UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

~~________________~~

FORM 10-Q

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

	For the Quarterly Period ended March 31, ~~September~~ ~~30, 2018~~2019

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

	For the transition period from _______________ to ______________

Commission File Number 000-31311

PDF SOLUTIONS, INC.

(Exact name of Registrant as Specified in its Charter)

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

2858 De La Cruz Blvd.,
~~San~~taSanta Clara, California	9505095050
(Address of Principal Executive Offices)	(Zip Code)

(408) 280-7900

(Registrant’s Telephone Number, Including Area Code)

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

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

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

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

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

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

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock	PDFS	The NASDAQ Stock Market LLC

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

There were ~~32,274,543~~32,428,712 shares of the Registrant’s Common Stock outstanding as of ~~November 5, 2018.~~May 3, 2019.

Table of Contents

TABLE OF CONTENTS

	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	56
Notes to Condensed Consolidated Financial Statements	67
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	2423
Item 3. Quantitative and Qualitative Disclosures About Market Risk	3231
Item 4. Controls and Procedures	32
PART II OTHER INFORMATION
Item 1. Legal Proceedings	3332
Item 1A. Risk Factors	3332
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	3433
Item 3. Defaults Upon Senior Securities	3433
Item 4. Mine Safety Disclosures	3433
Item 5. Other Information	3433
Item 6. Exhibits	34
SIGNATURES	35
INDEX TO EXHIBITS	34

Table of Contents

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

PDF SOLUTIONS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(U~~naudited)~~(unaudited)

(in thousands, except par value)

	September 30,			December 31,
	2018			2017			March 31, 2019			December 31, 2018
ASSETS
Current assets:
Cash and cash equivalents	$	96,788		$	101,267		$	90,415		$	96,089
Accounts receivable, net of allowance of $333 and $374, respectively		52,744			57,564
Accounts receivable, net of allowance for doubtful accounts of $332 in 2019 and 2018								53,211			51,570
Prepaid expenses and other current assets		10,890			5,069			9,862			9,562
Total current assets		160,422			163,900			153,488			157,221
Property and equipment, net		34,120			25,386			35,936			35,681
Operating lease right-of-use assets, net								8,339			—
Goodwill		1,923			1,923			1,923			1,923
Intangible assets, net		5,317			6,074			4,812			5,064
Deferred tax assets		17,714			16,348			21,099			19,044
Other non-current assets		8,163			10,545			7,088			6,972
Total assets	$	227,659		$	224,176		$	232,685		$	225,905
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	3,286		$	2,536		$	2,522		$	2,454
Accrued compensation and related benefits		4,969			6,493			4,256			4,727
Accrued and other current liabilities		4,386			2,627			2,801			3,235
Operating lease liabilities – current portion								1,914			—
Deferred revenues – current portion		7,360			7,981			9,220			8,477
Billings in excess of recognized revenues		669			-			1,529			635
Total current liabilities		20,670			19,637			22,242			19,528
Long-term income taxes payable		4,140			3,902			3,898			3,751
Non-current operating lease liabilities								8,464			—
Other non-current liabilities		1,954			2,269			734			2,831
Total liabilities		26,764			25,808			35,338			26,110
Commitments and contingencies (Note 9)
Commitments and contingencies (Note 12)
Stockholders’ equity:
Preferred stock, $0.00015 par value, 5,000 shares authorized, no shares issued and outstanding		-			-			—			—
Common stock, $0.00015 par value, 70,000 shares authorized: shares issued 40,509 and 39,799, respectively; shares outstanding 32,257 and 32,112, respectively		5			5
Common stock, $0.00015 par value, 70,000 shares authorized: shares issued 41,009 and 40,677, respectively; shares outstanding 32,346 and 32,382, respectively								5			5
Additional paid-in-capital		308,098			297,950			315,429			310,660
Treasury stock at cost, 8,252 and 7,688 shares, respectively		(78,752	)		(71,793	)
Treasury stock at cost, 8,663 and 8,295 shares, respectively								(83,616	)		(79,142	)
Accumulated deficit		(27,337	)		(27,089	)		(33,143	)		(30,452	)
Accumulated other comprehensive loss		(1,119	)		(705	)		(1,328	)		(1,276	)
Total stockholders’ equity		200,895			198,368			197,347			199,795
Total liabilities and stockholders’ equity	$	227,659		$	224,176		$	232,685		$	225,905

See accompanying Notes to Condensed Consolidated Financial Statements (unaudited)

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PDF SOLUTIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND ~~COMPREHENSI~~VECOMPREHENSIVE INCOME (LOSS)

(U~~naudited)~~(unaudited)

(in thousands, except per share amounts)

													Three Months Ended March 31,
	Three Months Ended September 30,						Nine Months Ended September 30,						2019			2018
	2018			2017			2018			2017
Revenues:
Design-to-silicon-yield solutions	$	13,976		$	19,229		$	47,431		$	55,426
Solutions													$	16,661		$	18,190
Gainshare performance incentives		6,237			7,288			18,638			19,668			3,880			6,547
Total revenues		20,213			26,517			66,069			75,094			20,541			24,737

Costs of Design-to-silicon-yield solutions:
Direct costs of Design-to-silicon-yield solutions		10,539			12,295			32,651			34,913
Cost of Solutions
Direct costs of Solutions														7,723			11,338
Amortization of acquired technology		144			136			431			327			144			144
Total cost of Design-to-silicon-yield solutions		10,683			12,431			33,082			35,240
Total cost of solutions														7,867			11,482
Gross profit		9,530			14,086			32,987			39,854			12,674			13,255

Operating expenses:
Research and development		6,755			7,875			21,100			22,432			8,246			7,245
Selling, general and administrative		5,507			5,680			17,801			17,775			7,011			6,375
Amortization of other acquired intangible assets		108			107			326			291			108			109
Restructuring charges														92			—
Total operating expenses		12,370			13,662			39,227			40,498			15,457			13,729

Income (loss) from operations		(2,840	)		424			(6,240	)		(644	)
Loss from operations														(2,783	)		(474	)
Interest and other income (expense), net		223			(104	)		283			(305	)		(6	)		(331	)
Income (loss) before income taxes		(2,617	)		320			(5,957	)		(949	)
Loss before income taxes														(2,789	)		(805	)
Income tax benefit		(535	)		(270	)		(1,355	)		(2,246	)		(98	)		(381	)
Net income (loss)	$	(2,082	)	$	590		$	(4,602	)	$	1,297
Net loss													$	(2,691	)	$	(424	)

Net income (loss) per share:
Net loss per share:
Basic	$	(0.06	)	$	0.02		$	(0.14	)	$	0.04		$	(0.08	)	$	(0.01	)
Diluted	$	(0.06	)	$	0.02		$	(0.14	)	$	0.04		$	(0.08	)	$	(0.01	)

Weighted average common shares:
Basic		32,184			32,078			32,105			32,060			32,485			32,168
Diluted		32,184			32,969			32,105			33,317			32,485			32,168

Net income (loss)	$	(2,082	)	$	590		$	(4,602	)	$	1,297

Net loss													$	(2,691	)	$	(424	)
Other comprehensive income (loss):
Foreign currency translation adjustments, net of tax		(168	)		409			(414	)		1,117			(52	)		525
Comprehensive income (loss)	$	(2,250	)	$	999		$	(5,016	)	$	2,414		$	(2,743	)	$	101

See accompanying Notes to Condensed Consolidated Financial Statements (unaudited)

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PDF SOLUTIONS, INC.

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

(U~~naudited)~~(unaudited)

(in ~~thousands~~)thousands)

Nine Months Ended September 30,

2018

2017

Cash flows from operating activities:

Net income (loss)
$ (4,602 ) $ 1,297
Adjustments to reconcile net income (loss) to net cash provided by operating activities:

Depreciation and amortization
3,689 3,549
Stock-based compensation expense
7,825 8,737
Amortization of acquired intangible assets
757 618
Deferred taxes
(2,298 ) (3,514 )
Loss on disposal of property and equipment
4 5
Provision for (reversal of) allowance for doubtful accounts
(41 ) 124
Unrealized loss (gain) on foreign currency forward contract
59 (6 )
Changes in operating assets and liabilities:

Accounts receivable
5,653 (4,921 )
Prepaid expenses and other current assets
(3,444 ) (1,142 )
Accounts payable
(598 ) 1,611
Accrued compensation and related benefits
(1,377 ) (721 )
Accrued and other liabilities
(252 ) (225 )
Deferred revenues
632 (682 )
Billings in excess of recognized revenues
669 200
Other non-current assets
2,367 1,331
Net cash provided by operating activities
9,043 6,261

Cash flows from investing activities:

Purchases of property and equipment
(8,747 ) (6,942 )
Payments of business acquisitions, net of cash acquired
- (3,841 )
Net cash used in investing activities
(8,747 ) (10,783 )

Cash flows from financing activities:

Proceeds from exercise of stock options
469 2,304
Repurchases of common stock
(5,248 ) (13,418 )
Proceeds from employee stock purchase plan
1,832 1,866
Payments for taxes related to net share settlement of equity awards
(1,711 ) (2,439 )
Net cash used in financing activities
(4,658 ) (11,687 )

Effect of exchange rate changes on cash and cash equivalents
(117 ) 172
Net decrease in cash and cash equivalents
(4,479 ) (16,037 )
Cash and cash equivalents, beginning of period
101,267 116,787
Cash and cash equivalents, end of period
$ 96,788 $ 100,750

Supplemental disclosure of cash flow information:

Cash paid during the period for:

Taxes
$ 1,616 $ 1,876
Property and equipment received and accrued in accounts payable and accrued and other liabilities
$ 3,398 $ 1,533
Tenant allowance paid by landlord for leasehold improvements
$ 1,536 $ -

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

						Additional										Accumulated Other
	Common Stock					Paid-In		Treasury Stock					Accumulated			Comprehensive
	Shares			Amount		Capital		Shares		Amount			Deficit			Loss			Total
Balances, December 31, 2017		32,112		$	5	$	297,950		7,688	$	(71,793	)	$	(27,089	)	$	(705	)	$	198,368
Cumulative-effect adjustment from adoption of ASU 2014-09		-			-		-		-		-			4,353			-			4,353
Issuance of common stock in connection with employee stock purchase plan		108			-		1,007		-		-			-			-			1,007
Issuance of common stock in connection with exercise of options		8			-		39		-		-			-			-			39
Vesting of restricted stock units		74			-		-		-		-			-			-			-
Purchases of treasury stock in connection with tax withholdings on restricted stock grants		-			-		-		36		(557	)		-			-			(557	)
Repurchases of common stock		(338	)		-		-		338		(4,123	)		-			-			(4,123	)
Stock-based compensation expense		-			-		2,871		-		-			-			-			2,871
Comprehensive income (loss)		-			-		-		-		-			(424	)		525			101
Balances, March 31, 2018		31,964		$	5	$	301,867		8,062	$	(76,473	)	$	(23,160	)	$	(180	)	$	202,059

See accompanying Notes to Condensed Consolidated Financial Statements (unaudited)

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PDF SOLUTIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands)

	Three Months Ended March 31,
	2019			2018
Operating activities:
Net loss	$	(2,691	)	$	(424	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		1,292			1,261
Stock-based compensation expense		3,476			2,856
Amortization of acquired intangible assets		252			253
Deferred taxes		(2,054	)		117
Loss on disposal of property and equipment		—			3
Unrealized loss (gain) on foreign currency forward contract		(2	)		58
Changes in operating assets and liabilities:
Accounts receivable		(1,641	)		(80	)
Prepaid expenses and other current assets		(297	)		(2,183	)
Other non-current assets		50			798
Accounts payable		198			497
Accrued compensation and related benefits		(472	)		(1,278	)
Accrued and other liabilities		415			(532	)
Deferred revenues		429			1,906
Billings in excess of recognized revenues		894			—
Net cash provided by (used in) operating activities		(151	)		3,252
Investing activities:
Purchases of property and equipment		(2,357	)		(2,447	)
Net cash used in investing activities		(2,357	)		(2,447	)
Financing activities:
Proceeds from exercise of stock options		518			39
Repurchases of common stock		(3,917	)		(4,123	)
Proceeds from employee stock purchase plan		782			1,007
Payments for taxes related to net share settlement of equity awards		(557	)		(557	)
Net cash used in financing activities		(3,174	)		(3,634	)
Effect of exchange rate changes on cash and cash equivalents		8			84

Net change in cash and cash equivalents		(5,674	)		(2,745	)
Cash and cash equivalents, beginning of period		96,089			101,267
Cash and cash equivalents, end of period	$	90,415		$	98,522
Supplemental disclosure of cash flow information:
Cash paid during the period for taxes	$	462		$	622
Cash paid for amounts included in the measurement of operating lease liabilities	$	276		$	—

Property and equipment received and accrued in accounts payable and accrued and other liabilities	$	1,284		$	1,185

See accompanying Notes to Condensed Consolidated Financial Statements (unaudited)

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PDF SOLUTIONS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The interim unaudited condensed consolidated financial statements included herein have been prepared by PDF Solutions, Inc. (the “Company”) pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”), including the instructions to the Quarterly Report on Form 10-Q and Article 10 of Regulation S-X. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. The interim unaudited condensed consolidated financial statements reflect, in the opinion of management, all adjustments necessary (consisting only of normal recurring adjustments), to present a fair statement of results for the interim periods presented. The operating results for any interim period are not necessarily indicative of the results that may be expected for other interim periods or the full fiscal year. The accompanying interim unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2017.~~2018.

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, ~~2017~~2018, 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.

Use of Estimates

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

~~2. Revenue Recognition.~~

Recently Adopted Accounting Standards~~Pronouncements~~

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue recognition requirements in Revenue Recognition (Topic 605). Subsequently, the FASB has issued several amendments to the standard, including clarification on accounting for licenses of intellectual property and identifying performance obligations. Under Topic 606, the new revenue recognition standard provides a five-step analysis of transactions to determine when and how revenue is recognized. The core principle is that a company should recognize revenue to reflect the transfer of promised goods or 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. The Company adopted this new standard on the first day of the first fiscal quarter of fiscal 2018. The Company chose to adopt the standard using the modified retrospective transition method. See Note 2. Revenue Recognition, below for further information, including further discussion on the impact of adoption and changes in accounting policies relating to revenue recognition.

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): 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. The Company adopted this standard on January 1, 2018, and it did not have a material impact on its financial statements and footnote disclosures.

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In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, that will require that the amounts generally described as restricted cash and restricted cash equivalents would be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period amounts shown on the statement of cash flows. The new guidance also requires certain disclosures to supplement the statement of cash flows. This update is effective for annual periods beginning after December 15, 2017, and interim periods within those fiscal years. The Company adopted this standard on January 1, 2018, and it did not have a material impact on its 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. The Company adopted this standard on January 1, 2018, and it did not have a material impact on its financial statements and footnote disclosures.

In May 2017, the FASB issued ASU No. 2017-09, Compensation-Stock Compensation (Topic 718) Scope of Modification Accounting. This standard 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. The Company adopted this standard on January 1, 2018, and it did not have a material impact on its financial statements and footnote disclosures.

