension Schema Document.~~and contained in Exhibit 101).†
__________________________
†
Filed herewith.
** Furnished, and not filed.
+
Certain portions of this document that constitute confidential information have been redacted in accordance with Regulation S-K, Item 601(b)(10).
~~101.CAL~~
~~XBRL Taxonomy Extension Calculation Linkbase Document.~~
~~101.DEF~~
~~XBRL Taxonomy Extension Definition Linkbase Document.~~
~~101.LAB~~
~~XBRL Taxonomy Extension Label Linkbase Document.~~
~~101.PRE~~
~~XBRL Taxonomy Extension Presentation Linkbase Document.~~

30
45
Table of Contents

SIGNATURES

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


PDF SOLUTIONS, INC.








Date: November 6, ~~2017~~2020
By:
/s/ JOHN K. KIBARIAN



John K. Kibarian



President and Chief Executive Officer
(principal executive officer)
Date: November 6, 2020
By:
/s/ ADNAN RAZA
Adnan Raza
Executive Vice President, Finance and Chief Financial Officer



(principal ~~executive~~financial and accounting officer)
~~Date:~~ ~~November 6, 2017~~
~~By:~~
~~/s/~~ ~~GREGORY C. WALKER~~

~~Gregory C. Walker~~
~~Vice President, Finance and Chief Financial Officer~~
~~(principal financial and accounting officer)~~

31
~~Table of Contents~~
46
~~INDEX TO EXHIBITS~~
~~Exhibit~~
~~Number~~
~~Description~~
~~31.01~~
~~Certification of the principal executive officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.~~
~~31.02~~
~~Certification of the principal financial and accounting officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.~~
~~32.01~~
~~Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.~~
~~32.02~~
~~Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.~~
~~101.INS~~
~~XBRL Instance Document.~~
~~101.SCH~~
~~XBRL Taxonomy Extension Schema Document.~~
~~101.CAL~~
~~XBRL Taxonomy Extension Calculation Linkbase Document.~~
~~101.DEF~~
~~XBRL Taxonomy Extension Definition Linkbase Document.~~
~~101.LAB~~
~~XBRL Taxonomy Extension Label Linkbase Document.~~
~~101.PRE~~
~~XBRL Taxonomy Extension Presentation Linkbase Document.~~
32

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

~~333 West San Carlos Street, Suite 1000~~2858 De La Cruz Blvd.
~~San Jose,~~Santa Clara, California	~~95110~~95050
(Address of Principal Executive Offices)	(Zip Code)

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

☐Large accelerated filer ☐	☑Accelerated filer ☑
☐Non-accelerated filer ~~(Do not check if a smaller reporting company)~~☐	☐Smaller reporting company ☑
☐	Emerging growth company	☐

	Page
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets	3
Condensed Consolidated Statements of ~~Operations and~~ Comprehensive ~~Income~~Loss	4
Condensed Consolidated Statements of Stockholders’ Equity	5
Condensed Consolidated Statements of Cash Flows	57
Notes to Condensed Consolidated Financial Statements	69
Item 2. ~~Management~~’sManagement’s Discussion and Analysis of Financial Condition and Results of Operations	1830
Item 3. Quantitative and Qualitative Disclosures About Market Risk	2742
Item 4. Controls and Procedures	2842
PART II OTHER INFORMATION
Item 1. Legal Proceedings	2843
Item 1A. Risk Factors	28 43
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	2944
Item 3. Defaults Upon Senior Securities	2944
Item 4. Mine Safety Disclosures	2944
Item 5. Other Information	2944
Item 6. Exhibits	3045
SIGNATURES	3146
INDEX TO EXHIBITS	3245

							*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

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

	For the Quarterly Period ended September 30, ~~2017~~2020

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

	For the transition period from _______________ to ______________

	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

	*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

	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

	*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

	●	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

	(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

	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

				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

	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

	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

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

	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.

	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

	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

						*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

				*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

							*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	%		*	%

											*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	%

Level 1 -	Inputs are quoted prices in active markets for identical assets or liabilities.

