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 ~~September~~June 30 ~~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)

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

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

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit ~~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. ☐

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~~32,442,624 shares of the Registrant’s Common Stock outstanding as of ~~November 5, 2018.~~August 1, 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)~~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	2425
Item 3. Quantitative and Qualitative Disclosures About Market Risk	32 35
Item 4. Controls and Procedures	32 36
PART II OTHER INFORMATION
Item 1. Legal Proceedings	33 36
Item 1A. Risk Factors	33 36
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	34 37
Item 3. Defaults Upon Senior Securities	3437
Item 4. Mine Safety Disclosures	3437
Item 5. Other Information	3437
Item 6. Exhibits	3438
SIGNATURES	3539
INDEX TO EXHIBITS	38

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			June 30, 2019			December 31, 2018
ASSETS
Current assets:
Cash and cash equivalents	$	96,788		$	101,267		$	86,817		$	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								52,381			51,570
Prepaid expenses and other current assets		10,890			5,069			8,843			9,562
Total current assets		160,422			163,900			148,041			157,221
Property and equipment, net		34,120			25,386			35,846			35,681
Operating lease right-of-use assets, net								7,974			—
Goodwill		1,923			1,923			2,293			1,923
Intangible assets, net		5,317			6,074			6,855			5,064
Deferred tax assets		17,714			16,348			21,378			19,044
Other non-current assets		8,163			10,545			7,284			6,972
Total assets	$	227,659		$	224,176		$	229,671		$	225,905
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	3,286		$	2,536		$	1,813		$	2,454
Accrued compensation and related benefits		4,969			6,493			5,158			4,727
Accrued and other current liabilities		4,386			2,627			2,404			3,235
Operating lease liabilities – current portion								1,875			—
Deferred revenues – current portion		7,360			7,981			9,026			8,477
Billings in excess of recognized revenues		669			-			1,088			635
Total current liabilities		20,670			19,637			21,364			19,528
Long-term income taxes payable		4,140			3,902			3,571			3,751
Non-current operating lease liabilities								8,107			—
Other non-current liabilities		1,954			2,269			1,737			2,831
Total liabilities		26,764			25,808			34,779			26,110
Commitments and contingencies (Note 9)
Commitments and contingencies (Note 13)
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 41,326 and 40,677, respectively; shares outstanding 32,291 and 32,382, respectively								5			5
Additional paid-in-capital		308,098			297,950			318,356			310,660
Treasury stock at cost, 8,252 and 7,688 shares, respectively		(78,752	)		(71,793	)
Treasury stock at cost, 9,035 and 8,295 shares, respectively								(88,324	)		(79,142	)
Accumulated deficit		(27,337	)		(27,089	)		(33,853	)		(30,452	)
Accumulated other comprehensive loss		(1,119	)		(705	)		(1,292	)		(1,276	)
Total stockholders’ equity		200,895			198,368			194,892			199,795
Total liabilities and stockholders’ equity	$	227,659		$	224,176		$	229,671		$	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~~COMPREHENSIVE ~~VE INCOME~~ ~~(LOSS)~~LOSS

(U~~naudited)~~(unaudited)

(in thousands, except per share amounts)

													Three Months Ended June 30,						Six Months Ended June 30,
	Three Months Ended September 30,						Nine Months Ended September 30,						2019			2018			2019			2018
	2018			2017			2018			2017
Revenues:
Design-to-silicon-yield solutions	$	13,976		$	19,229		$	47,431		$	55,426
Solutions													$	13,429		$	15,266		$	30,090		$	33,456
Gainshare performance incentives		6,237			7,288			18,638			19,668			7,139			5,853			11,019			12,400
Total revenues		20,213			26,517			66,069			75,094			20,568			21,119			41,109			45,856

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														7,689			10,774			15,413			22,112
Amortization of acquired technology		144			136			431			327			143			143			287			287
Total cost of Design-to-silicon-yield solutions		10,683			12,431			33,082			35,240
Total cost of solutions														7,832			10,917			15,700			22,399
Gross profit		9,530			14,086			32,987			39,854			12,736			10,202			25,409			23,457

Operating expenses:
Research and development		6,755			7,875			21,100			22,432			7,312			7,100			15,558			14,345
Selling, general and administrative		5,507			5,680			17,801			17,775			6,940			5,919			13,950			12,294
Amortization of other acquired intangible assets		108			107			326			291			154			108			262			217
Restructuring charges														—			—			92			—
Total operating expenses		12,370			13,662			39,227			40,498			14,406			13,127			29,862			26,856

Income (loss) from operations		(2,840	)		424			(6,240	)		(644	)
Loss from operations														(1,670	)		(2,925	)		(4,453	)		(3,399	)
Interest and other income (expense), net		223			(104	)		283			(305	)		111			390			105			59
Income (loss) before income taxes		(2,617	)		320			(5,957	)		(949	)
Loss before income taxes														(1,559	)		(2,535	)		(4,348	)		(3,340	)
Income tax benefit		(535	)		(270	)		(1,355	)		(2,246	)		(849	)		(439	)		(947	)		(820	)
Net income (loss)	$	(2,082	)	$	590		$	(4,602	)	$	1,297
Net loss													$	(710	)	$	(2,096	)	$	(3,401	)	$	(2,520	)

Net income (loss) per share:
Net loss per share:
Basic	$	(0.06	)	$	0.02		$	(0.14	)	$	0.04		$	(0.02	)	$	(0.07	)	$	(0.10	)	$	(0.08	)
Diluted	$	(0.06	)	$	0.02		$	(0.14	)	$	0.04		$	(0.02	)	$	(0.07	)	$	(0.10	)	$	(0.08	)

Weighted average common shares:
Basic		32,184			32,078			32,105			32,060			32,339			31,962			32,412			32,065
Diluted		32,184			32,969			32,105			33,317			32,339			31,962			32,412			32,065

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

Net loss													$	(710	)	$	(2,096	)	$	(3,401	)	$	(2,520	)
Other comprehensive income (loss):
Foreign currency translation adjustments, net of tax		(168	)		409			(414	)		1,117			36			(771	)		(16	)		(246	)
Comprehensive income (loss)	$	(2,250	)	$	999		$	(5,016	)	$	2,414
Comprehensive loss													$	(674	)	$	(2,867	)	$	(3,417	)	$	(2,766	)

See accompanying Notes to Condensed Consolidated Financial Statements (unaudited)

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PDF SOLUTIONS, INC.

CONDENDSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(unaudited)

(in thousands)

	Six Months Ended June 30, 2019
																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		-			-		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
Issuance of common stock in connection with employee stock purchase plan		-			-		-		-		-			-			-			-
Issuance of common stock in connection with exercise of options		69			-		326		-		-			-			-			326
Vesting of restricted stock units		176			-		-		-		-			-			-			-
Purchases of treasury stock in connection with tax withholdings on restricted stock grants		-			-		-		72		(918	)		-			-			(918	)
Repurchases of common stock		(300	)		-		-		300		(3,790	)		-			-			(3,790	)
Stock-based compensation		-			-		2,601		-		-			-			-			2,601
Comprehensive income (loss)		-			-		-		-		-			(710	)		36			(674	)
Balances, June 30, 2019		32,291	��	$	5	$	318,356		9,035	$	(88,324	)	$	(33,853	)	$	(1,292	)	$	194,892

	Six Months Ended June 30, 2018
						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		-			-		2,871		-		-			-			-			2,871
Comprehensive income (loss)		-			-		-		-		-			(424	)		525			101
Balances, March 31, 2018		31,964			5		301,867		8,062		(76,473	)		(23,160	)		(180	)		202,059
Issuance of common stock in connection with employee stock purchase plan		-			-		-		-		-			-			-			-
Issuance of common stock in connection with exercise of options		51			-		377		-		-			-			-			377
Vesting of restricted stock units		159			-		-		-		-			-			-			-
Purchases of treasury stock in connection with tax withholdings on restricted stock grants		-			-		-		63		(819	)		-			-			(819	)
Repurchases of common stock		(99	)		-		-		99		(1,125	)		-			-			(1,125	)
Stock-based compensation		-			-		2,699		-		-			-			-			2,699
Comprehensive loss		-			-		-		-		-			(2,096	)		(771	)		(2,867	)
Balances, June 30, 2018		32,075		$	5	$	304,943		8,224	$	(78,417	)	$	(25,256	)	$	(951	)	$	200,324

See accompanying Notes to Condensed Consolidated Financial Statements (unaudited)

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PDF SOLUTIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(U~~naudited)~~(unaudited)

(in ~~thousands~~)thousands)

	Nine Months Ended September 30,						Six Months Ended June 30,
	2018			2017			2019			2018