~~Recent~~ Leases~~Accounting Standards~~ ~~or Updates~~ ~~Not Yet Effective~~

In February 2016, the ~~FASB~~Financial Accounting Standards Board (or FASB) issued ~~ASU No.~~Accounting Standards Update (ASU) 2016-02, Leases (Topic 842) and subsequent amendments to the initial guidance: ASU 2017-13, ASU 2018-10, ASU 2018-11, ASU 2018-20 and ASU 2019-01 (collectively, Topic 842). ~~The update requires that most~~Topic 842 aims to increase transparency and comparability among organizations by requiring lessees to recognize leases ~~including operating leases, be recorded~~with a term greater than 12 months as a right-of-use asset (“ROU”) and corresponding lease liabilities on the balance sheet, ~~as an asset~~regardless of lease classification, and arequiring disclosure of key information about leasing arrangements. The lease liability should be initially measured at the present value of the remaining contractual lease payments. Subsequently, the ~~lease asset~~ROU assets will be amortized generally on a straight-line basis over the lease term, and the lease liability will bear interest expense and be reduced for lease payments. ~~The amendments in this update are~~Topic 842 became effective for public companies’ financial statements issued for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective application is required with an option to not restate comparative periods in the period of adoption. The Company ~~is still~~adopted Topic 842 on January 1, 2019 using the modified retrospective approach, and financial information for the comparative period was not updated.

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

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

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

	●	operating lease liabilities of approximately $10.5 million, which represents the present value of the remaining lease payments, as of the date of adoption, discounted using the Company’s incremental borrowing rate of 5.3%, and
	●	operating lease ROU assets of approximately $8.7 million which represents the operating lease liabilities of $10.5 million, adjusted for (1) deferred rent of approximately $0.3 million, and (2) lease incentives or tenant improvement allowance of $1.5 million.

The adoption of the new lease accounting standard did not have any other impact on the Company’s condensed consolidated balance sheet, and did not impact the Company’s operating results and cash flows. See Leases, in ~~the process of evaluating~~Note 4 for further information, including further discussion on the impact of ~~adopting~~adoption and changes in accounting policies relating to leases.

Income Statement – Reporting Comprehensive Income

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

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

Accounting Standards Not Yet Effective

In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350). This standard eliminates step 2 from the annual goodwill impairment test. This update is effective for annual periods 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 its condensed consolidated financial statements or the related disclosures.

In ~~February~~August 2018, the FASB issued ASU No. ~~2018-02, Income Statement – Reporting Comprehensive Income (Topic 220)~~2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): ~~Reclassification~~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 ~~Certain Tax Effect from Accumulated Other Comprehensive Income.~~a hosting arrangement over the term of the hosting arrangement. This update allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Job Act ("TCJA") enacted in December 2017. This update will bestandard is effective for the Company ~~for fiscal years~~ beginning ~~after December 15, 2018 and interim periods within those fiscal years.~~in the first quarter of 2020. Early adoption is permitted. ASU No. 2018-15 should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The Company ~~does not anticipate that the adoption of this standard will have a significant impact on its consolidated financial statements or the related disclosures.~~

In March 2018, the Financial Accounting Standards Board (FASB) issued ASUNo. 2018-05, Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118. The staff of the SEC recognized the complexity of reflecting the impacts of the TCJA, and on December 22, 2017, issued guidance in Staff Accounting Bulletin 118 (SAB 118), which clarifies accounting for income taxes under Accounting Standards Codification (ASC) 740 if information ishas not yet available or complete and provides for up to a one year period in which to complete the required analysis and accounting (the measurement period). Refer to Note 5. Income Taxes, for further discussion regardingdetermined the impact of this standard ~~to the Company's~~on its condensed consolidated financial statements.

22. REVENUE ~~. REVENUE RECOGNITION~~FROM CONTRACTS WITH CUSTOMERS

On January 1, 2018, the Company adopted Topic 606, using the modified retrospective transition method applied to those contracts which were not completed as of January 1, 2018. Under this method, the Company evaluated contracts that were in effect at the beginning of fiscal 2018 as if those contracts had been accounted for under Topic 606 from the beginning of their terms. Upon adoption, the Company recognized the cumulative effect of adopting this guidance as an adjustment to accumulated deficit on the date of initial application. The comparative information in prior periods has not been restated and continues to be reported under the accounting standards in effect for those periods.

The Company also considered the impact of subtopic ASC 340-40. Prior to the adoption of Topic 606, the Company expensed commission costs and related fringe benefits as incurred. Under ASC 340-40, the Company is required to capitalize and amortize the incremental costs of obtaining or fulfilling a contract over the period of the expected benefit. Incremental costs of obtaining and fulfilling a contract are recognized as an asset if the costs are expected to be recovered.

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~~The most significant impacts of the adoption of Topic 606 are as follows:~~

●

At the adoption date, the Company recorded a net decrease of $4.4 million to accumulated deficit related to the acceleration of revenue required by the adoption of Topic 606 using the modified retrospective method and the capitalization of incremental sales commission costs, net of related deferred tax impact. Under the modified retrospective method, a portion of revenue for uncompleted contracts, which would have been recognized in future periods under Topic 605, was accelerated and recognized as an adjustment to accumulated deficit as of the date of adoption. As a result, the beginning balance on January 1, 2018 of accounts receivable increased by $0.8 million, contract assets were established at $1.9 million and deferred revenue decreased by $2.5 million. The Company capitalized $0.5 million of incremental sales commission costs at the adoption date directly related to obtaining customer contracts and will amortize these costs over the lives of the contracts for which such commissions are paid.

●

For fiscal 2018, revenue generated under Topic 606 is expected to be slightly higher than revenue would have been under Topic 605. This is the result of a combination of factors, including the reduction of deferred revenue that under Topic 605 would continue to be recognized as revenue in 2018 and beyond, as well as changes in the timing of revenue recognition as discussed below. The actual effect on revenue recognized for both the three and nine months ended September 30, 2018 was approximately $0.5 million.

The adoption of Topic 606 impacted the Company’s accounting for certain commercial software multi-element arrangements that combine software-related deliverables, which may include software contracts with varying terms and service elements. Topic 605 required establishing vendor specific objective evidence of fair value ("VSOE"), for undelivered elements to recognize revenue separately for each of the different elements. Topic 606 requires the Company to allocate consideration to each separate different performance obligation through the use of stand-alone selling prices (“SSPs”) and to recognize the revenue as if those performance obligations had been sold on a standalone basis, either at a point-in-time or over time. The most significant impact of this change relates to the Company’s accounting for software license revenue. For the Company’s Exensio software that is licensed under a time-based license model, the Company will recognize a portion of revenue on these types of contracts at the time of delivery rather than ratably over the term of the license. For perpetual software license contracts, the Company will allocate consideration to the different performance obligations based on their SSPs rather than using the VSOE for undelivered elements as required under Topic 605.

In addition, under the Company’s previous accounting practices, revenue was recognized from Gainshare performance incentive agreements in the period of receipt of related Gainshare acknowledgement reports, which was generally one quarter in arrears from the period in which the underlying sales (usage) occurred. Under Topic 606, the Company is now required to record Gainshare revenue in the same period in which the usage occurs. Because the Company generally does not receive the acknowledgment reports 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 the customer's underlying sales achievement. 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.

Under Topic 605, the Company recognized revenue for professional services, including revenue from fixed price solution implementation service contracts, either on a percentage-of-completion method or time-and-materials method. Under Topic 606, revenue related to these professional services will remain substantially unchanged.

~~The following table summarizes the effects of adopting Topic 606 on the Company’s condensed consolidated balance sheet as of September 30, 2018:~~

(In thousands)

As reported
under Topic 606

Adjustments

Balances under
Topic 605

Accounts receivable, net of allowance
$ 52,744 $ 125 $ 52,869
Prepaid expenses and other current assets
10,890 (3,490 ) 7,400
Deferred tax assets
17,714 435 18,149
Other non-current assets
8,163 (28 ) 8,135
Deferred revenues – current portion
7,360 2,150 9,510
Long-term income taxes payable
4,140 (1,046 ) 3,094
Other non-current liabilities
1,954 616 2,570
Accumulated deficit
$ (27,337 ) $ (4,679 ) $ (32,016 )

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The Company’s net cash provided by operating activities for the three and nine months ended September 30, 2018 did not change due to the adoption of Topic 606. The following table summarizes the effects of adopting Topic 606 on the financial statement line items of the Company’s condensed consolidated statement of cash flows for the nine months ended September 30, 2018:

(In thousands)

As reported
under Topic 606

Adjustments

Balances under
Topic 605

Net income (loss)
$ (4,602 ) $ (325 ) $ (4,927 )
Adjustments to reconcile net income (loss) to net cash provided by operating activities:

Deferred taxes
(2,298 ) (137 ) (2,435 )
Changes in operating assets and liabilities:

Accounts receivable, net of allowance
5,654 (917 ) 4,737
Prepaid expenses and other current assets
(3,444 ) 1,100 (2,344 )
Other non-current assets
2,367 28 2,395
Other accrued and long-term liabilities
(252 ) 3 (249 )
Deferred revenue
$ 632 $ 248 $ 880

The Company derives revenue from two sources: ~~Design-to-silicon-yield solutions~~Solutions revenue and Gainshare performance incentives.

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.

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The Company determines revenue recognition through the following five steps:

●

Identification of the contract, or contracts, with a customer

●

Identification of the performance obligations in the contract

●

Determination of the transaction price

●

Allocation of the transaction price to the performance obligations in the contract

●

Recognition of revenue when, or as, performance obligations are satisfied

The Company accounts for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and ~~collectability~~collectibility 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, generally on a relative basis using its standalone selling price. The Company does not adjust transaction price for the effects of a significant financing component when the period between the transfers of the promised good or service to the customer and payment for that good or service by the customer is expected to be one year or less. The Company assessed each of its revenue generating arrangements in order to determine whether a significant financing component exists, and determined its contracts did not include a significant financing component for the three months ended March 31, 2019 and 2018.

Nature of Products and Services

~~Design-to-silicon-yield solutions —~~Solutions revenue – The Company recognizes revenue for each element of ~~Design-to-silicon-yield~~ solutions revenue as follows:

The Company generates a significant portion of its Design-to-silicon-yield solutions revenue from fixed-price solution implementation service contracts delivered over a specific period of time. Revenue under project–based contracts for solution implementation services is recognized as services are performed using a percentage-of-completion method based on costs or labor-hours inputs. Due to the nature of the work performed in these arrangements, the estimation of costs or hours at completion is complex, subject to many variables and requires significant judgment. Key factors reviewed by the Company to estimate costs to complete each contract are future labor and product costs and expected productivity efficiencies. If circumstances arise that change the original estimates of revenues, costs, or the extent of progress toward completion, revisions to the estimates are made. These revisions may result in increases or decreases in estimated revenues or costs. Losses on fixed-price solution implementation contracts are recognized in the period when they become probable. Revisions in profit estimates are reflected in the period in which the conditions that require the revisions become known and can be estimated (the cumulative catch-up method).

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

~~The Company also~~ licenses our Design-for-Inspection ("DFI") system as a separate component of fixed-price service contracts. The Company allocates revenue to all deliverables based on their standalone selling prices, or SSP. In such instances, the Company applies judgment to estimate the range of SSPs for each performance obligation.

~~The Company licenses some~~majority of its software products separately from project-based solution ~~implementations, primarily~~implementation service contracts, in particular, its Exensio ~~software~~big data platform and related products. The majority of ~~these products are~~this software is delivered as ~~on premise~~on-premise software licenses, while others can be delivered entirely or partially through Software-as-a-Service (SaaS) or cloud delivery models. Revenue from perpetual (one-time charge) license software is recognized at ~~the~~a point in time ofat the inception of the arrangement when control transfers to the client, if the software license is distinct from the services offered by the Company. Revenue from post-contract support subscription is recognized over the contract term on a straight-line basis, because the Company is providing ~~(i)~~ a service of standing ready to provide support, when-and-if needed, and ~~(ii)~~is providing unspecified software upgrades on a when-and-if available basis over the contract term. Revenue from time-based license software is allocated to each performance obligation and is recognized either at a ~~point-in-time~~point in time or ~~over-time.~~over time. The license component is recognized at ~~the~~a point in time, ofat the delivery of the software license, with the post-contract support subscription component being recognized ratably over for the committed term of the contract. Revenue from software hosting or SaaS arrangements that allow 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 and recognized as revenue ratably, on a straight-line basis, over the coverage period beginning on the date the service is made available to customers.

The Company also licenses the Design-for-Inspection (DFI) system as a separate component of fixed-price service contracts that are not project-based solutions implementation services contracts. The Company allocates revenue to all deliverables under these DFI contracts based on their standalone selling prices, or SSP. In such instances, the Company applies judgment to estimate the range of SSPs for each performance obligation.

The Company generates a significant portion of its solutions revenue from fixed-price, project-based solution implementation service contracts that are associated with its classic yield ramp business, which services are delivered over a specific period of time. Revenue under these project–based contracts for solution implementation services is recognized as services are performed using a percentage of completion method based on costs or labor-hours inputs, whichever is the most appropriate measure of the progress towards completion of the contract. Due to the nature of the work performed in these arrangements, the estimation of costs or hours at completion is complex, subject to many variables and requires significant judgment. Key factors reviewed by the Company to estimate costs to complete each contract are future labor and product costs and expected productivity efficiencies. If circumstances arise that change the original estimates of revenues, costs, or extent of progress toward completion, revisions to the estimates are made. These revisions may result in increases or decreases in estimated revenues or costs. Losses on fixed-price solution implementation contracts are recognized in the period when they become probable. Revisions in profit estimates are reflected in the period in which the conditions that require the revisions become known and can be estimated (cumulative catch-up method).

The Company typically includes some of its products and other technology as components of its fixed-price, project-based services contracts. In such instances, the Company determines whether the services performed and products/technology

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included, are distinct. In most cases, the arrangement is a single performance obligation and therefore follows the pattern of transfer as the service is provided. The Company applies a measure of progress (typically hours-to-hours or cost-to-cost) to any fixed consideration. As a result, revenue is generally recognized over the period the services are performed using percentage of completion method. This results in revenue recognition that corresponds with the value to the client for the services transferred to date relative to the remaining services promised.

Gainshare Performance Incentives — When the Company enters into a project-based solution implementation services contract, ~~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 pays a variable fee, usually after the fixed fee period has ended, related to ~~the~~continued usage of the Company's intellectual property. Revenue derived from Gainshare performance incentives is contingent upon the Company’s customers reaching certain defined production yield levels. Gainshare performance incentive periods are usually subsequent to the delivery of all contractual services and performance obligations. The Company ~~records~~recorded Gainshare revenue as a usage-based royalty based on customers' usage of intellectual property and ~~records it~~recorded in the same period in which the usage occurs.

The following table summarizes the effects of adopting Topic 606 on the financial statement line items of the Company’s condensed consolidated statements of operations for the three months ended September 30, 2018:

(In thousands)

As reported
under Topic 606

Adjustments

Balances under
Topic 605

Design-to-silicon-yield solutions
$ 13,976 $ (522 ) $ 13,454
Total revenue
20,213 (522 ) 19,691
Gross margin
9,530 (522 ) 9,008
Selling, general and administrative
5,507 (49 ) 5,458
Total operating expenses
12,370 (49 ) 12,321
Income (loss) from operations
(2,840 ) (473 ) (3,313 )
Income (loss) before taxes
(2,617 ) (473 ) (3,090 )
Income tax benefit
(535 ) (92 ) (627 )
Net loss
$ (2,082 ) $ (381 ) $ (2,463 )

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(In thousands)

As reported
under Topic 606

Adjustments

Balances under
Topic 605

Design-to-silicon-yield solutions
$ 47,431 $ (539 ) $ 46,892
Total revenue
66,069 (539 ) 65,530
Gross margin
32,987 (539 ) 32,448
Selling, general and administrative
17,801 (122 ) 17,679
Total operating expenses
39,227 (122 ) 39,105
Income (loss) from operations
(6,240 ) (417 ) (6,657 )
Income (loss) before taxes
(5,957 ) (417 ) (6,374 )
Income tax benefit
(1,355 ) (92 ) (1,447 )
Net loss
$ (4,602 ) $ (325 ) $ (4,927 )

Disaggregation of revenue

~~In accordance with ASC 606-10-50, the~~The Company disaggregates revenue from contracts with customers into geographical regions, major contract performance obligations and timing of transfer of goods and services. The Company determined that disaggregating revenue into these categories achieves the disclosure objective to depict how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors.