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

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

											*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

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

•	Total revenues ~~for~~were $23.1 million, an increase of $1.2 million, or 5%, compared to the three months ended September 30, ~~2017, were $26.5~~2019. Analytics revenue was $14.3 million, ~~a decrease~~which was an increase of ~~$0.7~~$1.7 million, ~~or 3%,~~ compared to ~~$27.3~~the three months ended September 30, 2019. The increase in Analytics revenue was primarily driven by a $2.1 million increase in Exensio licenses and Characterization Vehicle (CV®) services due to higher hours worked across multiple contracts and customers, partially offset by a $0.4 million decrease in Design-for-Inspection (DFI™) revenue. Integrated Yield Ramp revenue decreased $0.5 million for the three months ended September 30, ~~2016. Design-to-silicon-yield solutions revenue for~~2020, compared to the three months ended September 30, ~~2017, was $19.2~~ ~~million, an increase~~2019, due primarily to decrease in Gainshare royalty from the 14nm and 28nm technology nodes.

•	Costs of ~~$0.7 million, or 4%, when compared to Design-to-silicon yield solutions revenue of $18.6~~revenues increased $0.8 million for the three months ended September 30, ~~2016. The increase in Design-to-silicon-yield solutions was~~2020, compared to the three months ended September 30, 2019, primarily due to an(i) a $1.0 million increase in ~~the revenue from our Design-For-Inspection (“DFI”) solution~~personnel-related costs, (ii) a $0.7 million increase in cloud-delivery related costs, and ~~from our Exensio big data solution,~~(iii) a $0.1 million increase in subcontractor expenses, partially offset by (i) a $0.5 million decrease in direct costs due mainly to hardware expense, shipping costs and the ~~revenue~~timing of deferral of contract costs, and (ii) a $0.5 million decrease in travel expenses resulting from ~~our yield ramp solution. Gainshare performance incentives revenue~~reduced business travel due to the global COVID-19 pandemic.

•	Gross margin was 59%, compared to 60% for the three months ended September 30, ~~2017,~~2019.

•	Net loss was ~~$7.3~~$2.7 million, ~~a decrease of $1.4 million, or 16%,~~ compared to ~~$8.7~~$0.7 million for the three months ended September 30, ~~2016.~~2019. The ~~decrease~~increase in ~~revenue from Gainshare performance incentives~~net loss was primarily ~~the result~~attributable to (i) a $0.8 million increase in costs of ~~Gainshare period ending on~~revenues, (ii) a $2.3 million increase in operating expenses due primarily to our sales and marketing activities, and an ~~older 28nm node.~~increase in general and administrative expenses related to subcontractor costs, legal fees, and accounting and related fees, and (iii) $0.6 million increase in interest and other expense (income), net, partially offset by a $1.2 million increase in revenues, and a $0.4 million increase in income tax benefit.

•	•	~~Net income for the three months ended~~Cash, cash equivalents and short-term investments increased $70.8 million to $168.4 million at September 30, ~~2017 was $0.6~~2020, from $97.6 million ~~compared to $2.0 million for the three months ended September 30, 2016. The decrease in net income was primarily attributable to a $1.7 million decrease in gross margin due to the~~ decrease in Gainshare performance incentive revenue and a $1.0 million increase in operating expense, primarily driven by the continued activity related to our development of our DFI solution, partially offset by a $1.3 million decrease in tax provisionat December 31, 2019, primarily due to the ~~recognition~~proceeds from the issuance of ~~excess tax benefits~~our common stock in connection with our strategic partnership with Advantest, partially offset by cash used in investing activities primarily related to ~~employee stock compensation as a result of the adoption of ASU 2016-09 as well as the decrease~~additions to property and equipment for our DFI™ solution, including investments in ~~level of income.~~constructing eProbe tools.

•	~~Net income per basic and diluted share was $0.02 for the three months ended September 30, 2017, as compared to $0.06 for the three months ended September 30, 2016.~~