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:
Operating activities:
Net loss							$	(3,401	)	$	(2,520	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		3,689			3,549			2,634			2,531
Stock-based compensation expense		7,825			8,737			5,910			5,557
Amortization of acquired intangible assets		757			618			549			505
Amortization of costs capitalized to obtain revenue contracts								227			179
Deferred taxes		(2,298	)		(3,514	)		(2,423	)		(1,701	)
Loss on disposal of property and equipment		4			5			130			3
Provision for (reversal of) allowance for doubtful accounts		(41	)		124
Reversal of allowance for doubtful accounts								—			(42	)
Unrealized loss (gain) on foreign currency forward contract		59			(6	)		(55	)		47
Changes in operating assets and liabilities:
Accounts receivable		5,653			(4,921	)		(811	)		4,479
Prepaid expenses and other current assets		(3,444	)		(1,142	)		491			(1,383	)
Other non-current assets								(181	)		1,597
Accounts payable		(598	)		1,611			188			(992	)
Accrued compensation and related benefits		(1,377	)		(721	)		433			(818	)
Accrued and other liabilities		(252	)		(225	)		(367	)		(475	)
Deferred revenues		632			(682	)		1,189			2,745
Billings in excess of recognized revenues		669			200			453			7
Other non-current assets		2,367			1,331
Net cash provided by operating activities		9,043			6,261			4,966			9,719

Cash flows from investing activities:
Investing activities:
Proceeds from the sale of property and equipment								50			—
Purchases of property and equipment		(8,747	)		(6,942	)		(4,054	)		(4,810	)
Payments of business acquisitions, net of cash acquired		-			(3,841	)
Payment for business acquisition								(2,660	)		—
Net cash used in investing activities		(8,747	)		(10,783	)		(6,664	)		(4,810	)

Cash flows from financing activities:
Financing activities:
Proceeds from exercise of stock options		469			2,304			844			416
Proceeds from employee stock purchase plan								782			1,007
Repurchases of common stock		(5,248	)		(13,418	)		(7,707	)		(5,248	)
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	)		(1,475	)		(1,376	)
Net cash used in financing activities		(4,658	)		(11,687	)		(7,556	)		(5,201	)
Effect of exchange rate changes on cash and cash equivalents								(18	)		(59	)

Effect of exchange rate changes on cash and cash equivalents		(117	)		172
Net decrease in cash and cash equivalents		(4,479	)		(16,037	)
Net change in cash and cash equivalents								(9,272	)		(351	)
Cash and cash equivalents, beginning of period		101,267			116,787			96,089			101,267
Cash and cash equivalents, end of period	$	96,788		$	100,750		$	86,817		$	100,916
Supplemental disclosure of cash flow information:
Cash paid during the period for taxes							$	887		$	1,104
Cash paid for amounts included in the measurement of operating lease liabilities							$	781		$	—

Supplemental disclosure of cash flow information:
Cash paid during the period for:
Taxes	$	1,616		$	1,876
Stock-based compensation capitalized as software development costs							$	168		$	—
Property and equipment received and accrued in accounts payable and accrued and other liabilities	$	3,398		$	1,533		$	859		$	1,673
Tenant allowance paid by landlord for leasehold improvements	$	1,536		$	-

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 (“U.S. GAAP”) have been condensed or omitted. The interim unaudited condensed consolidated financial statements reflect, in the opinion of management, all adjustments necessary (consisting only of normal recurring adjustments), to present a fair statement of results for the interim periods presented. The operating results for any interim period are not necessarily indicative of the results that may be expected for other interim periods or the full fiscal year. The accompanying interim unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~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”)~~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.~~

Reclassification of Prior Period Amount

Certain prior period amounts have been reclassified to conform to current year presentation of reporting amortization of costs capitalized to obtain revenue contracts on the Condensed Consolidated Statements of Cash Flows. This reclassification had no effect on the Company’s reported net loss or net cash provided by operating activities.

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.

~~Table of Contents~~

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 (i) whether agreements contain leases, (ii) the classification of leases, and (iii) the capitalization of initial direct costs. Further, the Company elected to not separate lease and non-lease components for all of its leases. The Company also made an accounting policy election to recognize lease expense for leases with a term of 12 months or less on a straight-line basis over the lease term and recognize no 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 include administrative and sales offices, and its research and development laboratory and clean room. Some of these leases also require the Company to pay maintenance, utilities, taxes, insurance, and other operating expenses associated with the leased space. Based upon the nature of the items leased and the structure of the leases, the Company’s leases are classified as operating leases and continue to be classified as operating leases under the new accounting standard.

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

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

The adoption of the new lease accounting standard did not have any other impact on the Company’s condensed consolidated balance sheet, and did not impact the Company’s operating results and cash flows. See Leases, in ~~the process of evaluating~~Note 5 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 (Loss)

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

Compensation - Stock Compensation

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

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

Accounting Standards Not Yet Effective

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

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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~~2018-15, Intangibles – ~~Reporting Comprehensive Income (Topic 220)~~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.

2~~. REVENUE RECOGNITION~~2. BUSINESS COMBINATION

On ~~January 1, 2018,~~April 29, 2019 (the “Acquisition Date”), the Company ~~adopted Topic 606, using~~acquired certain assets from StreamMosaic, Inc., a privately held provider of artificial intelligence and machine learning solutions, including the ~~modified retrospective transition method applied~~Stream.AI software product line and related assets. Pursuant to ~~those contracts which were not completed as~~the terms of ~~January 1, 2018. Under this method,~~an asset purchase agreement, the Company ~~evaluated contracts that were~~acquired certain assets, including all intellectual property, from StreamMosaic and certain related liabilities for the purpose of enhancing the Company’s position in ~~effect at~~advanced data analytics for semiconductors and electronics by broadening its product offering and expanding its customer reach. In connection with the ~~beginning of fiscal 2018 as if those contracts had been accounted for under Topic 606 from the beginning of their terms. Upon adoption,~~acquisition, the Company ~~recognized the cumulative effect~~paid a total consideration of ~~adopting this guidance as an adjustment to accumulated deficit~~approximately $2.7 million using cash 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.~~hand.

The Company ~~also considered~~accounted for this acquisition as a business combination. This method requires that assets acquired and liabilities assumed in a business combination be recognized at their fair values as of the ~~impact~~Acquisition Date. The excess of ~~subtopic ASC 340-40. Prior to~~purchase consideration over the ~~adoption~~fair value of ~~Topic 606,~~net tangible and identifiable intangible assets acquired was recorded as goodwill. The goodwill recorded from this acquisition represents business benefits the Company ~~expensed commission costs~~anticipates from assembled workforce and ~~related fringe benefits as incurred. Under ASC 340-40, the Company is required to capitalize~~expectation for expanded sales opportunities in advanced data analytics for semiconductors and ~~amortize the incremental costs~~electronics. The amount 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~~goodwill expected to be ~~recovered.~~deductible for tax purposes is $370,000. Pro-forma results of operations have not been presented because the effect of the acquisition was not material to our financial results.

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

(in thousands)

Amortization
period (years)

Finite-lived intangible assets:

Developed technology
$ 1,640 9
Customer relationship
700 9
Deferred revenue
(50 )
Net asset acquired
$ 2,290
Goodwill
370
Purchase consideration
$ 2,660

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9
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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

3. REVENUE FROM CONTRACTS WITH CUSTOMERS

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.

The Company determines revenue recognition through the following five steps:

●

Identification of the contract, or contracts, with a customer

●

Identification of the performance obligations in the contract

●

Determination of the transaction price

●

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

●

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

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

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 and six months ended June 30, 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 licenses majority of its software products separately from project-based solution implementation service contracts, in particular, its 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 the Company. Revenue from post-contract support subscription is recognized over the contract term on a straight-line basis, because the Company is 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 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 is 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.

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The Company generates a ~~significant~~ portion of its ~~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~~percentage of completion method based on costs or labor-hours ~~inputs.~~inputs, depending on 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 ~~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).

~~Table~~
The Company typically includes some of ~~Contents~~

~~On occasion, the Company includes~~ its products and other technology as ~~a component~~components of its fixed-price, ~~service~~project-based services contracts. In such instances, the Company determines 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. 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~~percentage of completion method. This results in revenue recognition that corresponds with the value to the client offor 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 of its software products separately from solution implementations, primarily its 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 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) 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 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 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 Gainshare revenue as a usage-based royalty based on customers' usage of intellectual property and records it 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:~~(in thousands):

	Three Months Ended September 30, 2018		Nine Months Ended September 30, 2018		Three Months Ended June 30,				Six Months Ended June 30,
Product and licenses	$	7,729	$	22,044
Support and services		11,905		43,095
					2019		2018		2019		2018
Licenses and Gainshare Performance Incentives					$	8,725	$	6,828	$	13,906	$	14,315
Support and Services						11,779		14,200		27,031		31,190
Other		579		930		64		91		172		351
Total	$	20,213	$	66,069	$	20,568	$	21,119	$	41,109	$	45,856

~~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.