The following table shows the revenues from contracts with customers by the nature of ~~transactions for the three and nine months ended September 30, 2018:~~transactions:

	Three Months Ended September 30, 2018		Nine Months Ended September 30, 2018		Three Months Ended March 31,
Product and licenses	$	7,729	$	22,044
Support and services		11,905		43,095
					2019		2018
Licenses and Gainshare Performance Incentives					$	5,181	$	7,487
Support and Services						15,252		16,989
Other		579		930		108		261
Total	$	20,213	$	66,069	$	20,541	$	24,737

~~Product~~Licenses and ~~licenses include a portion~~Gainshare Performance Incentives revenue is comprised of (i) the software license fees for perpetual and time-based software license contracts where the standalone selling prices are estimable by the Company, or distinct and separate performance obligations; and (ii) the variable fee component of the Company’s yield improvement service contracts, or Gainshare Performance Incentives, which is usually recognized inas revenue subsequent to the ~~period, perpetual~~delivery of all contractual services and performance obligations. The services component of such contracts, including recurring fees for unspecified software updates and ~~Gainshare performance incentives. The remaining portions of revenue from these contracts correspond to services or other types of performance obligations reported~~technical support, is presented as ~~either services revenue or other revenue.~~support and services.

~~Under Topic 606, the~~The Company’s performance obligations are satisfied either ~~over-time~~over time or at a point-in-time. ~~Revenue from performance obligations, satisfied over time and at~~The following table represents a ~~point-in-time,~~disaggregation of revenue by timing of revenue:

Three Months
Ended March 31,

2019

2018

Over time
75
%
69
%
Point-in-time
25
%
31
%
Total
100
%
100
%

International revenues accounted for approximately ~~59% and 41%~~55% of our total revenues for the three months ended September 30, 2018, respectively. Revenue from performance obligations, satisfied over time and at a point-in-time, accounted for approximately 66% and 34% for the nine months ended September 30, 2018, respectively. International revenues accounted for approximatelyMarch 31, 2019 as compared to 59% ~~and 58% of total revenues~~ for the three ~~and nine~~ months ended ~~September 30, 2018, respectively, compared to 63% and 58% for the three and nine months ended September 30, 2017, respectively.~~March 31, 2018. See Note 7.10. Customer and Geographic Information.

Significant Judgments

~~More judgments~~Judgments and estimates are required under ~~Topic 606 than were required under Topic 605.~~ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). Due to the complexity of certain contracts, the actual revenue recognition treatment required under Topic 606 for the Company’s arrangements may be dependent on contract-specific terms and may vary in some instances.

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

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

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

The Company is required to record Gainshare royalty revenue in the same period in which the usage occurs. Because the Company generally does not receive the acknowledgment reports during a given quarter within the time frame necessary to adequately review the reports and include the actual amounts in quarterly results for such quarter, the Company accrues the related revenue based on estimates of customer's underlying sales achievement. The Company estimation process can be based on historical data, trends, seasonality, changes in the contract rate, knowledge of the changes in the industry and changes in the customer’s manufacturing environment learned through discussions with customers and sales personnel. As a result of accruing revenue for the quarter based on such estimates, adjustments will be required in the following quarter to true-up revenue to the actual amounts reported.

Contract Balances

The Company performs its ~~obligation~~obligations under a contract with a customer by transferring products or services in exchange for consideration from the customer. The timing of the Company’s performance often differs from the timing of the customer’s payment, which results in the recognition of a receivable, a contract asset or a contract liability. The Company classifies the right to consideration in exchange for products or services transferred to a client as either a receivable or a contract asset. A receivable is a right to consideration that is unconditional as compared to a contract asset which is a right to consideration that is conditional upon factors other than the passage of time. The majority of the Company’s contract assets represent unbilled amounts related to fixed-price solution implementation service contracts when the costs or labor-hours input method of revenue recognition is utilized and revenue recognized exceeds the amount billed to the client, and the right to consideration is subject to milestone completion or client acceptance. 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. The contract assets ~~are~~is included in prepaid expenses and other current assets in the condensed consolidated balance sheets. At ~~September 30, 2018~~March 31, 2019 and ~~January 1,~~December 31, 2018, contract assets of ~~$3.1~~$3.5 million and ~~$1.9~~$2.7 million, respectively, ~~were~~are included in prepaid expenses and other current assets in the condensed consolidated balance sheets. The change in the contract assets balance during the period relates to the recording of revenues for which the right to consideration is subject to milestone completion or client acceptance and movement of previously recorded contract assets to receivables as the right to consideration becomes unconditional. 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 ~~twelve month~~twelve-month period is recorded as current deferred revenues, and the remaining portion is recorded as non-current deferred revenues. This balance was recorded in the other non-current liabilities in the accompanying condensed consolidated balance sheets. The non-current portion of deferred revenue included in other non-current liabilities was ~~$0.3~~$0.7 million and ~~$0.9~~$1.0 million, respectively, as of ~~September 30, 2018~~March 31, 2019 and ~~January 1,~~December 31, 2018.

~~During~~ Revenue recognized for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2019 and 2018, ~~the Company recognized $4.4 million and $12.0 million, respectively, of revenue~~ that was included in the deferred revenue balance ~~as adjusted for Topic 606,~~ at the beginning of ~~2018.~~each reporting period was $3.3 million and $2.6 million, respectively.

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At ~~September 30, 2018,~~March 31, 2019, 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 ~~$38.7~~$40.4 million. Given the applicable contract terms, the majority of this amount is expected to be recognized as revenue over the next 2two years, with the remainder in the following 5five years. This amount does not include contracts to which the customer is not committed, nor contracts with original expected lengths of one year or less, nor contracts for which we recognize revenue equal to the amount we have the right to invoice for services performed, or future sales-based or usage-based royalty payments in exchange for a license of intellectual property. This amount is subject to change due to future revaluations of variable consideration, terminations, other contract modifications, or currency adjustments. The estimated timing of the recognition of remaining unsatisfied performance obligations is subject to change and is affected by changes to the scope, change in timing of delivery of products and services, or contract modifications.

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Payment terms and conditions vary by contract type, although terms generally include a requirement of payment within 30 to 90 days. In instances where the timing of revenue recognition differs from the timing of invoicing, the Company has determined that its contracts generally do not include a significant financing component. The primary purpose of invoicing terms is to provide customers with simplified and predictable ways of purchasing the Company’s products and services, and not to facilitate financing arrangements.

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

Costs to obtain or fulfill a contract

The Company capitalizes the incremental costs to obtain or fulfill a contract with a customer, including direct sales commissions and related fees, when it expects to recover those costs. As a result, these costs will need to be capitalized and amortized over an appropriate period, which may exceed the initial contract term. The incremental costs of obtaining a contract are costs that would not have been incurred if the contract had not been obtained. The Company uses the portfolio method to recognize the amortization expense related to these capitalized costs related to initial contracts and renewals and such expense is recognized over the period associated with the revenue of the related portfolio. Total capitalized direct sales commission costs as of ~~September 30,~~March 31, 2019 and December 31, 2018 were ~~$0.4~~$0.6 million and ~~the amortization~~$0.5 million, respectively. Amortization of these assets ~~were $0.1 million and $0.3 million~~ during each of the three ~~and nine~~ months ended ~~September 30,~~March 31, 2019 and 2018 ~~respectively.~~was $0.1 million. There was no impairment loss in relation to the costs capitalized for the periods presented. Certain eligible initial project costs are capitalized when the costs relate directly to the contract, the costs generate or enhance resources of the company that will be used in satisfying the performance obligation in the future, and the costs are expected to be recovered. These costs primarily consist of transition and set-up costs related to the installation of systems and processes and other deferred fulfillment costs eligible for capitalization. Capitalized costs are amortized consistent with the transfer to the client of the services to which the asset relates and ~~are~~ recorded as a component of cost of revenues. The Company also incurred certain direct costs to provide solution implementation services in relation to the specific anticipated contracts. The Company recognizes such costs as a component of cost of revenues, the timing of which is dependent upon identification of a contract arrangement. The Company also defers costs from arrangements that required us to defer the revenues, typically due to the pattern of transfer of the performance obligations in the contract. These costs are recognized in proportion to the related revenue. At the end of the reporting period, the Company evaluates its deferred costs for their probable recoverability. The Company recognizes impairment of deferred costs when it is determined that the costs no longer have future benefits and are no longer recoverable. ~~The deferred~~Deferred costs balance was ~~$0.4~~$0.1 million and ~~$0.6~~$0.2 million as of ~~September 30, 2018~~March 31, 2019 and December 31, ~~2017,~~2018, respectively. The balance was included in prepaid expenses and other current assets and other non-current assets in the accompanying condensed consolidated balance sheets.

3. BALANCE SHEET COMPONENTS

Accounts receivable

Account receivable include amounts that are unbilled at the end of the period that are expected to be billed and collected within a 12-month period. Unbilled accounts receivable, included in accounts receivable, totaled ~~$22.7~~$19.4 million and $22.2 million as of ~~September 30, 2018,~~March 31, 2019, and December 31, ~~2017,~~2018, respectively. Unbilled accounts receivable that are not expected to be billed and collected during the succeeding 12-month period are recorded in other non-current assets and totaled ~~$6.4~~$5.1 million and ~~$8.6~~$5.3 million as of ~~September 30, 2018~~March 31, 2019, and December 31, ~~2017,~~2018, respectively.

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Property and equipment

Property and equipment, net consists of (in thousands):

	September 30,			December 31,			March 31, 2019			December 31, 2018
(Dollars in thousands)	2018			2017
Property and equipment, net:
Computer equipment	$	10,446		$	10,729		$	10,645		$	10,536
Software		4,121			3,348			4,106			4,112
Furniture, fixtures and equipment		4,420			3,676			4,853			4,688
Leasehold improvements		5,573			1,980			5,020			5,474
Test equipment		14,694			13,796			15,110			14,697
Construction-in-progress		17,928			12,527			20,958			20,293
		57,182			46,056			60,692			59,800
Less: accumulated depreciation and amortization		(23,062	)		(20,670	)
Less: accumulated depreciation								(24,756	)		(24,119	)
Total	$	34,120		$	25,386		$	35,936		$	35,681

Test equipment includes ~~some~~ DFI assets at customer sites that are contributing to DFI solution revenues. The construction-in-progress balance as of ~~September 30, 2018~~March 31, 2019 and December 31, ~~2017~~2018 was primarily related to construction of DFI assets. ~~Leasehold improvements increased to $5.6 million due to a recent move of the Company’s headquarters to a new office location.~~ Depreciation and amortization expense was ~~$1.2 million and~~ $1.3 million for both the three months ended ~~September 30, 2018~~March 31, 2019 and ~~2017, respectively. Depreciation~~2018.

Goodwill and ~~amortization expense was $3.7 million and $3.5 million for the nine months ended September 30, 2018 and 2017, respectively.~~ Intangible Assets

As of ~~both September 30, 2018,~~March 31, 2019, and December 31, ~~2017,~~2018, the carrying amount of goodwill was $1.9 million.

Intangible assets balance was ~~$5.3~~$4.8 million and ~~$6.1~~$5.1 million as of ~~September 30, 2018,~~March 31, 2019 and December 31, ~~2017,~~2018, respectively. Intangible assets as of ~~September 30, 2018~~March 31, 2019 and December 31, ~~2017~~2018 consist of the following (in thousands):

					September 30, 2018							December 31, 2017										March 31, 2019							December 31, 2018
		Amortization			Gross					Net		Gross					Net		Amortization Period (Years)			Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
		Period			Carrying		Accumulated			Carrying		Carrying		Accumulated			Carrying
(Dollars in thousands)		(Years)			Amount		Amortization			Amount		Amount		Amortization			Amount
Acquired identifiable intangibles:
Customer relationships		1	-	9	$	6,740	$	(4,421	)	$	2,319	$	6,740	$	(4,145	)	$	2,595	1	‒	9	$	6,740	$	(4,606	)	$	2,134	$	6,740	$	(4,514	)	$	2,226
Developed technology		4	-	6		15,820		(13,261	)		2,559		15,820		(12,829	)		2,991	4	‒	9		15,820		(13,548	)		2,272		15,820		(13,404	)		2,416
Tradename		2	-	4		790		(641	)		149		790		(622	)		168	2	‒	7		790		(654	)		136		790		(648	)		142
Patent		7	-	10		1800		(1,510	)		290		1,800		(1,480	)		320	7	‒	10		1,800		(1,530	)		270		1,800		(1,520	)		280
Total	Total				$	25,150	$	(19,833	)	$	5,317	$	25,150	$	(19,076	)	$	6,074				$	25,150	$	(20,338	)	$	4,812	$	25,150	$	(20,086	)	$	5,064

The weighted average ~~remaining~~ amortization period for acquired identifiable intangible assets was ~~6.1~~5.7 years as of ~~September 30, 2018.~~March 31, 2019. For both the three ~~and nine~~ months ended ~~September 30,~~March 31, 2019 and 2018, ~~total~~ intangible asset amortization expense was $0.3 ~~million and $0.8 million, respectively. For the three and nine months ended September 30, 2017, total intangible asset amortization expense was $0.2 million and $0.6 million, respectively.~~million. The Company expects annual amortization of acquired identifiable intangible assets to be as follows (in thousands):

~~Table of Contents~~

Year ending December 31,	Amount		Amount
2018 (remaining three months)	$	253
2019		1,009
2019 (remaining nine months)			$	757
2020		1,009		1,009
2021		833		832
2022		626		626
2023 and thereafter		1,587
2023				626
2024 and thereafter				962
Total future amortization expense	$	5,317	$	4,812

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, 2018,~~March 31, 2019, there were no indicators of impairment related to the Company’s intangible assets.

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~~4. STOCKHOLDERS’ EQUITY~~4. LEASES

~~Stock-based compensation is estimated~~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 2028. The Company had no leases that were classified as a financing lease as of March 31, 2019.

Leases with an initial term of 12 months or less are not recorded on the ~~grant date~~balance sheet, and the Company recognizes lease expense for these leases on a straight-line basis over the lease term. Long-term operating leases are included in operating lease ROU assets and operating lease liabilities in the Company’s condensed consolidated balance sheet as of March 31, 2019.

ROU assets represent the Company’s right to use an underlying asset for the lease term and operating lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Effective January 1, 2019, operating lease ROU assets and liabilities are recognized based on the ~~award’s fair~~present value of remaining lease payments over the lease term. In determining the present value of lease payments, implicit rate must be used when readily determinable. As the Company’s leases do not provide implicit rates, at the date of the Company’s adoption of the new lease standard, the discount rate is calculated using the Company’s incremental borrowing rate determined based on the information available. The operating lease ROU asset also includes any lease payments made and excludes lease incentives or tenant improvement allowance. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the ~~vesting periods, generally four years~~. ~~Stock-based compensation~~lease term.