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~~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, accounted for approximately 59% and 41% 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. disaggregation of revenue by timing of revenue:

Three Months
Ended June 30,

Six Months
Ended June 30,

2019

2018

2019

2018

Over time
58
%
68
%
66
%
68
%
Point-in-time
42
%
32
%
34
%
32
%
Total
100
%
100
%
100
%
100
%

International revenues accounted for approximately ~~59%~~58% and ~~58%~~56% of our total revenues for the three and ~~nine~~six months ended ~~September~~June 30, ~~2018,~~2019, respectively, compared to ~~63%~~58% and ~~58%~~59% of our total revenues for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2018, respectively. See Note 7.11. 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.

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 from its customers during a given quarter within the time frame necessary to adequately review the reports and include the actual amounts in quarterly results for such quarter, the Company accrues the related revenue based on estimates of customer's underlying sales achievement. The ~~Company~~Company’s estimation process can be based on historical data, trends, seasonality, changes in the contract rate, knowledge of the changes in the industry and changes in the customer’s manufacturing environment learned through discussions with customers and sales personnel. As a result of accruing revenue for the quarter based on such estimates, adjustments will be required in the following quarter to true-up revenue to the actual amounts reported.

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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 included in prepaid expenses~~At June 30, 2019 and ~~other current assets in the condensed consolidated balance sheets. At September 30, 2018 and January 1,~~December 31, 2018, contract assets of ~~$3.1~~$2.3 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.

Contract liabilities primarily consist of deferred revenues and billings in excess of recognized revenues. Deferred revenues consist substantially of amounts invoiced in advance of revenue recognition and is recognized as the revenue recognition criteria are met. Deferred revenues that will be recognized during the succeeding ~~twelve month~~twelve-month period isare 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~~$1.7 million and ~~$0.9~~$1.0 million, respectively, as of ~~September~~June 30, ~~2018~~2019 and ~~January 1,~~December 31, 2018.

~~During~~ Billings in excess of recognized revenues included in the condensed consolidated balance sheets are attributable to billings in excess of costs under the percentage of completion method representing the difference between contractually invoiced amounts (billings) and revenue recognized based on costs incurred to total estimated total costs at end of period. Billings in excess of recognized revenues are expected to be realized during the succeeding twelve-month period. Revenue recognized for the three ~~and nine~~ months ended ~~September~~June 30, ~~2018, the Company recognized $4.4 million~~2019 and ~~$12.0 million, respectively, of revenue~~2018, that was included in the deferred ~~revenue balance, as adjusted for Topic 606,~~revenues and billings in excess of recognized revenues balances at the beginning of ~~2018.~~each reporting period was $4.7 million and $5.0 million, respectively. Revenue recognized for the six months ended June 30, 2019, and 2018, that was included in the deferred revenues and billings in excess of recognized revenues balances at the beginning of each reporting period was $8.7 million and $7.6 million, respectively.

At ~~September~~June 30, ~~2018,~~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~~$37.4 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~~June 30, 2019 and 2018 from ~~significant~~ performance obligations satisfied (or partially satisfied) in previous periods was ~~$1.3~~an increase of $0.3 million and ~~$1.6~~a decrease of $0.2 million, respectively. ~~This amount~~The adjustment to revenue recognized in the six months ended June 30, 2019 and 2018 from performance obligations satisfied (or partially satisfied) in previous periods was a decrease of $0.2 million and an increase of $0.3 million, respectively. 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.

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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~~June 30, 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~~June 30, 2019 and 2018 ~~respectively.~~was $0.1 million. Amortization of these assets during each of the six months ended June 30, 2019 and 2018 was $0.2 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~~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~~$1.0 million and ~~$0.6~~$0.2 million as of ~~September~~June 30, ~~2018~~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.

3.4. BALANCE SHEET COMPONENTS

Accounts receivable ~~include~~

Account receivable includes 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~~$13.4 million and $22.2 million as of ~~September~~June 30, ~~2018,~~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~~$5.6 million and ~~$8.6~~$5.3 million as of ~~September~~June 30, ~~2018~~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,			June 30, 2019			December 31, 2018
(Dollars in thousands)	2018			2017
Property and equipment, net:
Computer equipment	$	10,446		$	10,729		$	10,660		$	10,536
Software		4,121			3,348			4,214			4,112
Furniture, fixtures and equipment		4,420			3,676			4,836			4,688
Leasehold improvements		5,573			1,980			5,996			5,474
Test equipment		14,694			13,796			21,952			14,697
Construction-in-progress		17,928			12,527			14,262			20,293
		57,182			46,056			61,920			59,800
Less: accumulated depreciation and amortization		(23,062	)		(20,670	)		(26,074	)		(24,119	)
Total	$	34,120		$	25,386		$	35,846		$	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~~June 30, ~~2018~~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~~June 30, ~~2018~~2019 and ~~2017, respectively.~~2018. Depreciation and amortization expense for the six months ended June 30, 2019 and 2018 was ~~$3.7~~$2.6 million and ~~$3.5~~$2.5 million, ~~for the nine months ended September 30, 2018~~respectively.

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Goodwill and ~~2017, respectively.~~ Intangible Assets

As of ~~both September~~June 30, ~~2018,~~2019, and December 31, ~~2017,~~2018, the carrying ~~amount~~amounts of goodwill ~~was~~were $2.3 million and $1.9 ~~million.~~million, respectively.

Intangible assets balance was ~~$5.3~~$6.9 million and ~~$6.1~~$5.1 million as of ~~September~~June 30, ~~2018,~~2019 and December 31, ~~2017,~~2018, respectively. Intangible assets as of ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017~~2018 consist of the following (in thousands):

					September 30, 2018							December 31, 2017										June 30, 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	$	7,440	$	(4,712	)	$	2,728	$	6,740	$	(4,514	)	$	2,226
Developed technology		4	-	6		15,820		(13,261	)		2,559		15,820		(12,829	)		2,991	4	‒	9		17,460		(13,723	)		3,737		15,820		(13,404	)		2,416
Tradename		2	-	4		790		(641	)		149		790		(622	)		168	2	‒	7		790		(660	)		130		790		(648	)		142
Patent		7	-	10		1800		(1,510	)		290		1,800		(1,480	)		320	7	‒	10		1,800		(1,540	)		260		1,800		(1,520	)		280
Total	Total				$	25,150	$	(19,833	)	$	5,317	$	25,150	$	(19,076	)	$	6,074				$	27,490	$	(20,635	)	$	6,855	$	25,150	$	(20,086	)	$	5,064

The weighted average ~~remaining~~ amortization period for acquired identifiable intangible assets was ~~6.1~~6.6 years as of ~~September~~June 30, ~~2018.~~2019. For both the three ~~and nine~~ months ended ~~September~~June 30, 2019 and 2018, intangible asset amortization expense was $0.3 million. For both the six months ended June 30, 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.~~$0.5 million. The Company expects annual amortization of acquired identifiable intangible assets to be as follows (in thousands):

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Year ending December 31,	Amount		Amount
2018 (remaining three months)	$	253
2019		1,009
2019 (remaining six months)			$	634
2020		1,009		1,269
2021		833		1,093
2022		626		886
2023 and thereafter		1,587
2023				886
2024 and thereafter				2,087
Total future amortization expense	$	5,317	$	6,855

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~~six months ended ~~September~~June 30, ~~2018,~~2019, there were no indicators of impairment related to the Company’s intangible assets.

~~4. STOCKHOLDERS’ EQUITY~~5. 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 June 30, 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 June 30, 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.

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Operating lease expense ~~before taxes related to~~was $0.6 million and $0.7 million for the ~~Company’s stock plans~~three months ended June 30, 2019 and ~~employee stock purchase plan~~2018, respectively. Operating lease expense was ~~allocated~~$1.1 million and $1.3 million for the six months ended June 30, 2019 and 2018, respectively. Operating lease cost includes short-term leases and variable lease costs, which are immaterial.

Maturity of operating lease liabilities as of June 30, 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⁽¹⁾
2019 (remaining six months)
$ 882
2020
1,862
2021
1,711
2022
1,526
2023
1,409
2024 and thereafter
4,750
Total future minimum lease payments
$ 12,140
Less: Interest⁽²⁾
(2,158
)
Present value of operating lease liabilities⁽³⁾
$ 9,982

	⁽¹⁾	As of June 30, 2019, the total operating lease liability includes $1.0 million related to an option to extend a lease term that is reasonably certain to be exercised.
	⁽²⁾	Calculated using incremental borrowing interest rate for each lease.
	⁽³⁾	Includes the current portion of operating lease liabilities of $1.9 million as of June 30, 2019.