Operating lease expense ~~before taxes related~~for the three months ended March 31, 2019 and 2018, amounted to ~~the Company’s stock plans~~$0.5 million and ~~employee stock purchase plan was allocated~~$0.6 million, respectively. Operating lease cost includes short-term leases and variable lease costs, which are immaterial.

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

Three Months Ended
September 30,

Nine Months Ended
September 30,

2018

2017

2018

2017

Costs of Design-to-silicon-yield solutions
$ 787 $ 1,184 $ 2,768 $ 3,445
Research and development
725 877 2,449 2,558
Selling, general and administrative
756 888 2,608 2,734
Stock-based compensation expenses
$ 2,268 $ 2,949 $ 7,825 $ 8,737
Year ending December 31,

Amount^(a)

2019 (remaining nine months)
$ 1,381
2020
1,870
2021
1,719
2022
1,536
2023
1,417
2024 and thereafter
4,750
Total future minimum lease payments
$ 12,673
Less: Interest⁽^b⁾
(2,295
)
Present value of operating lease liabilities^(c⁾
$ 10,378

	^(a)	As of March 31, 2019, amounts include a lease arrangement that commenced on April 1, 2019, with a renewal option that is reasonably certain to be exercised. The total operating lease liability recognized pertaining to the lease arrangement was approximately $1.9 million, of which $0.9 million pertains to the renewal period.
	^(b)	Calculated using incremental borrowing interest rate for each lease.
	^(c)	Includes the current portion of operating lease liabilities of $1.9 million as of March 31, 2019.

As of March 31, 2019, the weighted average remaining lease term under operating ROU leases was 7.8 years.

As of March 31, 2019, the weighted average discount rate for operating lease liabilities was approximately 5.3%.

No new Operating lease ROU asset was obtained in exchange of operating lease liabilities during the three months ended March 31, 2019.

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5. STOCKHOLDERS’ EQUITY

Stock Repurchase Program

On ~~September 30,~~October 25, 2016, the Board of Directors adopted a program that was effective immediately to repurchase up to $25.0 million of the Company’s common stock both on the open market and in privately negotiated transactions over the next two years. On May 29, 2018, the Board of Directors terminated that 2016 stock repurchase program, and adopted a new program to repurchase up to $25.0 million of the Company’s common stock both on the open market and in privately negotiated transactions, from time to time, over the next two years. During the three months ended March 31, 2019, the Company repurchased approximately 314,000 shares at an average price of $12.46 per share, for $3.9 million under the 2018 program. During the three months ended March 31, 2018, the Company repurchased approximately 338,000 shares at an average price of $12.19 per share, for $4.1 million under the 2016 program. Under the 2018 program, as of March 31, 2019, $21.1 million of the Company’s common stock remained available for future repurchases.

6. EMPLOYEE BENEFIT PLANS

On March 31, 2019, the Company had the following stock-based compensation plans:

Employee Stock Purchase Plan

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

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:

Three Months
Ended March 31,

2019

2018

Expected life (in years)
1.25 1.25
Volatility
45.19
%
37.23
%
Risk-free interest rate
2.52
%
1.93
%
Expected dividend
— —
Weighted average fair value per share of options granted during the period
$ 3.67 $ 4.32

During the three months ended March 31, 2019 and 2018, a total of approximately 88,000 and 108,000 shares, respectively, were issued at a weighted-average purchase price of $8.93 and $9.29 per share, respectively. As of March 31, 2019, there was $1.3 million of unrecognized compensation cost related to the Purchase Plan. That cost is expected to be recognized over a weighted average period of 1.83 years. As of March 31, 2019, 5.2 million shares were available for future issuance under the Purchase Plan.

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Stock Incentive Plans —

On November 16, 2011, the Company’s stockholders approved the 2011 Stock Incentive Plan ~~which was amended and restated four times thereafter, most recently on May 31, 2017, when the Company’s stockholders approved the Fourth Amended and Restated 2011 Stock Incentive Plan~~ (as amended, the “2011 ~~Stock~~ Plan”). Under the 2011 ~~Stock~~ Plan, the Company may award stock options, stock appreciation rights, stock grants or stock units covering shares of the ~~Company's~~Company’s common stock to employees, directors, non-employee directors and contractors. The aggregate number of shares reserved for awards under this plan is ~~7,800,000~~9,050,000 shares, plus up to 3,500,000 shares previously issued under the 2001 ~~Stock~~ Plan that are forfeited or repurchased by the Company or shares subject to awards previously ~~issued.~~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 ~~the~~ 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.

On April 26, 2019, the Company’s Board of Directors amended the 2011 Plan, subject to stockholder approval, to increase the number of shares reserved for awards under it to a total of 10,300,00 shares, which is an increase of an additional 1,250,000 shares.

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 2001 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.

As of ~~September 30, 2018, the Company has reserved 9,600,000~~March 31, 2019, 9.6 million shares of common stock were reserved to cover stock-based awards under the 2011 ~~Stock~~ Plan, of which ~~approximately 4.0~~2.9 million shares were available for future grant. The number of shares reserved and available under the 2011 ~~Stock~~ Plan includes 0.5 million shares that were subject to awards previously made under the 2001 ~~Stock~~ Plan ~~which~~and were forfeited, expired or repurchased by the Company after adoption of the 2011 ~~Stock~~ Plan through ~~September 30, 2018.~~March 31, 2019. As of ~~September 30, 2018,~~March 31, 2019, there were no outstanding awards that had been granted outside of the 2011, ~~Stock Plan, the~~ 2001 ~~Stock Plan~~ or the ~~2001 Stock Option/Stock Issuance Plan assumed in connection with the acquisition of~~ IDS ~~Systems Inc.~~Plans (collectively, the ~~"Stock Plans"~~“Stock Plans”).

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

	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended March 31,
	2018			2017			2018			2017			2019			2018
Expected life (in years)		4.43			4.41			4.43			4.41			4.46			4.43
Volatility		44.01	%		41.49	%		43.82	%		41.53	%		45.26	%		42.22	%
Risk-free interest rate		2.73	%		1.65	%		2.71	%		1.69	%		2.55	%		2.52	%
Expected dividend		-			-			-			-			—			—
Weighted average fair value per share of options granted during the period	$	4.21		$	5.78		$	4.22		$	6.14		$	4.51		$	4.28

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

Three Months
Ended March 31,

2019

2018

Cost of solutions
$ 860 $ 1,014
Research and development
1,718 879
Selling, general and administrative
898 963
Stock-based compensation expenses
$ 3,476 $ 2,856

The stock-based compensation expense for the three months ended March 31, 2019, and 2018 in the table above includes expense related to cash-settled stock appreciation rights (“SARs”) granted to certain employees which totaled to an expense of $7,000, and a credit of $15,000, respectively. The Company ~~granted 87,000 shares~~accounted for these awards as liability and the amount was included in accrued compensation and related benefits.

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Additional information with respect to options ~~to purchase shares of common stock~~under the Stock Plans during the three months ended ~~September 30, 2018.~~

~~Stock option activity under the Company’s Stock Plans during the nine months ended September 30, 2018~~March 31, 2019, was as follows:

Number of
Options
(in thousands)

Weighted
Average
Exercise
Price Per
Share

Weighted
Average
Remaining
Contractual
Term
(Years)

Aggregate
Intrinsic
Value
(in thousands)

Outstanding, January 1, 2018
1,045 $ 9.65
Granted (weighted average fair value of $4.22 per share)
98 $ 10.71
Exercised
(68 ) $ 6.88
Canceled or expired
(30 ) $ 13.84
Outstanding, September 30, 2018
1,045 $ 9.81 4.64 $ 1,422
Vested and expected to vest, September 30, 2018
1,039 $ 9.77 4.59 $ 1,422
Exercisable, September 30, 2018
806 $ 8.60 3.31 $ 1,422

Number of
Options
(in thousands)

Weighted
Average
Exercise
Price per
Share

Weighted
Average
Remaining
Contractual
Term
(years)

Aggregate
Intrinsic
Value
(in thousands)

Outstanding, January 1, 2019
1,027 $ 9.75
Granted (weighted average fair value of $4.51 per share)
30 $ 11.19
Exercised
(87
)
$ 5.98
Canceled
(3
)
$ 14.41
Expired
(10
)
$ 16.70
Outstanding, March 31, 2019
957 $ 10.05 4.62 $ 3,191
Vested and expected to vest, March 31, 2019
936 $ 9.99 4.52 $ 3,167
Exercisable, March 31, 2019
713 $ 9.03 3.17 $ 2,932

The aggregate intrinsic value in the table above represents the total intrinsic value based on the Company’s closing stock price of ~~$9.03~~$12.35 per share as of ~~September 30, 2018.~~March 31, 2019. The total intrinsic value of options exercised during the ~~nine~~three months ended ~~September 30, 2018~~March 31, 2019, was ~~$0.3~~$0.4 million.

As of ~~September 30, 2018,~~March 31, 2019, there was ~~$1.1~~$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 3.0 years. The total fair value of shares vested ~~was $0.3 million~~ during the ~~nine~~three months ended ~~September 30, 2018.~~March 31, 2019, was $0.1 million.

~~Restricted~~Nonvested restricted stock ~~unit~~units activity during the ~~nine~~three months ended ~~September 30, 2018~~March 31, 2019, was as follows:

Shares (in
thousands)

Weighted
Average
Grant Date
Fair Value
Per Share

Outstanding, January 1, 2018
1,617 $ 15.66
Granted
113 $ 10.70
Vested
(440 ) $ 15.73
Forfeited
(116 ) $ 15.21
Outstanding, September 30, 2018
1,174 $ 15.21

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Shares
(in thousands)

Weighted
Average Grant
Date Fair Value
Per Share

Nonvested, January 1, 2019
1,835 $ 11.93
Granted
155 $ 12.26
Vested
(158
)
$ 13.62
Forfeited
(41
)
$ 12.72
Nonvested, March 31, 2019
1,791 $ 11.80

As of ~~September 30, 2018,~~March 31, 2019, there was ~~$14~~$16.2 million of total unrecognized compensation cost related to ~~outstanding~~nonvested restricted stock units. That cost is expected to be recognized over a weighted average period of ~~2.2~~2.6 years. Restricted stock units do not have rights to dividends prior to vesting.

7. RESTRUCTURING CHARGES

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

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

Nine Months Ended
September 30,

2018

2017

Expected life (in years)
1.25 1.25
Volatility
42.85 % 40.63 %
Risk-free interest rate
2.48 % 1.25 %
Expected dividend
— —
Weighted average fair value per share of options granted during the period
$ 3.62 $ 5.22

~~During the three months ended~~On September 30, 2018 and 2017, a total of 92,345 and 99,550 shares, respectively, were issued at a weighted-average purchase price of $8.925 and $9.53 per share. During the nine months ended September 30, 2018 and 2017, a total of 200,704 and 199,827 shares, respectively, were issued at a weighted-average purchase price of $9.12 and $9.33 per share, respectively. As of September 30, 2018, there was $1.7 million of unrecognized compensation cost related to the ESPP. That cost is expected to be recognized over a weighted average period of 1.83 years. As of September 30, 2018, 4.7 million shares were available for future issuance under the ESPP.

~~Stock Repurchase Program~~ ~~- On May 29,~~27, 2018, the Board of Directors ~~terminated the previous 2016 stock repurchase program, and adopted a new 2018 program to repurchase up to $25.0 million~~ of the ~~Company’s common stock both~~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 ~~open market~~restructuring plan to March 31, 2019, the Company has recorded restructuring charges of $0.7 million, primarily consisting of employee separation charges. The Company is in the process of implementing the restructuring plan, and ~~in privately negotiated transactions, from time~~the remaining charges expected to ~~time, over~~be incurred is not expected to be significant.

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The following table summarizes the ~~next two years. During~~activities of restructuring liabilities under this plan for the three ~~and~~months ended March 31, 2019 (in thousands):

Three Months
Ended
March 31, 2019

Beginning balance
$ 244
Restructuring charges
92
Cash payments
(245
)
Ending balance
$ 91

Cash payments for the remaining restructuring liabilities as of March 31, 2019 are expected to be made in the remaining nine months ~~ended September 30, 2018, the Company repurchased zero and 437,007 shares, respectively, under the 2016 and 2018 programs. As~~ of September 30, 2018, 1,279,189 shares had been repurchased at an average price of $14.59 per share under the 2016 program, for a total purchase of $18.7 million. Under the 2018 program, as of September 30, 2018, $25.0 million of the Company’s common stock remained available for future repurchases.

fiscal 2019.

5.8. INCOME TAXES

Income tax benefit decreased ~~by $0.9~~$0.3 million for the ~~nine~~three months ended ~~September 30, 2018~~March 31, 2019, to ~~$1.3~~a $0.1 million income tax benefit as compared to ~~$2.2~~an income tax benefit of $0.4 million for the ~~nine~~three months ended ~~September 30, 2017.~~March 31, 2018. The Company’s effective tax rate benefit was ~~2.27%~~4% and ~~236.7%~~47% for the ~~nine~~three months ended ~~September 30,~~March 31, 2019 and 2018, ~~and 2017,~~ respectively. The Company’s effective tax rate benefit decreased in the ~~nine~~three months ended ~~September 30, 2018,~~March 31, 2019, as compared to the same period in ~~2017,~~2018, primarily due to ~~lower~~unfavorable reductions in excess tax benefits related to employee stock compensation and ~~the impact of the recently enacted TCJA, such as a decrease~~changes in the ~~maximum federal tax rate from 35% to 21%.~~level of profitability and forecasted income.

The Company’s total amount of unrecognized tax benefits, excluding interest and penalties, as of ~~September 30, 2018,~~March 31, 2019, was ~~$12.9~~$13.8 million, of which ~~$7.6~~$8.1 million, if recognized, would affect the Company’s effective tax rate. The Company’s total amount of unrecognized tax benefits, excluding interest and penalties, as of December 31, ~~2017,~~2018, was ~~$12.9~~$13.3 million, of which ~~$7.7~~$7.8 million, if recognized, would affect the Company's effective tax rate. As of ~~September 30, 2018,~~March 31, 2019, the Company has recorded unrecognized tax benefits of ~~$2.9~~$3.2 million, including interest and penalties of $0.8 million, as long-term taxes payable in its condensed consolidated balance sheet. The remaining ~~$10.7~~$11.4 million has been recorded net of our deferred tax assets, of which ~~$5.3~~$5.7 million is subject to a full valuation allowance.

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The valuation allowance was approximately ~~$9.4~~$10.4 million and ~~$9.1~~$9.8 million as of ~~September 30, 2018,~~March 31, 2019, and December 31, ~~2017,~~2018, respectively, which was related to California R&D tax credits and California net operating losses related to ~~the Company's~~our acquisition of Syntricity ~~Inc.~~ that itwe currently ~~does~~do not believe ~~they~~ are more likely than not to be ultimately realized.

The Company is required to assess whether it is more-likely-than-not that deferred tax assets will be recovered from future taxable income and if the Company believes that they are not likely to be realizable before the expiration dates applicable to such assets then, to the extent the Company believes that recovery is not likely, establish a valuation allowance. Changes in the net deferred tax assets, less offsetting valuation allowance, in a financial reporting period are recorded through the income tax provision and could have a material impact to the condensed consolidated statements of operations.