As of June 30, 2019, the weighted average remaining lease term under operating ROU leases was 7.6 years.

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

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

6. STOCKHOLDERS’ EQUITY

Stock Repurchase Program

On ~~September~~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 and six months ended June 30, 2019, the Company repurchased approximately 300,000 shares and 614,000 shares, respectively. As of June 30, 2019, approximately 614,000 shares had been repurchased at an average price of $12.54 per share, for a total price of $7.7 million under the 2018 program. During the three and six months ended June 30, 2018, the Company repurchased approximately 99,000 and 437,000 shares, respectively, under the 2016 program. As of June 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 June 30, 2019, $17.3 million of the Company’s common stock remained available for future repurchases.

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7. EMPLOYEE BENEFIT PLANS

On June 30, 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:

Six Months Ended June 30,

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 June 30, 2019 and 2018, no shares were issued under the Purchase Plan. During the six months ended June 30, 2019 and 2018, a total of approximately 87,000 and 108,000 shares, respectively, were issued at a weighted-average purchase price of $8.93 and $9.29 per share, respectively. As of June 30, 2019, there was $1.0 million of unrecognized compensation cost related to the Purchase Plan. That cost is expected to be recognized over a weighted average period of 1.6 years. As of June 30, 2019, 5.2 million shares were available for future issuance under the Purchase Plan.

Stock Incentive Plans —

On November 16, 2011, the Company’s stockholders approved the 2011 Stock Incentive Plan, which ~~was~~has been amended and restated ~~four~~a number of 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~~10,300,000 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.

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.

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As of ~~September~~June 30, ~~2018, the Company has reserved 9,600,000~~2019, 10.8 million shares of common stock were reserved to cover stock-based awards under the 2011 ~~Stock~~ Plan, of which ~~approximately 4.0~~4.4 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~~June 30, ~~2018.~~2019. As of ~~September~~June 30, ~~2018,~~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 June 30,				Six Months Ended June 30,
	2018			2017			2018			2017			2019		2018		2019		2018
Expected life (in years)		4.43			4.41			4.43			4.41			4.46		—		4.46		4.43
Volatility		44.01	%		41.49	%		43.82	%		41.53	%		42.19		—		44.71		42.22
Risk-free interest rate		2.73	%		1.65	%		2.71	%		1.69	%		1.94		—		2.44		2.52	%
Expected dividend		-			-			-			-			—		—		—		—
Weighted average fair value per share of options granted during the period	$	4.21		$	5.78		$	4.22		$	6.14		$	4.67	$	—	$	4.54	$	4.28

~~The Company~~No stock options were granted ~~87,000 shares of options to purchase shares of common stock~~ during the three months ended ~~September~~June 30, 2018.

~~Stock option activity~~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 June 30,

Six Months
Ended June 30,

2019

2018

2019

2018

Cost of solutions
$ 799 $ 968 $ 1,659 $ 1,981
Research and development
901 845 2,619 1,724
Selling, general and administrative
734 889 1,632 1,852
Stock-based compensation expenses
$ 2,434 $ 2,702 $ 5,910 $ 5,557

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

Additional information with respect to options under the ~~Company’s~~ Stock Plans during the ~~nine~~six months ended ~~September~~June 30, ~~2018~~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 $4.54 per share)
37 $ 11.43
Exercised
(156
)
$ 5.42
Canceled
(70
)
$ 14.64
Expired
(12
)
$ 17.13
Outstanding, June 30, 2019
826 $ 10.11 4.08 $ 3,086
Vested and expected to vest, June 30, 2019
813 $ 10.09 4.00 $ 3,062
Exercisable, June 30, 2019
656 $ 9.59 2.84 $ 2,788

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The aggregate intrinsic value in the table above represents the total intrinsic value based on the Company’s closing stock price of ~~$9.03~~$13.12 per share as of ~~September~~June 30, ~~2018.~~2019. The total intrinsic value of options exercised during the ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019, was ~~$0.3~~$1.0 million.

As of ~~September~~June 30, ~~2018,~~2019, there was ~~$1.1~~$0.6 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~~2.8 years. The total fair value of shares vested ~~was $0.3 million~~ during the ~~nine~~six months ended ~~September~~June 30, ~~2018.~~2019, was $0.1 million.

~~Restricted~~Nonvested restricted stock ~~unit~~units activity during the ~~nine~~six months ended ~~September~~June 30, ~~2018~~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
162 $ 12.28
Vested
(406
)
$ 13.29
Forfeited
(113
)
$ 11.78
Nonvested, June 30, 2019
1,478 $ 11.61

As of ~~September~~June 30, ~~2018,~~2019, there was ~~$14~~$13.5 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~~2.5 years. Restricted stock units do not have rights to dividends prior to vesting.

~~Employee Stock Purchase Plan~~ — In July 2001, the Company adopted a ten-year 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.

8. RESTRUCTURING CHARGES

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 and in privately negotiated transactions, from time~~restructuring plan to ~~time, over the next two years. During the three and nine months ended September~~June 30, ~~2018,~~2019, the Company ~~repurchased zero~~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 ~~437,007 shares, respectively,~~the remaining charges expected to be incurred are not expected to be significant.

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

Three Months
Ended June 30,
2019

Six Months
Ended June 30,
2019

Beginning balance
$ 91 $ 244
Restructuring charges
— 92
Cash payments
(91 ) (336
)
Ending balance
$ — $ —

5.9. INCOME TAXES

Income tax benefit ~~decreased by $0.9~~increased $0.1 million for the ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019, to ~~$1.3~~a $0.9 million income tax benefit as compared to ~~$2.2~~an income tax benefit of $0.8 million for the ~~nine~~six months ended ~~September~~June 30, ~~2017.~~2018. The Company’s effective tax rate benefit was ~~2.27%~~22% and ~~236.7%~~25% for the ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 and ~~2017,~~2018, respectively. The Company’s effective tax rate benefit decreased in the ~~nine~~six months ended ~~September~~June 30, ~~2018,~~2019, as compared to the same period in ~~2017,~~2018, primarily due to ~~lower~~favorable 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.

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The Company’s total amount of unrecognized tax benefits, excluding interest and penalties, as of ~~September~~June 30, ~~2018,~~2019, was ~~$12.9~~$13.5 million, of which ~~$7.6~~$7.9 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~~June 30, ~~2018,~~2019, the Company has recorded unrecognized tax benefits of ~~$2.9~~$3.0 million, including interest and penalties of $0.7 million, as long-term taxes payable in its condensed consolidated balance sheet. The remaining ~~$10.7~~$11.3 million has been recorded net of our deferred tax assets, of which ~~$5.3~~$5.6 million is subject to a full valuation allowance.

~~Table of Contents~~

The valuation allowance was approximately ~~$9.4~~$10.2 million and ~~$9.1~~$9.8 million as of ~~September~~June 30, ~~2018,~~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~~Company’s acquisition of ~~Syntricity, Inc.~~Syntricity. The Company has recorded a valuation allowance against these deferred tax assets because it believes that it ~~currently does not believe they are~~is more likely than not tothat these tax attributes will not 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~~the Company is allowed to make an accounting policy choice of either (1) treating taxes due on future U.S. inclusions related to GILTI as a current-period expense when incurred (the “period cost method”) or (2) factoring such amounts into a company’s measurement of its deferred taxes (the “deferred method”). During the first quarter of 2018, the Company selected the period cost method in recording the tax effects of GILTI in its condensed consolidated financial statements.

The Company conducts business globally and, as a result, files numerous consolidated and separate income tax returns in the U.S. ~~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.

6.10. NET ~~INCOME~~LOSS PER SHARE

Basic net ~~income~~loss per share is computed by dividing net ~~income~~loss 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 June 30,

Six Months
Ended June 30,

2019

2018

2019

2018

Numerator:

Net loss
$ (710
)
$ (2,096
)
$ (3,401
)
$ (2,520
)
Denominator:

Basic weighted-average common shares outstanding
32,339 31,962 32,412 32,065
Effect of dilutive options and restricted stock
— — — —
Diluted weighted average shares outstanding
32,339 31,962 32,412 32,065

Net loss per share – Basic
$ (0.02
)
$ (0.07
)
$ (0.10
)
$ (0.08
)
Net loss per share – Diluted
$ (0.02
)
$ (0.07
)
$ (0.10
)
$ (0.08
)

For the three and ~~nine~~six months ended ~~September~~June 30, 2019 and 2018, ~~there are no~~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~~would have been anti-dilutive.