In December 2017, the SEC issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (SAB 118), which allows companies to record provisional amounts during a measurement period not to extend more than one year beyond the TCJA enactment date. Since the TCJA was passed late in the fourth quarter of 2017, and ongoing guidance and accounting interpretation are expected during the year, we consider the accounting for deferred tax remeasurements, the impact of the transition of U.S. international taxation from a worldwide tax system to a territorial system and other provisions to be incomplete. There have been no material changes to the provisional adjustments disclosed in our 2017 Form 10-K. The Company is continuing to evaluate the estimates used to record and disclose the effects of the TCJA.

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

The Company conducts business globally and, as a result, files numerous consolidated and separate income tax returns in the U.S. ~~including~~ federal, ~~and~~ various ~~states,~~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 of limitation remain open for all tax years to the extent of the attributes carried forward into tax year 2002 for federal and California tax purposes. The Company is not subject to income tax examinations in any of its major foreign subsidiaries’ jurisdictions.

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6.9. NET ~~INCOME~~ LOSS PER SHARE

Basic net ~~income~~loss per share is computed by dividing net income by ~~the~~ 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 ~~that~~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):

Three Months

Nine Months

Ended September 30,

Ended September 30,

2018

2017

2018

2017

Numerator:

Net income (loss)
$ (2,082 ) $ 590 $ (4,602 ) $ 1,297
Denominator:

Basic weighted-average common shares outstanding
32,184 32,078 32,105 32,060
Effect of dilutive options and restricted stock
- 891 - 1,257
Diluted weighted average shares outstanding
32,184 32,969 32,105 33,317

Net income (loss) per share - Basic
$ (0.06 ) $ 0.02 $ (0.14 ) $ 0.04
Net income (loss) per share - Diluted
$ (0.06 ) $ 0.02 $ (0.14 ) $ 0.04

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Three Months Ended March 31,

2019

2018

Numerator:

Net loss
$ (2,691
)
$ (424
)
Denominator:

Basic weighted-average shares outstanding
32,485 32,168
Effect of dilutive options and restricted stock
— —
Diluted weighted average shares outstanding
32,485 32,168

Net loss per share - Basic
$ (0.08
)
$ (0.01
)
Net loss per share - Diluted
$ (0.08
)
$ (0.01
)

For the ~~three~~periods ended March 31, 2019 and ~~nine months ended September 30,~~ 2018, ~~there are no~~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 ~~dilutive~~ common shares ~~included in the computation of diluted net income (loss) per share because there was a net loss for both periods.~~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):

	Three Months				Nine Months				Three Months Ended March 31,
	Ended September 30,				Ended September 30,				2019		2018
	2018		2017		2018		2017
Outstanding stock options		-		211		-		109
Outstanding options										622		655
Nonvested restricted stock units		-		15		-		12		748		961
Employee Stock Purchase Plan		-		68		-		42		379		32
Total		-		294		-		163		1,749		1,648

7.10. CUSTOMER AND GEOGRAPHIC INFORMATION

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

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

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

	Three Months						Nine Months
	Ended September 30,						Ended September 30,						Three Months Ended March 31,
Customer	2018			2017			2018			2017			2019			2018
A		38	%		38	%		39	%		41	%		36	%		38	%

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

September 30,

December 31,

Customer

2018

2017

A
41
%
41
%
B
19
%
15
%

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Customer

March 31,
2019

December 31,
2018

A
35
%
35
%
B
23
%
21
%

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

	Three Months Ended September 30,										Three Months Ended March 31,
	2018					2017					2019					2018
	Revenues		Percentage of Revenues			Revenues		Percentage of Revenues			Revenues		Percentage of Revenues			Revenues		Percentage of Revenues
United States	$	8,366		41	%	$	9,750		37	%	$	9,315		45	%	$	10,083		41	%
China		4,644		23	%		6,452		24	%		2,983		15			5,182		21
Taiwan		936		5	%		2,414		9	%		1,755		9			2,135		9
Germany												1,085		5			1,544		6
Rest of the world		6,267		31	%		7,901		30	%		5,403		26			5,793		23
Total revenue	$	20,213		100	%	$	26,517		100	%	$	20,541		100	%	$	24,737		100	%

Nine Months Ended September 30,

2018

2017

Revenues

Percentage
of Revenues

Revenues

Percentage
of Revenues

United States
$ 27,430 42 % $ 30,610 41 %
China
14,186 21 % 12,891 17 %
Taiwan
4,109 6 % 9,894 13 %
Rest of the world
20,344 31 % 21,699 29 %
Total revenue
$ 66,069 100 % $ 75,094 100 %

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

	September 30,		December 31,
	2018		2017		March 31, 2019⁽¹⁾		December 31, 2018⁽²⁾
United States	$	33,690	$	24,883	$	41,579	$	35,173
Rest of the world		430		503		2,696		508
Total long-lived assets, net	$	34,120	$	25,386	$	44,275	$	35,681

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

8.11. FAIR VALUE MEASUREMENTS

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

Level 1 -

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


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


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

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The following table represents the Company’s assets measured at fair value on a recurring basis as of ~~September 30, 2018,~~March 31, 2019, and the basis for that measurement (in thousands):

	As of September 30, 2018
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
Assets	Total		(Level 1)		(Level 2)		(Level 3)		Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Money market mutual funds	$	26,934	$	26,934	$	—	$	—	$	27,218	$	27,218	$	—	$	—

The following table represents the Company’s assets measured at fair value on a recurring basis as of December 31, ~~2017,~~2018, and the basis for that measurement (in thousands):

	As of December 31, 2017
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
Assets	Total		(Level 1)		(Level 2)		(Level 3)		Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Money market mutual funds	$	26,638	$	26,638	$	—	$	—	$	27,068	$	27,068	$	—	$	—

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 accounts payables and intercompany balances. The primary objective of the Company’s hedging program is to reduce volatility of earnings related to foreign currency exchange rate fluctuations. The counterparty to these foreign currency forward contracts is a 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), net, and offsets the change in fair value of the foreign currency denominated assets and liabilities, which is also recorded in other income (expense), net. For the three months ended ~~September 30,~~March 31, 2019 and 2018, ~~and 2017,~~ the Company recognized a realized loss of ~~$0.1~~$0.3 million and a realized gain of $0.2 million on the contracts, respectively, which was recorded in other income (expense), net in the Company’s ~~Statements~~condensed consolidated statements of ~~Operations~~operations and Comprehensive Income (Loss). For the nine months ended September 30, 2018 and 2017, the Company recognized a realized loss of $0.5 million and a realized gain $0.7 million on the contracts, respectively, which was recorded in othercomprehensive income ~~(expense), net in the Company’s Statements of Operations and Comprehensive Income (Loss)~~(loss).

The Company carries these derivatives financial instruments on its ~~Condensed Consolidated Balance Sheets~~condensed consolidated balance sheets at their fair values. The Company’s foreign currency forward contracts are classified as Level 2 because it is not actively traded and the valuation inputs are based on quoted prices and market observable data of similar instruments. As of September 30, 2018, the Company had one outstanding forward contract with a notional amount of $8.1 million and recorded $47,000 in other current liabilities associated with this outstanding forward contract. As of DecemberMarch 31, ~~2017,~~2019, the Company had one outstanding forward contract with a notional amount of $8.2 million and recorded ~~$12,000~~$53,000 other current ~~assets~~liability associated with this outstanding forward contract. As of December 31, 2018, the Company had one outstanding forward contract with a notional amount of $8.2 million and recorded $55,000 other current liability associated with the outstanding forward contract.

9. 12. COMMITMENTS AND CONTINGENCIES

~~Leases~~

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 2028. Rent expense was $0.6 million for both the three months ended September 30, 2018 and 2017, respectively. Rent expense was $1.9 million and $1.6 million for the nine months ended September 30, 2018 and 2017, respectively.

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~~Future minimum lease payments under noncancelable operating leases at September 30, 2018 are as follows (in thousands):~~

Year ending December 31,

Amount

2018 (remaining three months)
$ 357
2019
1,659
2020
1,813
2021
1,654
2022
1,483
2023 and thereafter
4,799
Total future minimum lease payments
$ 11,765

In April 2018, the Company entered into a new approximately 20,800 square foot lease, located in Santa Clara, California. The term of the new lease is ten years commencing on September 1, 2018. Total lease obligation over the new lease term is approximately $7.3 million, less a lease abatement allowance of approximately $0.4 million. The terms of the new lease include a tenant improvement allowance of $1.5 million. Future minimum lease payments under the lease are included in the above table.

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

Purchase obligations — The Company has purchase obligations with certain suppliers for the purchase of goods and services entered in the ordinary course of business. As of ~~September 30, 2018,~~March 31, 2019, total outstanding purchase obligations were ~~$10.0~~$8.2 million, which are primarily due within the next 1512 months.

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

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

Litigation — 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, 2018,~~March 31, 2019, the Company was not party to any material legal proceedings, ~~and~~ thus no loss was probable and no amount was accrued.

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~~10. SUBSEQUENT EVENT~~

~~Restructuring~~

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. The Company expects to incur total pre-tax cash restructuring charges, primarily relating to severance and transition assistance, of approximately $1.2 million to $2.3 million. The charges are expected to be expensed in the fourth quarter of 2018 and first quarter of 2019. The Company expects cash payments to be made in the fourth quarter of 2018 and into 2019.

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

Forward-Looking Statements

The following discussion of our financial condition and results of operations contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements other than statements of historical fact may be forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may,” “could,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential”, “target” or “continue,” the negative effect of terms like these or other similar expressions. Any statement concerning future financial performance (including future revenues, earnings or growth rates), ongoing business strategies or prospects, and possible actions taken by us or our subsidiaries, 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, ~~2017,~~2018, filed with the Securities and Exchange Commission on March ~~16, 2018.~~8, 2019. All references to “we”, “us”, “our”, “PDF”, “PDF Solutions” or “the Company” refer to PDF Solutions, Inc.

Overview

We analyze our customers’ ~~integrated circuit ("IC")~~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 ~~with~~ 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. We receive license fees and service fees for related installation, integration, training, and maintenance and support services for our software and hardware that we license on a stand-alone basis.

Industry Trend

The logic foundry market at the leading edge nodes, such as 10nm and 7nm, is undergoing significant change. The leading foundry has increased market share as other foundries either suspended 7nm development or ~~forecast~~forecasted a later start of mass production. This trend will likely negatively impact our future yield ramp solutions business on these ~~nodes unless we are able to engage on our Integrated Yield Ramp with that leading foundry.~~nodes. For many foundries, utilization rates for 28nm fabs remain suppressed. We expect most logic foundries to invest in derivatives of older process nodes, such as 28nm and 20nm, to extract additional value as many of their customers will not move to advanced nodes due to either technological barriers or restrictive economics. ~~Leading foundries continuing to invest in~~Foundries that participate at leading edge nodes are expected to continue to invest in new technologies such as memory, packaging, and ~~packaging,~~ multi-patterned and EUV lithography, as well as new innovations in process control and variability management. We expect China’s investment in semiconductors to continue for at least the next few years. 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.

Generally, the demand for consumer electronics, ~~and~~ communications devices, and high performance computing continues to drive technological innovation in the semiconductor industry as the need for products with greater performance, lower power consumption, reduced costs and smaller size continues to grow with each new product generation. In addition, advances in computing systems and mobile devices have fueled demand for higher capacity memory chips. To meet these demands, IC manufacturers and designers are constantly challenged to improve the overall performance of their ICs by designing and manufacturing ICs with more embedded applications to create greater functionality while lowering power and cost per transistor. As this trend continues, companies will continually be challenged to improve process capabilities to optimally produce ICs with minimal random and systematic yield loss, which is driven by the lack of compatibility between the design and its respective manufacturing process. We believe that these difficulties will create a greater need for products and services that address yield loss across the IC product life cycle.

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The interest in Industry 4.0 (i.e., the fourth industrial revolution or the digital transformation of manufacturing technologies) is another trend that will drive increased innovation in semiconductor and electronics manufacturing. The ability to add cost-effective sensors to monitor every step of a manufacturing process and the continual reduction in the cost per terabyte of data storage is moving companies that manufacture products directly or through a supply chain to collect as much manufacturing and test data as possible in order to analyze it and optimize every aspect of manufacturing and test operations to lower costs and improve product quality and profitability. Many software companies, both large and small, are developing advanced analytics solutions that employ both artificial intelligence and machine learning algorithms to identify and optimize these inefficiencies in the manufacturing supply chain. We believe that this trend will continue for the next few years, and the challenges involved in finding new insights will create opportunities for companies that have a combination of advanced analytics capabilities, domain-specific IP, and professional services.

Customer Contracts

Although a substantial portion of our total revenues are concentrated in a small number of customers, the total revenues for each of these customers in any period is the result of ~~Design-to-silicon-yield solutions~~Solutions revenue and Gainshare performance incentives revenues recognized in the period under multiple, separate contracts, with no interdependent performance obligations. In general, our customer contracts are ~~noncancelable.~~non-cancellable. 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 14 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.

~~During~~ For example, during the third quarter of 2018, ~~we were notified by~~ a major customer publicly announced that it was ~~discontinuing~~indefinitely suspending the development and production of its 7nm technology node. This customer’s decision ~~will~~ negatively ~~impact~~impacted our ~~solutions~~Solutions revenue in the fourth quarter of 2018 and Gainshare performance incentives revenues ~~for~~in the first quarter of 2019. In March 2019, we entered into an amendment to the 7nm technology ~~node. We cannot assess~~development agreement with this customer. Even though we were able to recognize Solutions revenue from this customer during the ~~ultimate resolution~~first quarter of 2019 as a result of this ~~noncancelable contract at the current time pending further discussion with the customer. We~~amendment, we expect that Gainshare performance incentives revenues related to this contract will not be recognized in the long-term as Gainshare performance incentives revenues are based on future production of the customer.

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, ~~2017,~~2018, and in Item 1A, “Risk Factors,” on pages 1312 through 1921 of our Annual Report on Form 10-K for the year ended December 31, ~~2017,~~2018, for related information on the risks associated with customer concentration and Gainshare performance incentives revenue.

Financial Highlights

Financial highlights for the three months ended ~~September 30, 2018~~March 31, 2019, were ~~summarized~~ as follows:

●•

Total revenues were ~~$20.2~~$20.5 million, which was a decrease of ~~$6.3~~$4.2 million, or ~~24%~~17%, compared to the ~~three months ended September 30, 2017. Design-to-silicon-yield solutions revenues were $14.0~~year-ago period. Solutions revenue was $16.7 million, which was a decrease of ~~$5.3~~$1.5 million, or ~~27%~~8%, compared to the ~~three months ended September 30, 2017.~~year-ago period. The decrease in ~~Design-to-silicon-yield solutions~~Solutions revenue was primarily ~~related~~due to the decrease in revenue from our yield ramp solutions resulting from lower hours worked across multiple contracts and customers, which was partially offset by increases in Exensio ~~software revenues.~~big data solution revenues that were driven by strong business activity. Gainshare performance incentives revenue was ~~$6.2~~$3.9 million, a decrease of ~~$1.1~~$2.7 million, or 14%, compared to the three months ended September 30, 2017. Our Gainshare performance incentives revenue may continue to fluctuate from period to period. Gainshare performance incentives revenue 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 performance incentives, sustained yield improvements by our customers, and our ability to enter into new Design-to-silicon-yield solutions contracts containing Gainshare performance incentives.

●

Net loss was $2.1 million for the three months ended September 30, 2018, compared to net income of $0.6 million for the three months ended September 30, 2017. The decrease in net income was primarily attributable to 24% lower total revenue for the three months ended September 30, 2018 compared to the year-ago period.

●

Net loss per basic and diluted share was $(0.06) for the three months ended September 30, 2018, compared to net income per basic and diluted share of $0.02, for the three months ended September 30, 2017, a decrease of $0.08 per basic and diluted share.

~~Financial highlights for the nine months ended September 30, 2018, were as follows:~~

●

Total revenues were $66.1 million, which was a decrease of $9.0 million, or 12%, compared to the nine months ended September 30, 2017. Design-to-silicon-yield solutions revenues were $47.4 million, which was a decrease of $8.0 million, or 14%41%, compared to the year-ago period. The decrease was primarily due to lower Gainshare performance incentives revenue from 28nm and 14nm technology nodes.

•

Gross margin for the three months ended March 31, 2019 was 62%, compared to 54% for the year-ago period. During the three months ended March 31, 2019, our gross profit was significantly higher than the prior period due primarily to recognition of Solutions revenue of $3.3 million from a customer contract amendment, and reduction in ~~design-to-silicon-yield solutions revenue was~~headcount primarily related to our yield ramp business, which is a cost of revenues. Cost of solutions decreased for the three months ended March 31, 2019, compared to the year-ago period, primarily due to (i) a $2.7 million decrease in personnel-related cost driven by (i) lower headcount and lower chargeable hours ~~worked~~incurred across multiple contracts and customers, ~~which was~~and a decrease in stock-based compensation expense, partially offset by a provision for discretionary employee bonus for fiscal 2019, (ii) a $0.4 million decrease in hardware and equipment expense due to lesser solutions revenue, and (iii) a $0.3 million decrease in travel expenses resulting from our cost management effort. These increases in ~~Exensio software revenues. Gainshare performance incentives revenue was $18.6~~gross margin were partially offset by a $2.7 million ~~a decrease of $1.0 million, or 6%, compared to the nine months ended September 30, 2017. The~~ decrease in Gainshare performance ~~incentives revenue was primarily due to lower incentives revenue from the 28nm nodes, partially offset by higher incentives revenue from the 14nm nodes.~~incentives.

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●

~~Gross margin for the nine months ended September 30, 2018, was 50%, compared to 53% for the nine months ended September 30, 2017.~~

●•

Net loss was ~~$4.6~~$2.7 million, compared to net loss of $0.4 million for the ~~nine months ended September 30, 2018, compared to net income of $1.3 million for the nine months ended September 30, 2017.~~year-ago period. The ~~decrease~~increase in net ~~income~~loss was primarily attributable to 17% lower ~~total revenue~~revenues, and a lower tax benefit mainly driven by the changes in forecasted income/loss between fiscal 2019 and 2018, and lower excess tax benefit for ~~the nine months ended September 30, 2018,~~employee stock compensation compared to the year-ago period, ~~and~~partially offset by a ~~$0.9~~$1.9 million decrease in ~~income tax benefit primarily due to lower excess tax benefits~~cost of solutions and operating expenses related to ~~employee stock compensation and the impact of the recently enacted U.S. Tax Cuts and Jobs Act, such as,~~ a decrease in ~~the maximum federal tax rate from 35% to 21%.~~personnel-related costs driven by lower headcount, decrease in equipment, travel and subcontractor expenses, and foreign exchange loss.


	●•	Net loss per basic and diluted share was ~~$(0.14)~~$(0.08) for the ~~nine~~three months ended ~~September 30, 2018,~~March 31, 2019, which was an increase in net loss of $0.07 per basic and diluted share, compared to net ~~income~~loss per basic and diluted share of ~~$0.04,~~($0.01), for the ~~nine months ended September 30, 2017, a decrease of $0.18 per basic and diluted share.~~year-ago period.

	•	Cash, cash equivalents and investments decreased ~~by $4.5~~$5.7 million to ~~$96.8~~$90.4 million at ~~September 30, 2018,~~March 31, 2019, from ~~$101.3~~$96.1 million at December 31, ~~2017,~~2018, primarily due ~~primarily~~ to cash used in investing activities related to the ~~development of our Design-for-Inspection (“DFI”) solution and~~ property and equipment purchased for the development our DFI solution, new office headquarters and expansion of our research and development laboratory and clean room, and cash used in financing activities primarily due to repurchases of our common ~~stock, partially offset by cash generated from operating activities during the nine months period ended September 30, 2018.~~stock.

Critical Accounting Policies and Estimates

See Note 1 of “Notes to Condensed Consolidated Financial Statements (Unaudited)” of this Quarterly Report on Form 10-Q for a description of recent accounting pronouncements and accounting changes, including the expected dates of adoption and estimated effects, if any, on our condensed consolidated financial statements, and to Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, ~~2017.~~2018.

With the exception of the changes made to our ~~revenue recognition policy~~accounting for leases as a result of the adoption of ASC ~~606,~~842, there have been no material changes during the ~~nine~~three months ended ~~September 30, 2018,~~March 31, 2019 to the items that we disclosed as our critical accounting policies and estimates ~~in our Critical Accounting Policies~~ in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2017.~~2018.

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 ~~condensed~~ consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. We ~~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 and the realization of deferred tax assets. Actual amounts may differ from such estimates under different assumptions or conditions.

Revenue Recognition

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

~~Design-to-silicon-yield solutions~~Solutions revenue — We recognize revenue for each element of ~~Design-to-silicon-yield~~ solutions revenue as follows:

We license the majority of our software products separately from project-based solution implementation service contracts, in particular, our Exensio big data platform and related products. The majority of this software is delivered as on-premise software licenses, while others can be delivered entirely or partially through Software-as-a-Service (SaaS) or cloud delivery models. Revenue from perpetual (one-time charge) license software is recognized at a point in time at the inception of the arrangement when control transfers to the client, if the software license is distinct from the services offered by us. Revenue from post-contract support subscription is recognized over the contract term on a straight-line basis, because we are providing a service of standing ready to provide support, when-and-if needed, and is providing unspecified software upgrades on a when-and-if available basis over the contract term. Revenue from time-based license software is allocated to each performance obligation and is recognized either at a

Table of Contents

point in time or over time. The license component is recognized at a point in time, at the delivery of the software license, with the post-contract support subscription component being recognized ratably over for the committed term of the contract. Revenue from software hosting or SaaS arrangements that allow 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 and recognized as revenue ratably, on a straight-line basis, over the coverage period beginning on the date the service is made available to customers.

We also license our Design-for-Inspection (DFI) system as a separate component of fixed-price service contracts that are not project-based solutions implementation services contracts. We allocate revenue to all deliverables under these DFI contracts based on their standalone selling prices, or SSP. In such instances, we apply judgment to estimate the range of SSPs for each performance obligation.

We generate a significant portion of our ~~Design-to-silicon-yield~~ solutions revenue from fixed-price, project-based solution implementation service contracts that are associated with its classic yield ramp business, which services are delivered over a specific period of time. Revenue under these project–based contracts for solution implementation services is recognized as services are performed using a percentage of completion method based on costs or labor-hours inputs, whichever is the most appropriate measure of the progress towards completion of the contract. Due to the nature of the work performed in these arrangements, the estimation of costs or hours at completion is complex, subject to many variables and requires significant judgment. Key factors reviewed by us to estimate costs to complete each contract are future labor and product costs and expected productivity efficiencies. If circumstances arise that change the original estimates of revenues, costs, or extent of progress toward completion, revisions to the estimates are made. These revisions may result in increases or decreases in estimated revenues or costs. Losses on fixed-price solution implementation contracts are recognized in the period when they become probable. Revisions in profit estimates are reflected in the period in which the conditions that require the revisions become known and can be estimated (cumulative catch-up method).

~~Table~~
We typically include some of ~~Contents~~

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

We also license our DFI system as a separate component of fixed-price service contracts. We allocate revenue to all deliverables based on their standalone selling prices, or SSP. In such instances, we apply judgment to estimate the range of SSPs for each performance obligation.

We license some of our software products separately from solution implementations, primarily our Exensio software platform and related products. The majority of these products are delivered as on-premise software licenses, while others can be delivered entirely or partially through Software-as-a-Service (“SaaS”) or cloud delivery models. Revenue from perpetual (one-time charge) license software is recognized at the time of the inception of the arrangement when control transfers to the client, if the software license is distinct from the services offered by us. Revenue from post-contract support subscription is recognized over the contract term on a straight-line basis, because we are providing (i) a service of standing ready to provide support, when-and-if needed, and (ii) unspecified software upgrades on a when-and-if available basis over the contract term. Revenue from time-based license software is allocated to each performance obligation and is recognized either at a point in time or over time. The license component is recognized at the time of the delivery of the software license, with the post-contract support subscription component being recognized ratably over for the committed term of the contract. Revenue from software hosting or SaaS arrangements that allow 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 and are recognized as revenue ratably, on a straight-line basis, over the coverage period beginning on the date the service is made available to customers.

Gainshare p~~erformance~~ i~~ncentives~~Performance Incentives — When we enter into a project-based solution implementation services 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 pays a variable fee, usually after the fixed fee period has ended, related to ~~the~~continued usage of the Company's intellectual property. Revenue derived from Gainshare performance incentives is contingent upon our customers reaching certain defined production yield levels. Gainshare performance incentive periods are usually subsequent to the delivery of all contractual services and performance obligations. We recorded Gainshare revenue as a usage-based royalty ~~in accordance with~~based on customers' usage of intellectual property and recorded in the same period in which the usage occurs.

Income Taxes

We are required to assess whether it is more-likely-than-not that our deferred tax assets will be recovered from future taxable income and if we believe that they are not likely to be realizable before the expiration dates applicable to such assets then, to the extent we believe that recovery is not likely, establish a valuation allowance. Changes in the net deferred tax assets, less offsetting valuation allowance, in a financial reporting period are recorded through theThe Company's provision for income tax ~~provision~~comprises its current tax liability and could have a material impact on the condensed consolidated statements of operations. The valuation allowance was approximately $9.4 million and $9.1 million as of September 30, 2018 and December 31, 2017, respectively, which was related to California R&D tax credits and California net operating losses related to an acquisition that we currently do not believe to be "more-likely-than-not" to be ultimately realized. If we conclude at a future financial reporting period that there has been a change in ~~our ability to realize our California R&D credit and net operating loss carry forward~~ deferred tax assets and ~~it is at such time “more-likely-than-not” that we will realize~~liabilities. Deferred tax assets and liabilities are recognized for the expected tax consequences of temporary differences between the tax ~~credits before applicable expiration dates, our~~bases of assets and liabilities. The measurement of current and deferred tax ~~provision will decrease~~assets and liabilities is based on provisions of enacted tax laws; the effect of future changes in tax laws or rates are not anticipated. Valuation allowances are provided to reduce deferred tax assets to an amount that in management’s judgment is more likely than not to be recoverable against future taxable income. No U.S. taxes are provided on earnings of non-U.S. subsidiaries, to the ~~period in which we make~~extent such ~~determination.~~

~~Our~~earnings are deemed to be permanently invested. The Company's income tax calculations are based on application of the respective U.S. federal, state or foreign tax ~~law. Our~~laws. The Company’s tax filings, however, are subject to audit by the respective tax authorities. Accordingly, ~~we recognize~~the Company recognizes tax liabilities based upon ~~our~~its 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~~from the amounts originally accrued, the increases or decreases are recorded as an income tax expense or benefit in the consolidated statements of ~~operations. The Company intends to reinvest the earnings of its non-U.S. subsidiaries in those~~ operations indefinitely. As such, the Company has not provided for any taxes on the earnings of foreign subsidiaries as of September 30, 2018. It is not practicable to determine the amount of the unrecognized tax liability at this time.and comprehensive income (loss).

Recent Accounting Pronouncements and Accounting Changes

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Results of Operations

Discussion of Financial Data for the Three Months Ended March 31, 2019 and ~~Nine Months~~ ~~Ended~~ 2018~~September~~

~~30, 2018 and 2017~~

Revenues

~~Revenues~~

	Three Months Ended September 30,								Nine Months Ended September 30,								Three Months Ended March 31,						$			%
(Dollars in thousands)	2018			2017			Percent Change		2018			2017			Percent Change		2019			2018			Change			Change
Design-to-silicon-yield solutions	$	13,976		$	19,229			(27%)	$	47,431		$	55,426			(14%)
Solutions																	$	16,661		$	18,190		$	(1,529	)		(8	%)
Gainshare performance incentives		6,237			7,288			(14%)		18,638			19,668			(5%)		3,880			6,547			(2,667	)		(41	%)
Total revenues	$	20,213		$	26,517			(24%)	$	66,069		$	75,094			(12%)	$	20,541		$	24,737		$	(4,196	)		(17	%)
Design-to-silicon-yield solutions as a percentage of total revenues		69	%		73	%				72	%		74	%
Solutions revenue as a percentage of total revenues																		81	%		74	%
Gainshare performance incentives as a percentage of total revenues		31	%		27	%				28	%		26	%				19	%		26	%

~~Design-to-silicon-yield solutions~~Solutions revenue is derived from services (including solution implementations, software support and maintenance, consulting, and training) and software and hardware licenses provided during our customer yield improvement engagements as well as during solution product sales. ~~Design-to-silicon-yield solutions~~Solutions revenue decreased $1.5 million for the three ~~and nine~~ months ended ~~September 30, 2018,~~March 31, 2019, compared to the year-ago ~~periods~~period, due primarily to the decrease in the revenue from our yield ramp solutions ~~due to~~resulting from lower hours worked across multiple contracts and customers, which was partially offset by increases in Exensio ~~software~~big data solution revenues that were driven by strong business ~~activities.~~activity. Our ~~Design-to-silicon-yield solutions~~Solutions revenue may fluctuate in the future and is dependent on a number of factors, including the semiconductor industry’s continued acceptance of our solutions, the timing of purchases by existing and new customers, cancellations by existing customers, and our ability to attract new customers 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, or if any of our significant customers, who have entered into a time and materials contract, take advantage of certain contractual provisions that permit the suspension of contracted work for a period if their business experiences a financial hardship.business.

Gainshare performance incentives revenues represent royalties and performance incentives earned contingent upon our customers reaching certain defined operational levels. Revenue derived from Gainshare performance incentives decreased ~~$1.1 million and $1.0~~by $2.7 million for the three months ~~and nine months~~ ended ~~September 30, 2018, respectively,~~March 31, 2019, compared to the year-ago ~~periods~~period, due primarily to lower ~~gainshare~~Gainshare performance incentives ~~revenue~~revenues from ~~the~~ 28nm ~~nodes, partially offset by higher incentives revenue from the~~and 14nm technology nodes. Our Gainshare performance incentives revenue may continue to fluctuate from period to period. Gainshare performance incentives revenue 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.