Table of ~~diluted net income (loss) per share because there was a net loss for both periods.~~
Contents

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 June 30,				Six Months Ended June 30,
	Ended September 30,				Ended September 30,				2019		2018		2019		2018
	2018		2017		2018		2017
Outstanding stock options		-		211		-		109
Outstanding options										606		621		614		638
Nonvested restricted stock units		-		15		-		12		813		1,108		781		1,034
Employee Stock Purchase Plan		-		68		-		42		18		—		198		16
Total		-		294		-		163		1,437		1,729		1,593		1,688

7.11. 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 individual customers in excess of 10% of total revenues as follows:

	Three Months						Nine Months
	Ended September 30,						Ended September 30,						Three Months Ended June 30,						Six Months Ended June 30,
Customer	2018			2017			2018			2017			2019			2018			2019			2018
A		38	%		38	%		39	%		41	%		33	%		40	%		34	%		39	%
B														*	%		10	%		*	%		*	%

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

	September 30,			December 31,
Customer	2018			2017			June 30, 2019			December 31, 2018
A		41	%		41	%		31	%		35	%
B		19	%		15	%		22	%		21	%

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represents less than 10%

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 June 30,
	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	%	$	8,547		42	%	$	8,982		42	%
China		4,644		23	%		6,452		24	%		3,267		16			4,360		21
Taiwan		936		5	%		2,414		9	%		2,341		11			1,038		5
Rest of the world		6,267		31	%		7,901		30	%		6,413		31			6,739		32
Total revenue	$	20,213		100	%	$	26,517		100	%	$	20,568		100	%	$	21,119		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 %
21
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Six Months Ended June 30,

2019

2018

Revenues

Percentage
of
Revenues

Revenues

Percentage
of
Revenues

United States
$ 17,862 44
%
$ 19,065 41
%
China
6,250 15 9,542 21
Taiwan
4,096 10 3,173 7
Rest of the world
12,901 31 14,076 31
Total revenue
$ 41,109 100
%
$ 45,856 100
%

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

	September 30,		December 31,
	2018		2017		June 30, 2019⁽¹⁾		December 31, 2018⁽²⁾
United States	$	33,690	$	24,883	$	41,379	$	35,173
Rest of the world		430		503		2,441		508
Total long-lived assets, net	$	34,120	$	25,386	$	43,820	$	35,681

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

8.12. 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.

2022

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The following table represents the Company’s assets measured at fair value on a recurring basis as of ~~September~~June 30, ~~2018,~~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	$	—	$	—	$	27,375	$	27,375	$	—	$	—

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 from time to time to reduce the exposure to foreign currency exchange rate fluctuations on certain foreign currency denominated monetary assets and liabilities, primarily on third-party accounts payables and intercompany balances. The primary objective of the Company’s hedging program is to reduce volatility of earnings related to foreign currency exchange rate fluctuations. The counterparty to these foreign currency forward contracts is a 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~~June 30, ~~2018~~2019 and ~~2017,~~2018, the Company recognized a realized loss of ~~$0.1 million~~$22,000 and a realized ~~gain $0.2 million~~loss of $551,000 on the contracts, respectively, which was recorded in other income (expense), net in the Company’s Condensed Consolidated Statements of Operations and Comprehensive ~~Income (Loss).~~Loss. For the ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 and ~~2017,~~2018, the Company recognized a realized loss of ~~$0.5 million~~$292,000 and a realized ~~gain $0.7 million~~loss of $365,000 on the contracts, respectively, which was recorded in other income (expense), net in the Company’s Condensed Consolidated 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~~they are not actively traded and the valuation inputs are based on quoted prices and market observable data of similar instruments. As of ~~September~~June 30, ~~2018,~~2019, 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~~no outstanding forward contract. As of December 31, ~~2017,~~2018, the Company had one outstanding forward contract with a notional amount of $8.2 million and recorded ~~$12,000~~$55,000 other current ~~assets~~liability associated with the outstanding forward contract.

~~9. 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):~~ 13. COMMITMENTS AND CONTINGENCIES

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~~June 30, ~~2018,~~2019, total outstanding purchase obligations were ~~$10.0~~$11.0 million, which are primarily due within the next 1512 months.

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

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

Litigation — 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~~June 30, ~~2018,~~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 have either suspended 7nm development, ~~or forecast~~forecasted a later start of mass ~~production.~~production, or started later than originally forecast in some cases. 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.~~nodes and continue to engage foreign suppliers.

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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~~Customer Contracts~~The interest in Industry 4.0 (i.e., the fourth industrial revolution or the digital transformation of manufacturing technologies) is another trend that should 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~~is 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 the 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~~June 30, ~~2018~~2019, were ~~summarized~~ as follows:

●

Total revenues were ~~$20.2~~$20.6 million, which was a decrease of ~~$6.3~~$0.6 million, or ~~24%~~3%, compared to the ~~three months ended September 30, 2017. Design-to-silicon-yield solutions revenues were $14.0~~year-ago period. Solutions revenue was $13.4 million, which was a decrease of ~~$5.3~~$1.8 million, or ~~27%~~12%, compared to the year-ago period. The decrease in Solutions revenue was primarily 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 big data solution revenues that were driven by higher business activity. Deferred revenue for the second fiscal quarter of 2019 includes $1.0 million associated with one customer in China that is significantly delinquent in payments, which revenue we expect to recognize in the future when it is more than likely that such payments will be made in the near term. Gainshare performance incentives revenue was $7.1 million, an increase of $1.3 million, or 22%, compared to the year-ago period. The increase was primarily due to higher Gainshare performance incentives revenue from 14nm technology node.

●

Gross margin for the three months ended ~~September~~June 30, ~~2017.~~2019 was 62%, compared to 48% for the year-ago period. During the three months ended June 30, 2019, our gross profit was significantly higher than the prior period due primarily to an increase in Gainshare performance incentives and reduction in headcount primarily related to our yield ramp business, which is a cost of revenues. Cost of solutions decreased for the three months ended June 30, 2019, compared to the year-ago period, primarily due to (i) a $2.2 million decrease in personnel-related cost driven by lower headcount and lower chargeable hours incurred across multiple contracts and customers, and a decrease in stock-based compensation expense, (ii) a $0.4 million decrease in hardware and equipment expense due to lower solutions revenue, and (iii) a $0.3 million decrease in travel expenses resulting from our cost management efforts.

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●

Net loss was $0.7 million, compared to a net loss of $2.1 million for the year-ago period. The decrease in ~~Design-to-silicon-yield~~net loss was primarily attributable to (i) a $1.8 million decrease in cost of solutions and operating expenses related to a decrease in personnel-related costs driven by lower headcount, hardware and equipment, travel, and subcontractor expenses and accounting and audit fees, partially offset by increase in legal fees, facilities and depreciation and amortization expense, and (ii) a higher tax benefit mainly driven by the changes in forecasted income/loss between fiscal 2019 and 2018, and higher excess tax benefit for employee stock compensation compared to the year-ago period. The decreases in costs of solutions and operating expenses and higher tax benefit for the three months ended June 30, 2019 were partially offset by a $0.6 million decrease in total revenues.

●	Net loss per basic and diluted share was $(0.02) for the three months ended June 30, 2019, compared to net loss per basic and diluted share of $(0.07), for the three months ended June 30, 2018, a decrease of $0.05 per basic and diluted share.

●

Cash and cash equivalents decreased $9.3 million to $86.8 million at June 30, 2019, from $96.1 million at December 31, 2018, primarily due to cash used in investing activities related to the property and equipment purchased for the development our Design-for-Inspection (DFI) solution, expansion of our research and development laboratory and clean room, and a payment for a business acquisition, and cash used in financing activities primarily due to repurchases of our common stock.

Financial highlights for the six months ended June 30, 2019, were as follows:

●

Total revenues were $41.1 million, which was a decrease of $4.7 million, or 10%, compared to the compared to the year-ago period. Solutions revenues were $30.1 million, which was a decrease of $3.4 million, or 10%, compared to the year-ago period. The decrease in solutions revenue was primarily related to 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 higher business activity. Deferred revenue for the second fiscal quarter of 2019 includes $1.0 million associated with one customer in China that is significantly delinquent in payments, which revenue we expect to recognize in the future when it is more than likely that such payments will be made in the near term. Gainshare performance incentives revenue was ~~$6.2~~$11.0 million, a decrease of ~~$1.1~~$1.4 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%11%, compared to the year-ago period. The decrease in design-to-silicon-yield solutions revenue was primarily related to lower hours worked across multiple contracts and customers, which was partially offset by increases in Exensio software revenues. Gainshare performance incentives revenue was $18.6 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.~~technology node.

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●

Gross margin for the ~~nine~~six months ended ~~September~~June 30, ~~2018,~~2019 was ~~50%~~62%, compared to ~~53%~~51% for the ~~nine~~year-ago period. During the six months ended ~~September~~June 30, ~~2017.~~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 during the first quarter of fiscal year 2019, without which our gross margin would be approximately 3.5% lower, and a reduction in headcount primarily related to our yield ramp business, which is a cost of revenues. Cost of solutions decreased for the six months ended June 30, 2019, compared to the year-ago period, primarily due to (i) a $5.0 million decrease in personnel-related cost driven by lower headcount and lower chargeable hours incurred across multiple contracts and customers, and a decrease in stock-based compensation expense, partially offset by a provision for discretionary employee bonuses for fiscal year 2019, (ii) a $0.9 million decrease in hardware and equipment expense due to lower solutions revenue, (iii) a $0.5 million decrease in travel expenses resulting from our cost management effort, and (iv) a $0.3 million decrease in facilities expense. These increases in gross margin were partially offset by a $1.4 million decrease in Gainshare performance incentives.

●

Net loss was ~~$4.6~~$3.4 million, compared to a net loss of $2.5 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 10% lower ~~total revenue~~revenues, partially offset by (i) a $3.7 million decrease in cost of solutions and operating expenses related to a decrease in personnel-related costs driven by lower headcount, hardware and equipment, travel, operating lease and subcontractor expenses and accounting and audit fees, partially offset by increase in recruiting and legal fees, facilities and depreciation and amortization expenses, and (ii) a higher tax benefit mainly driven by the changes in forecasted income/loss between fiscal 2019 and 2018, and higher excess tax benefit for ~~the nine months ended September 30, 2018,~~employee stock compensation compared to the year-ago period and a $0.9 million decrease in income tax benefit primarily due to lower excess tax benefits 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%.period.

●

Net loss per basic and diluted share was ~~$(0.14)~~$(0.10) for the ~~nine~~six months ended ~~September~~June 30, ~~2018,~~2019, compared to net ~~income~~loss per basic and diluted share of ~~$0.04,~~$(0.08), for the ~~nine~~six months ended ~~September~~June 30, ~~2017, a decrease~~2018, an increase of ~~$0.18~~$0.02 per basic and diluted share.

Cash, cash equivalents and investments decreased by $4.5 million to $96.8 million at September 30, 2018, from $101.3 million at December 31, 2017, 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 new office headquarters 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.

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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~~six months ended ~~September~~June 30, ~~2018,~~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 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 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.

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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 our classic yield ramp business, which services are delivered over a specific period of time. Revenue under these project–based contracts for solution implementation services is recognized as services are performed using a percentage of completion method based on costs or labor-hours inputs, depending on whichever is the most appropriate measure of the progress towards completion of the contract. Due 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~~(the 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 the The 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 is not factored in. 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 condensed 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 loss.

Recent Accounting Pronouncements and Accounting Changes

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Results of Operations

Discussion of Financial Data for the Threeand ~~Nine~~Six Months Ended ~~September~~June 30, 2019 and 2018

~~30, 2018 and 2017~~

Revenues

Three Months Ended
June 30,

Change

Six Months Ended
June 30,

Change

(Dollars in thousands)

2019

2018

$

%

2019

2018

$

%

Solutions
$ 13,429 $ 15,266 $ (1,837
)
(12
)%
$ 30,090 $ 33,456 $ (3,366 ) (10
)%
Gainshare performance incentives
7,139 5,853 1,286 22
%
11,019 12,400 (1,381 ) (11
)%
Total revenues
$ 20,568 $ 21,119 $ (551
)
(3
)%
$ 41,109 $ 45,856 $ (4,747 ) (10
)%
Solutions revenue as a percentage of total revenues
65
%
72
%
73
%
73
%

Gainshare performance incentives as a percentage of total revenues
35
%
28
%
27
%
27
%

~~Revenues~~

Three Months Ended September 30,

Nine Months Ended September 30,

(Dollars in thousands)

2018

2017

Percent
Change

2018

2017

Percent
Change

Design-to-silicon-yield solutions
$ 13,976 $ 19,229 (27%) $ 47,431 $ 55,426 (14%)
Gainshare performance incentives
6,237 7,288 (14%) 18,638 19,668 (5%)
Total revenues
$ 20,213 $ 26,517 (24%) $ 66,069 $ 75,094 (12%)
Design-to-silicon-yield solutions as a percentage of total revenues
69 % 73 % 72 % 74 %
Gainshare performance incentives as a percentage of total revenues
31 % 27 % 28 % 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 $1.8 million and $3.4 million for the three and ~~nine~~six months ended ~~September~~June 30, ~~2018,~~2019, compared to the year-ago periods, 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~~higher business ~~activities.~~activity. Deferred revenue for the second fiscal quarter of 2019 includes $1.0 million associated with one customer in China that is significantly delinquent in payments, which revenue we expect to recognize in the future when it is more than likely that such payments will be made in the near term. 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~~increased by $1.3 million for the three months ~~and nine months~~ ended ~~September~~June 30, ~~2018, respectively,~~2019, compared to the year-ago ~~periods~~period, due primarily to higher Gainshare performance incentives revenues from 14nm technology node. Revenue derived from Gainshare performance incentives decreased by $1.4 million for the six months ended June 30, 2019, compared to the year-ago period, due primarily to lower ~~gainshare~~Gainshare performance incentives ~~revenue~~revenues from 28nm technology node during the ~~28nm nodes, partially offset by higher incentives revenue from the 14nm nodes.~~first quarter of fiscal year 2019. 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 %
Costs of Design-to-silicon-yield solutions consist of costs incurred to provide and support our services, costs recognized in connection with licensing our software, and amortization of acquired technology. Direct costs of Design-to-silicon-yield solutions consist of service and software licenses costs. Service costs consist of material, employee compensation and 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.

Three Months Ended
June 30,

Change

Six Months Ended
June 30,

Change

(Dollars in thousands)

2019

2018

$

%

2019

2018

$

%

Solutions
$ 5,597 $ 4,349 $ 1,248 29
%
$ 14,390 $ 11,057 $ 3,333 30
%
Gainshare performance incentives
7,139 5,853 1,286 22
%
11,019 12,400 (1,381 ) (11
)%
Gross profit
$ 12,736 $ 10,202 $ 2,534 25
%
$ 25,409 $ 23,457 $ 1,952 8
%
Gross margin – Solutions revenue
27
%
20
%
35
%
24
%

Gross margin – Gainshare performance incentives
35
%
28
%
27
%
27
%

Gross margin – Total Company
62
%
48
%
62
%
51
%

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~~Direct costs~~Gross margin increased for the three months ended June 30, 2019 compared to the year-ago period, due primarily to an increase in Gainshare performance incentives and reduction in headcount primarily related to our yield ramp business, which is a cost of ~~Design-to-silicon-yield~~revenues. Cost of solutions decreased for the three months ended ~~September~~June 30, ~~2018,~~2019, compared to the year-ago period, primarily due to (i) a ~~$1.7~~$2.2 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, (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.
Gross margin increased for the ~~three~~six months ended ~~September~~June 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 decreased for the nine months ended September 30, 2018,2019 compared to the year-ago period, due primarily to recognition of Solutions revenue of $3.3 million from a ~~$2.1~~customer contract amendment during the first quarter of fiscal year 2019, without which our gross margin would be approximately 3.5% lower, and reduction in headcount primarily related to our yield ramp business, which is a cost of revenues. Cost of solutions decreased for the six months ended June 30, 2019, compared to the year-ago period, primarily due to (i) a $5.0 million decrease in personnel-related cost driven by lower ~~headcount. Amortization of acquired technology~~headcount and lower chargeable hours incurred across multiple contracts and customers, and a decrease in stock-based compensation expense, partially offset by a provision for ~~the nine months ended September 30, 2018, slightly increased~~discretionary employee bonuses for fiscal year 2019, (ii) a $0.9 million decrease in hardware and equipment expense due to ~~the amortization of acquired technology~~lesser solutions revenue, (iii) a $0.5 million decrease in travel expenses resulting from our ~~acquisition of certain assets from Kinesys Software.~~ cost management effort, and (iv) a $0.3 million decrease in facilities expense. These increases in gross margin were partially offset by a $1.4 million decrease in Gainshare performance incentives

Research and Development

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended
June 30,

Change

Six Months Ended
June 30,

Change

(Dollars in thousands)

2018

2017

Percent
Change

2018

2017

Percent
Change

2019

2018

$

%

2019

2018

$

%

Research and development
$ 6,755 $ 7,875 (14%) $ 21,100 $ 22,432 (6%) $ 7,312 $ 7,100 $ 212 3
%
$ 15,558 $ 14,345 $ 1,213 8
%
As a percentage of total revenues
33 % 30 % 32 % 30 %
Research and development as a percentage of total revenues
36
%
34
%
38
%
31
%