~~Costs of Design-to-silicon-yield solutions~~Gross Margin

Three Months Ended September 30,

Nine Months Ended September 30,

(Dollars in thousands)

2018

2017

Percent
Change

2018

2017

Percent
Change

Direct costs of Design-to-silicon-yield solutions
$ 10,539 $ 12,295 (14%) $ 32,651 $ 34,913 (6%)
Amortization of acquired technology
144 136 6% 431 327 32%
Total costs of Design-to-silicon-yield solutions
$ 10,683 $ 12,431 (14%) $ 33,082 $ 35,240 (6%)
As a percentage of total revenues
53 % 47 % 50 % 47 %

Three Months Ended
March 31,

$

%

(Dollars in thousands)

2019

2018

Change

Change

Solutions
$ 8,794 $ 6,708 $ 2,086 31
%
Gainshare performance incentives
3,880 6,547 (2,667
)
(41
%)
Gross profit
$ 12,674 $ 13,255 $ (581
)
(4
%)
Gross margin - Solutions revenue
53 % 37 %
Gross margin - Gainshare performance incentives
100 % 100 %
Gross margin - Total Company 62 % 54 %

~~Costs~~Gross margin increased for the three months ended March 31, 2019 compared to the year-ago period, due primarily to recognition of ~~Design-to-silicon-yield solutions consist~~Solutions revenue of ~~costs incurred to provide~~$3.3 million from a customer contract amendment, and ~~support our services, costs recognized~~reduction 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 costs consist of material, employee compensation andheadcount primarily related ~~benefits, overhead costs, travel and facilities-related costs. Software license costs consist of costs associated with licensing third-party software used by the Company in providing services~~ to our ~~customers in solution engagements, or sold in conjunction with our software products.~~
28
~~Table~~yield ramp business, which is a cost of ~~Contents~~
~~Direct costs~~revenues. Cost of ~~Design-to-silicon-yield~~ solutions decreased for the three months ended ~~September 30, 2018,~~March 31, 2019, compared to the year-ago period, primarily due to (i) a ~~$1.7~~$2.7 million decrease in personnel-related cost driven by lower headcount and ~~project costs. Amortization of acquired technology~~lower chargeable hours incurred across multiple contracts and customers, and a decrease in stock-based compensation expense, partially offset by a provision for the three months ended September 30, 2018, increased slightly due to the amortization of acquired technology from our acquisition of certain assets from Realtime Performance Europe B.V. (dba “Kinesys Software”). Direct costs of Design-to-silicon-yield solutions decreaseddiscretionary employee bonus for ~~the nine months ended September 30, 2018, compared to the year-ago period due primarily to~~fiscal 2019, (ii) a ~~$2.1~~$0.4 million decrease in ~~personnel-related cost driven by lower headcount. Amortization of acquired technology for the nine months ended September 30, 2018, slightly increased~~hardware and equipment expense due to ~~the amortization of acquired technology~~lesser solutions revenue, and (iii) a $0.3 million decrease in travel expenses resulting from our ~~acquisition of certain assets from Kinesys Software.~~ cost management effort. These increases in gross margin were partially offset by a $2.7 million decrease in Gainshare performance incentives.

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Table of Contents
Research and Development

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended
March 31,

$

%

(Dollars in thousands)

2018

2017

Percent
Change

2018

2017

Percent
Change

2019

2018

Change

Change

Research and development
$ 6,755 $ 7,875 (14%) $ 21,100 $ 22,432 (6%) $ 8,246 $ 7,245 $ 1,001 14
%
As a percentage of total revenues
33 % 30 % 32 % 30 % 40
%
29
%

Research and development expenses consist primarily of personnel-related costs to support product development activities, including compensation and benefits, ~~third-party~~outside development services, travel, facilities cost allocations, and stock-based compensation charges. Research and development expenses ~~decreased~~increased for the three months ended ~~September 30, 2018,~~March 31, 2019, compared to the year-ago period, primarily due ~~primarily~~ to a ~~$1.1~~$1.2 million ~~decrease~~increase in personnel-related cost driven by an increase in stock based compensation expense ~~as a result~~ of ~~lower headcount. Research~~$0.8 million, higher payroll expenses charged due to shifting of more resources from our yield ramp business to research and development ~~expenses decreased for the nine months ended September 30, 2018, compared to the year-ago period due primarily to~~activities, a ~~$1.5~~$0.2 million ~~decrease~~increase in ~~personnel-related~~facilities expense, partially offset by a ~~$0.3~~$0.4 million ~~increase~~decrease in ~~depreciation expense for lab equipment.~~subcontractor expenses that is primarily related to our DFI and Exensio solutions. 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 the timing of product development projects and revenue generating activity requirements.

Selling, General and Administrative

Three Months Ended

Three Months Ended September 30,

Nine Months Ended September 30,

March 31,

$

%

(Dollars in thousands)

2018

2017

Percent
Change

2018

2017

Percent
Change

2019

2018

Change

Change

Selling, general and administrative
$ 5,507 $ 5,680 (3%) $ 17,801 $ 17,775 0% $ 7,011 $ 6,375 $ 636 10
%
As a percentage of total revenues
27 % 21 % 27 % 24 % 34
%
26
%

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 ~~decreased~~increased for the three months ended ~~September 30, 2018,~~March 31, 2019, compared to the year-ago period, primarily due to (i) $0.7 million increase in personnel-related expenses driven by higher payroll expenses allocated to selling and marketing activities as a result of shifting of resources from our yield ramp business, (ii) partially offset by a $0.2 million decrease in professional ~~fees. Selling, general and administrative expenses were flat for the nine months ended September 30, 2018, compared to the year-ago period, primarily~~fees due to ~~a $0.1 million increase in personnel-related expense, partially offset by a $0.1 million decrease in professional~~lower audit fees. We anticipate our selling, general and administrative expenses will fluctuate in absolute dollars from period to period as a result of cost control initiatives and to support increased selling efforts in the future.

Amortization of Other Acquired Intangible Assets

Three Months Ended September 30,

Nine Months Ended September 30,

(Dollars in thousands)

2018

2017

Percent
Change

2018

2017

Percent
Change

Amortization of other acquired intangible assets
$ 108 $ 107 1% $ 326 $ 291 12%

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~~Table of Contents~~

Three Months Ended

March 31,

$

%

(Dollars in thousands)

2019

2018

Change

Change

Amortization of other acquired intangible assets
$ 108 $ 109 $ (1 ) (1
%)

Amortization of other acquired intangible assets consists of amortization of intangibles acquired ~~from~~as a result of certain business ~~combinations. The increase in amortization~~combination.
28
Table of ~~other acquired intangible assets~~Contents
Restructuring charges

Three Months Ended

March 31,

$

%

(Dollars in thousands)

2019

2018

Change

Change

Restructuring charges
$ 92 $ — $ 92 100
%
Restructuring charges for the ~~nine~~three months ended ~~September 30, 2018, compared to the year-ago period, was~~March 31, 2019, were primarily related to employee separation charges incurred as part of the ~~amortization of other acquired intangible assets, which resulted from the acquisition of certain assets from Kinesys Software.~~Company’s restructuring plan announced on September 27, 2018, to reduce expenses and align its operations with evolving business needs.

See Note 7, Restructuring Charges, in Notes to Condensed Consolidated Financial Statements in Item 1 of Part I of this Report for more information regarding this restructuring plan.
Interest and Other Income (Expense), Net

Three Months Ended

Three Months Ended September 30,

Nine Months Ended September 30,

March 31,

$

%

(Dollars in thousands)

2018

2017

Percent
Change

2018

2017

Percent
Change

2019

2018

Change

Change

Interest and other income (expense), net
$ 223 $ (104 ) 314% $ 283 $ (305 ) 193% $ (6
)
$ (331
)
$ (325) (98
%)

Interest and other income (expense), net, ~~increased for the three and nine months ended September 30, 2018, compared to the year-ago periods,~~ primarily ~~due to foreign exchange rate movements and an increase in~~consists of interest income ~~due to higher interest rates.~~
~~Income Tax Provision (Benefit)~~

Three Months Ended September 30,

Nine Months Ended September 30,

(Dollars in thousands)

2018

2017

Percent
Change

2018

2017

Percent
Change

Income tax benefit
$ (535 ) $ (270 ) 98% $ (1,355 ) $ (2,246 ) (40%)
~~Income tax benefit increased by $0.3 million~~and foreign currency transaction exchange gain (loss). Interest and other income (expense), net, decreased for the three months ended ~~September 30, 2018,~~March 31, 2019, compared to the year-ago period primarily due to ~~higher pre-tax operating loss.~~ net favorable fluctuations in foreign exchange rates.
Income Tax Benefit

Three Months Ended

March 31,

$

%

(Dollars in thousands)

2019

2018

Change

Change

Income tax benefit
$ (98
)
$ (381
)
$ (283) (74
%)
Income tax benefit decreased ~~by $0.9~~$0.3 million for the ~~nine~~three months ended ~~September 30, 2018,~~March 31, 2019, compared to the year-ago period, primarily due to the changes in forecasted income/loss between fiscal 2019 and 2018, and lower excess tax ~~benefits related to~~benefit for employee stock compensation ~~and~~compared to the ~~impact of recently enacted U.S. tax reform, such as, a decrease in the maximum federal tax rate from 35% to 21% and GILTI.~~year-ago period.

Liquidity and Capital Resources

As of ~~September 30, 2018,~~March 31, 2019, our working capital, defined as total current assets less total current liabilities, was ~~$139.8~~$131.2 million, compared to ~~$144.3~~$137.7 million as of December 31, ~~2017.~~2018. Cash and cash equivalents were ~~$96.8~~$90.4 million as of ~~September 30, 2018,~~March 31, 2019, compared to ~~$101.3~~$96.1 million as of December 31, ~~2017.~~2018. As of ~~September 30, 2018~~March 31, 2019, and December 31, ~~2017,~~2018, cash and cash equivalents held by our foreign subsidiaries were ~~$3.8~~$3.0 million and ~~$3.1~~$4.1 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 the next twelve months.

Three Months Ended
March 31,

Nine Months Ended September 30,

2019

2018

$ Change

(In thousands)

2018

2017

Net cash flows provided by (used in):

Operating activities
$ 9,043 $ 6,261 $ (151
)
$ 3,252 $ (3,403
)
Investing activities
(8,747 ) (10,783 ) (2,357
)
(2,447
)
90
Financing activities
(4,658 ) (11,687 ) (3,174
)
(3,634
)
460
Effect of exchange rate changes on cash and cash equivalents
(117 ) 172 8 84 (76
)
Net decrease in cash and cash equivalents
$ (4,479 ) $ (16,037 ) $ (5,674
)
$ (2,745
)
$ (2,929
)

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Table of Contents

~~Our primary~~Net Cash Flows Provided by (Used in) Operating Activities
Cash flow from operating activities during the three months ended March 31, 2019 mostly consisted of net loss, adjusted for certain non-cash items which primarily consisted of depreciation and amortization, share-based compensation expense and deferred tax assets. The $3.4 million decrease in cash ~~inflows and outflows~~flows from operating activities for the ~~nine~~three months ended ~~September 30, 2018, as~~March 31, 2019, compared to the ~~nine~~year-ago period, was driven primarily by a $2.3 million increase in net loss, a decrease in non-cash adjustments to net loss by $1.6 million primarily due to an increase in deferred tax assets of $2.2 million, and an increase in stock-based compensation expense of $0.6 million, partially offset by a $0.4 million decrease in net change from operating assets and liabilities. The major contributors to the net change in operating assets and liabilities for the three months ended ~~September 30, 2017,~~March 31, 2019 were as follows:

●
~~During~~Accounts receivable increased by $1.6 million primarily due to slower payments from a few customers despite a decrease in revenues. Days of sales outstanding, or DSO, increased primarily due to slower payments by certain customers in Asia. We have not incurred any significant write-offs of accounts receivable during the ~~nine~~three months ended ~~September 30, 2018, net cash provided by operating activities was $9.0 million compared to $6.3 million during the nine months ended September 30, 2017. The $2.7 million increase~~March 31, 2019 and in net cash from operating activities was driven primarily by $8.2 million increase in the net change from operating assets and liabilities, which was partially offset by a $5.9 million increase in net loss. The major contributors to the net change in operating assets and liabilities in the nine months ended September 30, 2018, were as follows:fiscal year 2018.

●
~~Accounts receivable decreased~~Billings in excess of recognized revenues increased by ~~$5.7 million due primarily to significant collections from one large customer.~~
●
~~Other noncurrent assets decreased by $2.4 million due to billings to customers for unbilled receivables that had reached billing milestones.~~
●
~~Accrued compensation and related benefits decreased by $1.4~~$0.9 million primarily due to ~~bonus payout, vacation taken~~timing of billing and ~~ESPP purchases during the period.~~
●
~~Prepaid expenses and other current assets increased by $3.4 million due to contract assets resulting from the effect of adopting Topic 606.~~revenue recognition.

~~During the nine months ended September 30, 2018, net~~Net Cash Flows Used in Investing Activities
Net cash used in investing activities was ~~$8.7 million compared to $10.8 million during~~flat for the ~~nine~~three months ended ~~September 30, 2017.~~March 31, 2019 compared for the year-ago period. For the ~~nine~~three months ended ~~September 30,~~March 31, 2019 and 2018, cash flows used in investing activities ~~consisted of payments for capital expenditures which included purchases of test~~related to property and equipment ~~furniture and fixture and leasehold improvements~~purchased for the development our DFI solution, new office ~~headquarters. For the nine months ended September 30, 2017, cash flows used in investing activities primarily consisted~~headquarters and expansion of ~~payments for capital expenditures, primarily test equipment~~our research and ~~cash paid for acquisition of business.~~development laboratory and clean room.

~~During~~Net Cash Flows Used in Financing Activities
Net cash used in financing activities decreased by $0.5 million for the ~~nine~~three months ended ~~September 30, 2018,~~March 31, 2019, compared to the year-ago period. For the three months ended March 31, 2019, net cash used in financing activities ~~was $4.7 million compared to $11.7 million during the nine months ended September 30, 2017. For the nine months ended September 30, 2018, cash flows used in financing activities~~primarily consisted of ~~$5.2~~$3.9 million of cash used to repurchase shares of our common stock and ~~$1.7~~$0.6 million cash payments for taxes related to net share settlement of equity awards, partially offset by $1.3 million of proceeds from our Employee Stock Purchase Plan and exercise of stock options. For the three months ended March 31, 2018, net cash used in financing activities of $3.6 million, consisted of $4.1 million repurchases of common stock, $0.6 million of cash payments for taxes related to net share settlement of equity awards, partially offset by ~~$2.3~~$1.0 million of proceeds from our Employee Stock Purchase Plan and ~~the~~ exercise of stock options. For the nine months ended September 30, 2017, cash flows used in financing activities consisted of $13.4 million of cash used to repurchase shares of our common stock and $2.4 million of cash payments for taxes related to net share settlement of equity awards, partially offset by $4.2 million of proceeds from the exercise of stock options and from our Employee Stock Purchase Plan.