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~~slightly increased for the three months ended ~~September~~June 30, ~~2018,~~2019, compared to the year-ago period, primarily due to (i) a $0.1 million increase in personnel-related cost driven primarily by salary expenses related to our annual merit performance program, and higher payroll expenses charged due to the shifting of more resources from our yield ramp business to research and development activities, and (ii) a $0.3 million increase in facilities and other expenses. These increases in research and development expense were partially offset by a $0.2 million decrease in subcontractor expenses that is primarily related to our DFI and Exensio solutions.
Research and development expenses increased for the six months ended June 30, 2019, compared to the year-ago period due primarily to (i) a ~~$1.1~~$1.4 million ~~decrease~~increase in personnel-related expense ~~as a result~~driven by an increase in stock based compensation expense of ~~lower headcount. Research~~$0.9 million, higher payroll expenses charged due to the shifting of more resources from our yield ramp business to research and development activities, a provision for discretionary employee bonuses for fiscal year 2019, and salary expenses ~~decreased for the nine months ended September 30, 2018, compared~~related to ~~the year-ago period due primarily to a $1.5 million decrease in personnel-related expense, partially offset by~~our worldwide merit increases, and (ii) a $0.3 million increase in ~~depreciation~~facilities expense. These increases in research and development expense ~~for lab equipment.~~ were partially offset by a $0.6 million decrease in 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.

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Table of Contents

Selling, General and Administrative

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended
June 30,

Change

Six Months Ended
June 30,

Change

(Dollars in thousands)

2018

2017

Percent
Change

2018

2017

Percent
Change

2019

2018

$

%

2019

2018

$

%

Selling, general and administrative
$ 5,507 $ 5,680 (3%) $ 17,801 $ 17,775 0% $ 6,940 $ 5,919 $ 1,021 17 % $ 13,950 $ 12,294 $ 1,656 13
%
As a percentage of total revenues
27 % 21 % 27 % 24 %
Selling, general and administrative as a percentage of total revenues
34
%
28
%
34
%
27
%

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~~June 30, ~~2018,~~2019, compared to the year-ago period, primarily due to (i) a $0.9 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, provision for discretionary and other employee bonuses for fiscal year 2019 and increase in accrued vacation benefits, partially offset by a decrease in stock-based compensation, (ii) a $0.4 million increase in legal expense due primarily to a business acquisition, and (iii) $0.2 million increase in facilities and depreciation and amortization expense. These increases in selling, general and administrative expenses were partially offset by a $0.2 million decrease in professional ~~fees.~~ fees due to lower audit fees, a $0.2 million decrease in travel expenses resulting from our cost management effort, and a $0.1 million decrease in operating lease expense.
Selling, general and administrative expenses ~~were flat~~increased for the ~~nine~~six months ended ~~September~~June 30, ~~2018,~~2019, compared to the year-ago period, primarily due to (i) a ~~$0.1~~$1.6 million increase in personnel-related ~~expense,~~expenses driven by higher payroll expenses allocated to selling and marketing activities as a result of the shifting of resources from our yield ramp business, a provision for discretionary employee bonuses for fiscal year 2019 and increase in accrued vacation benefits, partially offset by a ~~$0.1 million~~ decrease in ~~professional fees. We anticipate our~~stock-based compensation, (ii) a $0.3 million increase in legal expense due primarily related to a business acquisition, (iii) a $0.2 million increase in recruiting expense, and (iv) a $0.3 million increase in facilities and depreciation and amortization expense. These increases in selling, general and administrative expenses ~~will fluctuate~~were partially offset by a $0.4 million decrease in ~~absolute dollars~~professional fees due to lower audit fees, a $0.2 million decrease in travel expenses resulting from ~~period to period as~~our cost management effort, and a ~~result of cost control initiatives and to support increased selling efforts~~$0.2 million decrease in ~~the future.~~operating lease expense.

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%
29
~~Table of Contents~~

Three Months Ended
June 30,

Change

Six Months Ended
June 30,

Change

(Dollars in thousands)

2019

2018

$

%

2019

2018

$

%

Amortization of other acquired intangible assets
$ 154 $ 108 $ 46 43
%
$ 262 $ 217 $ 45 21
%

Amortization of other acquired intangible assets consists of amortization of intangibles acquired ~~from~~as a result of certain business ~~combinations.~~combination. The increase in amortization of other acquired intangible assets for the ~~nine~~three and six months ended ~~September~~June 30, ~~2018,~~2019, compared to the year-ago ~~period,~~periods, was primarily related to ~~the~~ amortization of other acquired intangible assets ~~which resulted from the~~related to acquisition of certain assets from ~~Kinesys Software.~~StreamMosaic, Inc.

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

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended
June 30,

Change

Six Months Ended
June 30,

Change

(Dollars in thousands)

2018

2017

Percent
Change

2018

2017

Percent
Change

2019

2018

$

%

2019

2018

$

%

Interest and other income (expense), net
$ 223 $ (104 ) 314% $ 283 $ (305 ) 193% $ 111 $ 390 $ (279
)
(72
)%
$ 105 $ 59 $ 46 78
%

Interest and other income (expense), net, primarily consists of interest income and foreign currency transaction exchange gain (loss). Interest and other income (expense), net, decreased for the three months ended June 30, 2019, compared to the year-ago period primarily due to net unfavorable fluctuations in foreign exchange rates. Interest and other income (expense), net, slightly increased for the six months ended June 30, 2019, compared to the year-ago period, primarily due to increase in interest income and decrease in other charges.
Income Tax Benefit

Three Months Ended
June 30,

Change

Six Months Ended
June 30,

Change

(Dollars in thousands)

2019

2018

$

%

2019

2018

$

%

Income tax benefit
$ (849 ) $ (439 ) $ 410 93 % $ (947 ) $ (820 ) $ 127 15 %
Income tax benefit increased for the three and ~~nine~~six months ended ~~September~~June 30, ~~2018,~~2019, compared to the year-ago periods, primarily due to ~~foreign exchange rate movements~~the changes in forecasted income/loss between fiscal year 2019 and ~~an increase in interest income due to~~2018, and 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~~excess tax benefit ~~increased by $0.3 million~~ for ~~the three months ended September 30, 2018,~~employee stock compensation compared to the year-ago period, primarily due to higher pre-tax operating loss. Income tax benefit decreased by $0.9 million for the nine months ended September 30, 2018, compared to the year-ago period, primarily due to lower excess tax benefits related to employee stock compensation and 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.periods.

Liquidity and Capital Resources

As of ~~September~~June 30, ~~2018,~~2019, our working capital, defined as total current assets less total current liabilities, was ~~$139.8~~$126.7 million, compared to ~~$144.3~~$137.7 million as of December 31, ~~2017.~~2018. Cash and cash equivalents were ~~$96.8~~$86.8 million as of ~~September~~June 30, ~~2018,~~2019, compared to ~~$101.3~~$96.1 million as of December 31, ~~2017.~~2018. As of ~~September~~June 30, ~~2018~~2019, and December 31, ~~2017,~~2018, cash and cash equivalents held by our foreign subsidiaries were ~~$3.8~~$5.3 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.

Six Months Ended
June 30,

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 $ 4,966 $ 9,719 $ (4,753
)
Investing activities
(8,747 ) (10,783 ) (6,664
)
(4,810
)
(1,854
)
Financing activities
(4,658 ) (11,687 ) (7,556
)
(5,201
)
(2,355
)
Effect of exchange rate changes on cash and cash equivalents
(117 ) 172 (18
)
(59
)
41
Net decrease in cash and cash equivalents
$ (4,479 ) $ (16,037 ) $ (9,272
)
$ (351
)
$ (8,921
)

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Table of Contents

~~Our primary~~Net Cash Flows Provided by Operating Activities
Cash flow from operating activities during the six months ended June 30, 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 $4.8 million decrease in cash ~~inflows and outflows~~flows from operating activities for the ~~nine~~six months ended ~~September~~June 30, ~~2018, as~~2019, compared to the ~~nine~~year-ago period, was driven primarily by (i) a $0.9 million increase in net loss, (ii) a decrease in non-cash adjustments to net loss by $0.1 million primarily due to an increase in deferred tax assets of $0.7 million, and an increase in stock-based compensation expense of $0.4 million, and (iii) a $3.8 million decrease in net change from operating assets and liabilities. The major contributors to the net change in operating assets and liabilities for the six months ended ~~September~~June 30, ~~2017,~~2019 were as follows:

●
~~During~~Accounts receivable increased by $0.8 million for the ~~nine~~six months ended ~~September~~June 30, 2019 compared to a decreased in accounts receivable by $4.5 million for the six months ended June 30, 2018 contributing to a higher net cash flows 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 in net cash from operating activities was driven primarily by $8.2 million increase in the ~~net change~~year ago period. Our days of sales outstanding, or DSO, increased from ~~operating assets~~135 days at December 31, 2018 to 172 days at June 30, 2019, and ~~liabilities,~~includes three slow paying customers in Asia. Had it not been for these three customers, our DSO at June 30, 2019 would have been 105 days. One customer has received a contractual dispute notice from us demanding payment. Under the dispute notice, the Company’s management agrees to meet to resolve the payment matter. If the dispute is not resolved, the matter would proceed to binding arbitration. We believe that we have honored the contract and would prevail in any arbitration. The customer represents 37 days of the DSO. Two other customers have administrative issues, 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:are being resolved. Accounts receivable balances from these customers when combined represent 67 days of DSO.