Off-Balance Sheet Agreements

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

30
Table of Contents

Contractual Obligations

The following table summarizes our known contractual obligations (in thousands) as of ~~September 30, 2018:~~March 31, 2019:

Payments Due by Period

Contractual Obligations

2018
(remaining
three
months)

2019

2020

2021

2022

2023 and
thereafter

Total

Operating lease obligations (1)
$ 357 $ 1,659 $ 1,813 $ 1,654 $ 1,483 $ 4,799 $ 11,765
Purchase obligations (2)
3,893 5,691 243 155 5 - 9,987
Total (3)
$ 4,250 $ 7,350 $ 2,056 $ 1,809 $ 1,488 $ 4,799 $ 21,752

Payments Due by Period

Contractual Obligations

2019
(remaining
nine months)

2020

2021

2022

2023

2024 and
thereafter

Total

Operating lease obligations(1)
$ 1,381 $ 1,870 $ 1,719 $ 1,536 $ 1,175 $ 3,673 $ 11,354
Purchase obligations(2)
7,149 678 401 8 4 ‒ 8,240
Total(3)
$ 8,530 $ 2,548 $ 2,120 $ 1,544 $ 1,179 $ 3,673 $ 19,594

(1)
~~In April 2018, we entered into a new approximately 20,800 square foot lease, located in Santa Clara, California. The term~~Refer to Note 4, Leases of the ~~new lease is ten years commencing on September~~Notes to Condensed Consolidated Financial Statements (Item 1 ~~2018. The total lease obligation over the new lease term is approximately $7.3 million, less a lease abatement allowance~~ of ~~approximately $0.4 million. The terms~~Part I of ~~the new lease include a tenant improvement allowance of $1.5 million. Future minimum lease payments under the lease are included in the above table.~~this Report)

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

(3)
The contractual obligation table above excludes liabilities for uncertain tax positions of ~~$2.9~~$3.2 million, which are not practicable to assign to any particular years, due to the inherent uncertainty of the tax positions. See Note 58 of “Notes to Condensed Consolidated Financial Statements” for further discussion.
31
~~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.   As of ~~September 30, 2018,~~March 31, 2019, we had cash and cash equivalents of ~~$96.8~~$90.4 million. Cash and cash equivalents consisted of cash and highly liquid money market instruments. We would not expect our operating results or cash flows to be affected to any significant degree by the effect of a sudden change in market interest on our portfolio. A hypothetical increase in market interest rates of 100 basis points from the market rates in effect at ~~September 30, 2018,~~March 31, 2019, 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.~~

Foreign Currency and Exchange ~~Rate~~ Risk.   Certain of our payables for our international offices are denominated in the local currency, including the Euro, Yen and ~~Renminbi.~~RMB. Therefore, a portion of our operating expenditures is subject to foreign currency risks. We enter into foreign currency forward contracts to reduce the exposure to foreign currency exchange rate fluctuations on certain foreign currency denominated monetary assets and liabilities. We do not use foreign currency forward contracts for speculative or trading purposes. We record these forward contracts at fair value. The counterparty to these foreign currency forward contracts is a 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, 2018,~~March 31, 2019, we had one outstanding forward contract with a notional amount of ~~$8.1~~$8.2 million. The foreign currency exchange rate movement of plus-or-minus 10% will result in the change in fair value of this contract of plus-or-minus $0.8 million.
31
Table of Contents

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 controls and procedures" as defined in ~~Securities and~~ Exchange Act ~~of 1934, as amended (the “Exchange Act”)~~ Rules 13a-15(e) and 15d-15(e) as of ~~September 30, 2018,~~March 31, 2019, in connection with the filing of this Quarterly Report on Form 10-Q. Based on that evaluation as of ~~September 30, 2018,~~March 31, 2019, our principal executive officer and principal financial and accounting officer concluded that our disclosure controls and procedures were effective to ensure that ~~the~~ 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 internal control over financial reporting during the three months ended ~~September 30, 2018,~~March 31, 2019, that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

32
~~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, 2018.~~March 31, 2019.

Item 1A. Risk Factors

Item 1A, “Risk Factors,” on pages 13 through 19 of the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2017,~~2018, provides information on the significant risks associated with our business. There have been no subsequent material changes to these ~~risks, except as set forth below.~~risks.

We generate most of our revenues from a limited number of customers, and a large percentage of our revenues from a single customer, so decreased business with, or the loss of, any one of these customers, or pricing pressure, or customer consolidation could significantly reduce our revenue or margins, negatively impacting results of operations, and require us to accept lower margin business on future nodes.
Historically, we have had a small number of large customers for our core Design-to-silicon-yield solutions and that contribute significant Gainshare performance incentives revenue. In the year ended December 31, 2017, one customer, GlobalFoundries, accounted for 40% of our revenues. We could lose a customer due to its decision not to engage us on future process nodes, its decision to reduce the scope of our services or technology used, which is permitted in certain of our contracts if the customer company's business materially adversely changes, its decision not to develop its own future process node, or as a result of industry factors, including but not limited to consolidation. During the third quarter of 2018, we were notified by a major customer that it was discontinuing the development and production of its 7nm technology node. This customer’s decision will negatively impact our solutions and Gainshare performance incentives revenues on the 7nm technology node. We cannot assess the ultimate resolution of this noncancelable contract at the current time pending further discussion with the customer. We expect Gainshare performance incentives revenues related to this contract will not be recognized in the long-term as Gainshare performance incentives revenues are based on future production of the customer. Further, new business may be delayed if a key customer uses its leverage to push for terms that are worse for us and we nonetheless continue to negotiate for better terms, in which case Solutions revenue in any particular quarter or year may fail to meet expectations. Also, the loss of any of these customers or the failure to secure new contracts with these customers could further increase our reliance on our remaining customers. For example, in the first quarter of 2015, we recognized significant one-time revenue associated with closing two contracts with one of our then-largest customers that we were unable to close on the expected schedule. Further, if any of our key customers default, declare bankruptcy or otherwise delay or fail to pay amounts owed, or we otherwise have a dispute with any of these customers, our results of operations would be negatively affected in the short term and possibly the long term. These customers may seek to renegotiate pre-existing contractual commitments due to adverse changes in their own businesses or, in some cases, take advantage of contractual provisions that permit the suspension of contracted work for some period if their business experiences a financial hardship, which would harm our operating results. In particular, these events could cause significant fluctuations in results of operations because our expenses are fixed in the short term and it takes us a long time to replace customers or reassign resources.

33
~~Table of Contents~~

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The table below sets forth the information with respect to purchases made by or on behalf of the Company or any “affiliated purchaser” (as the term is defined in Rule 10b-18(a)(3) under the Exchange Act) of our common stock during the three months ended ~~September 30, 2018~~March 31, 2019 (in thousands except per share amounts):

ISSUER PURCHASES OF EQUITY SECURITIES

Total

Number of

Approximate

Shares

Dollar

Purchased

Value of

as

Shares that

Total

Part of

May Yet Be

Number of

Publicly

Purchased

Shares

Announced

Under

Purchased

Average

Programs

Programs

(in thousands)

Price Paid

(in thousands)

(in thousands)

Period

(1)

Per Share

(1)

(1)

July 1, 2018 - July 31, 2018
- $ - -
August 1, 2018 - August 31, 2018
- $ - -
September 1, 2018 - September 30, 2018
- $ - - $ 25,000
Total
- $ - - $ 25,000

Period

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

Average
Price Paid
Per Share

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

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

January 1, 2019 through January 31, 2019
— $ — — $ 25,000
February 1, 2019 through February 28, 2019
— $ — — $ 25,000
March 1, 2019 through March 31, 2019
314 $ 12.46 314 $ 21,084
Total
314 $ 12.46 314

(1)
~~(1)~~On May 29, 2018, the Board of Directors adopted a new 2018 program to repurchase up to $25.0 million of common stock both on the open market and in privately negotiated transactions, from time to time, over the next two years. Under the 2018 program, ~~$25.0~~$21.1 million of common stock remained available for future repurchases.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

None.

Item 5. Other Information

~~None.~~ As disclosed in the Form 8-K filed October 29, 2018, the Company entered into a revised employment offer with Cornelis Hartgring. Pursuant to the revised employment offer, Mr. Hartgring ceased to be an executive officer as of November 1, 2018.
In addition, on April 26, 2019, the Board of Directors approved a new reporting structure for the Company effective January 1, 2019. As a result, Kwang-Hyun Kim ceased to be an executive officer on December 31, 2018, but continues as Vice President, Business Development, PDF Solutions Semiconductor Technology Korea Limited.
33
Table of Contents

Item 6. Exhibits

Exhibit
Number


Description

3.01 Amended and Restated Bylaws of PDF Solutions, Inc., effective January 28, 2019 (incorporated herein by reference to Exhibit 3.1 to registrant’s Current Report on Form 8-K, filed January 28, 2019).*
3.02 Amended and Restated Bylaws of PDF Solutions, Inc., effective April 26, 2019 (incorporated herein by reference to Exhibit 3.1 to registrant’s Current Report on Form 8-K, filed May 1, 2019).*
10.01
~~Employment offer~~Offer letter to ~~Christine A. Russell,~~Cornelis D. Hartgring from PDF Solutions, Inc. dated ~~July 31,~~October 26, 2018.*†

31.01

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



31.02

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



32.01

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



32.02

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

XBRL Instance Document.†



101.SCH

XBRL Taxonomy Extension Schema Document.†



101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document.†



101.DEF

XBRL Taxonomy Extension Definition Linkbase Document.†



101.LAB

XBRL Taxonomy Extension Label Linkbase Document.†



101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document.†
__________________________
*
Indicates management contract or compensatory plan or arrangement.
†
Filed herewith.
**
Furnished, and not filed.

34
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 8, 2018~~May 7, 2019
By:
/s/ JOHN K. KIBARIAN



John K. Kibarian



President and Chief Executive Officer



(~~Principal~~principal executive officer)


Date: ~~November 8, 2018~~May 7, 2019
By:
/s/ CHRISTINE A. RUSSELL



Christine A. Russell



Executive Vice President, Finance and Chief Financial Officer



(~~Principal~~principal financial and accounting officer)


35

(In thousands)	As reported under Topic 606			Adjustments			Balances under Topic 605
Accounts receivable, net of allowance	$	52,744		$	125		$	52,869
Prepaid expenses and other current assets		10,890			(3,490	)		7,400
Deferred tax assets		17,714			435			18,149
Other non-current assets		8,163			(28	)		8,135
Deferred revenues – current portion		7,360			2,150			9,510
Long-term income taxes payable		4,140			(1,046	)		3,094
Other non-current liabilities		1,954			616			2,570
Accumulated deficit	$	(27,337	)	$	(4,679	)	$	(32,016	)

Year ending December 31,	Amount^(a)
2019 (remaining nine months)	$	1,381
2020		1,870
2021		1,719
2022		1,536
2023		1,417
2024 and thereafter		4,750
Total future minimum lease payments	$	12,673
Less: Interest⁽^b⁾		(2,295	)
Present value of operating lease liabilities^(c⁾	$	10,378

	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, 2018		1,045		$	9.65
Granted (weighted average fair value of $4.22 per share)		98		$	10.71
Exercised		(68	)	$	6.88
Canceled or expired		(30	)	$	13.84
Outstanding, September 30, 2018		1,045		$	9.81		4.64	$	1,422
Vested and expected to vest, September 30, 2018		1,039		$	9.77		4.59	$	1,422
Exercisable, September 30, 2018		806		$	8.60		3.31	$	1,422

	Shares (in thousands)			Weighted Average Grant Date Fair Value Per Share
Outstanding, January 1, 2018		1,617		$	15.66
Granted		113		$	10.70
Vested		(440	)	$	15.73
Forfeited		(116	)	$	15.21
Outstanding, September 30, 2018		1,174		$	15.21

	Shares (in thousands)			Weighted Average Grant Date Fair Value Per Share
Nonvested, January 1, 2019		1,835		$	11.93
Granted		155		$	12.26
Vested		(158	)	$	13.62
Forfeited		(41	)	$	12.72
Nonvested, March 31, 2019		1,791		$	11.80

	Three Months Ended March 31, 2019
Beginning balance	$	244
Restructuring charges		92
Cash payments		(245	)
Ending balance	$	91

																	Three Months Ended
	Three Months Ended September 30,								Nine Months Ended September 30,								March 31,						$		%
(Dollars in thousands)	2018			2017			Percent Change		2018			2017			Percent Change		2019			2018			Change		Change
Selling, general and administrative	$	5,507		$	5,680			(3%)	$	17,801		$	17,775			0%	$	7,011		$	6,375		$	636		10	%
As a percentage of total revenues		27	%		21	%				27	%		24	%				34	%		26	%

	Payments Due by Period
Contractual Obligations	2018 (remaining three months)		2019		2020		2021		2022		2023 and thereafter		Total
Operating lease obligations (1)	$	357	$	1,659	$	1,813	$	1,654	$	1,483	$	4,799	$	11,765
Purchase obligations (2)		3,893		5,691		243		155		5		-		9,987
Total (3)	$	4,250	$	7,350	$	2,056	$	1,809	$	1,488	$	4,799	$	21,752

	Payments Due by Period
Contractual Obligations	2019 (remaining nine months)		2020		2021		2022		2023		2024 and thereafter		Total
Operating lease obligations(1)	$	1,381	$	1,870	$	1,719	$	1,536	$	1,175	$	3,673	$	11,354
Purchase obligations(2)		7,149		678		401		8		4		‒		8,240
Total(3)	$	8,530	$	2,548	$	2,120	$	1,544	$	1,179	$	3,673	$	19,594

	(1)	~~In April 2018, we entered into a new approximately 20,800 square foot lease, located in Santa Clara, California. The term~~Refer to Note 4, Leases of the ~~new lease is ten years commencing on September~~Notes to Condensed Consolidated Financial Statements (Item 1 ~~2018. The total lease obligation over the new lease term is approximately $7.3 million, less a lease abatement allowance~~ of ~~approximately $0.4 million. The terms~~Part I of ~~the new lease include a tenant improvement allowance of $1.5 million. Future minimum lease payments under the lease are included in the above table.~~this Report)

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

	(3)	The contractual obligation table above excludes liabilities for uncertain tax positions of ~~$2.9~~$3.2 million, which are not practicable to assign to any particular years, due to the inherent uncertainty of the tax positions. See Note 58 of “Notes to Condensed Consolidated Financial Statements” for further discussion.

Period	Total Number of Shares Purchased (in thousands) (1)		Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Programs (in thousands) (1)		Approximate Dollar Value of Shares that May Yet Be Purchased Under Programs (in thousands) (1)
January 1, 2019 through January 31, 2019		—	$	—		—	$	25,000
February 1, 2019 through February 28, 2019		—	$	—		—	$	25,000
March 1, 2019 through March 31, 2019		314	$	12.46		314	$	21,084
Total		314	$	12.46		314

Exhibit Number		Description

3.01		Amended and Restated Bylaws of PDF Solutions, Inc., effective January 28, 2019 (incorporated herein by reference to Exhibit 3.1 to registrant’s Current Report on Form 8-K, filed January 28, 2019).*

3.02		Amended and Restated Bylaws of PDF Solutions, Inc., effective April 26, 2019 (incorporated herein by reference to Exhibit 3.1 to registrant’s Current Report on Form 8-K, filed May 1, 2019).*

10.01		~~Employment offer~~Offer letter to ~~Christine A. Russell,~~Cornelis D. Hartgring from PDF Solutions, Inc. dated ~~July 31,~~October 26, 2018.*†

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

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

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

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

101.INS		XBRL Instance Document.†

101.SCH		XBRL Taxonomy Extension Schema Document.†

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document.†

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document.†

101.LAB		XBRL Taxonomy Extension Label Linkbase Document.†

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document.†

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

	PDF SOLUTIONS, INC.


Date: ~~November 8, 2018~~May 7, 2019	By:	/s/ JOHN K. KIBARIAN
		John K. Kibarian
		President and Chief Executive Officer
		(~~Principal~~principal executive officer)

Date: ~~November 8, 2018~~May 7, 2019	By:	/s/ CHRISTINE A. RUSSELL
		Christine A. Russell
		Executive Vice President, Finance and Chief Financial Officer
		(~~Principal~~principal financial and accounting officer)