●
~~Accounts receivable decreased~~Deferred revenue 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~~$1.2 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~~increased for the six months ended June 30, 2019 compared to ~~$10.8 million during~~ the ~~nine~~year-ago period. For the six months ended ~~September~~June 30, ~~2017.~~2019, cash flows used in investing activities related to (i) a $4.1 million property and equipment purchased primarily related to the construction of our DFI solution and expansion of our research and development laboratory and clean room and (ii) a $2.7 million payment for a business acquisition. For the ~~nine~~six months ended ~~September~~June 30, 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 ~~new office headquarters.~~development of our DFI solution.
Net Cash Flows Used in Financing Activities
Net cash used in financing activities increased by $2.4 million for the six months ended June 30, 2019, compared to the year-ago period. For the ~~nine~~six months ended ~~September~~June 30, ~~2017, cash flows used in investing activities primarily consisted of payments for capital expenditures, primarily test equipment and cash paid for acquisition of business.~~
~~During the nine months ended September 30, 2018,~~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~~$7.7 million ofin cash used to repurchase shares of our common stock and ~~$1.7~~$1.5 million in cash payments for taxes related to net share settlement of equity awards, partially offset by $1.6 million of proceeds from our Employee Stock Purchase Plan and exercise of stock options. For the six months ended June 30, 2018, net cash used in financing activities consisted of $5.2 million in cash used to repurchase shares of our common stock, $1.4 million of cash payments for taxes related to net share settlement of equity awards, partially offset by ~~$2.3~~$1.4 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.~~
34
Table of Contents

Contractual Obligations

The following table summarizes our known contractual obligations (in thousands) as of ~~September~~June 30, ~~2018:~~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
six
months)

2020

2021

2022

2023

2024 and
thereafter

Total

Operating lease obligations(1)
$ 882 $ 1,862 $ 1,711 $ 1,526 $ 1,167 $ 3,673 $ 10,821
Purchase obligations(2)
8,147 2,274 555 8 ‒ ‒ 10,984
Total(3)
$ 9,029 $ 4,136 $ 2,266 $ 1,534 $ 1,167 $ 3,673 $ 21,805

(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 5 of ~~the new lease is ten years commencing on September~~“Notes to Condensed Consolidated Financial Statements (Unaudited)” (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) for further discussion.

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

(3)
The contractual obligation table above excludes liabilities for uncertain tax positions of ~~$2.9~~$3.0 million, which are not practicable to assign to any particular years, due to the inherent uncertainty of the tax positions. See Note 59 of “Notes to Condensed Consolidated Financial ~~Statements”~~Statements (Unaudited)” (Item 1 of Part I of this Report) for further discussion.
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~~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~~June 30, ~~2018,~~2019, we had cash and cash equivalents of ~~$96.8~~$86.8 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~~June 30, ~~2018,~~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~~June 30, ~~2018,~~2019, we had no outstanding forward contracts. Subsequent to the end of second quarter of 2019, we entered into one outstanding forward contract with a notional amount of ~~$8.1~~$8.3 million. The foreign currency exchange rate movement of plus-or-minus 10% will result in the change in fair value of this contract of plus-or-minus $0.8 million.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements, investments in special purpose entities or undisclosed borrowings or debt.
35
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~~“disclosure controls and ~~procedures"~~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~~June 30, ~~2018,~~2019, in connection with the filing of this Quarterly Report on Form 10-Q. Based on that evaluation as of ~~September~~June 30, ~~2018,~~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~~June 30, ~~2018,~~2019, that have materially affected, or are reasonably likely to materially affect, the ~~Company's~~Company’s internal control over financial reporting.

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~~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~~June 30, ~~2018.~~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~~Except as set forth below, there have been no subsequent material changes to these ~~risks, except as set forth below.~~risks.

We ~~generate most~~have a limited number of customers with significant past due receivable balances, and our ~~revenues~~failure to collect a significant portion of such balances could adversely affect our cash, require us to write-off receivables or increase our bad debt allowance, and lose future business with these customers.
We recognized revenue from a limited number of customers in 2017, 2018 and ~~a large percentage~~2019 for services and deliverables that were performed and invoiced but remain largely unpaid. Our accounts receivable balance, net of allowances, was $52.4 million and $51.6 million as of June 30, 2019 and December 31, 2018, respectively. Days sales outstanding in accounts receivable (“DSO”) at the end of the second quarter of fiscal 2019 was 172 days. Two customers accounted for 56% of our gross accounts receivable as of December 31, 2018 and 2017, and one customer accounted for 37% and 40% of our revenues ~~from a single customer, so decreased business with,~~for 2018 and 2017, respectively. The allowance for doubtful accounts was $0.3 million and $0.4 million as of December 31, 2018 and 2017, respectively. We generally do not require collateral or other security to support accounts receivable. Despite the ~~loss of, any one~~financial ability of these customers to pay and on-going services by PDF under valid contracts, customers may delay payments or ~~pricing pressure,~~make claims regarding our performance or ~~customer consolidation~~the validity of the contracts in an attempt to negotiate reductions or to credit such balances against future work to be performed by us. Our allowances for potential credit losses, if any, could ~~significantly reduce~~be insufficient, and we may need to adjust our ~~revenue~~allowance for doubtful accounts from current estimates or ~~margins, negatively impacting results of operations, and require us to accept lower margin business~~write-off receivables depending 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 recognizedsuch claims in the ~~long-term as Gainshare performance incentives revenues are based on future production of the customer. Further, new business~~future. Any adjustments could be material to our consolidated financial statements and cash flows and, if, contrary to our judgment, it is later determined that an allowance should have been recorded earlier, we may be ~~delayed~~required to restate prior periods. Moreover, if ~~a key customer uses its leverage~~we are forced to ~~push for terms that are worse for us~~pursue legal remedies to collect receivables, our business relationship 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 contractsfuture business 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.suffer.

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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~~June 30, ~~2018~~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)

April 1, 2019 through April 30, 2019
— $ — — $ 21,084
May 1, 2019 through May 31, 2019
145 $ 12.61 145 $ 19,255
June 1, 2019 through June 30, 2019
155 $ 12.66 155 $ 17,293
Total
300 $ 12.63 300

(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 million~~See Note 6 of ~~common~~“Notes to Condensed Consolidated Financial Statements (Unaudited)” (Item 1 of Part I of this Report) for further information regarding our stock ~~remained available for future repurchases.~~  repurchase program.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

None.

Item 5. Other Information

None.
37
Table of Contents

Item 6. Exhibits

Exhibit
Number


Description
3.1

Amended and Restated Bylaws of PDF Solutions, Inc. effective April 26, 2019, filed as Exhibit 3.1 to the Company’s Form 8-K filed on May 1, 2019, and incorporated herein by reference.
~~10.01~~10.1

~~Employment offer~~PDF Solutions, Inc.’s Fifth Amended and Restated 2011 Stock Incentive Plan, filed as Appendix A to ~~Christine A. Russell, dated July 31, 2018.~~  the Company’s Proxy Statement filed on April 30, 2019, and incorporated herein by reference.*

31.01

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



31.02

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



32.01

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



32.02

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

XBRL Instance Document.†



101.SCH

XBRL Taxonomy Extension Schema Document.†



101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document.†



101.DEF

XBRL Taxonomy Extension Definition Linkbase Document.†



101.LAB

XBRL Taxonomy Extension Label Linkbase Document.†



101.PRE

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

3438
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~~August 6, 2019
By:
/s/ JOHN K. KIBARIAN



John K. Kibarian



President and Chief Executive Officer



(~~Principal~~principal executive officer)


Date: ~~November 8, 2018~~August 6, 2019
By:
/s/ CHRISTINE A. RUSSELL



Christine A. Russell



Executive Vice President, Finance and Chief Financial Officer



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


3539

	(in thousands)			Amortization period (years)

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

(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⁽¹⁾
2019 (remaining six months)	$	882
2020		1,862
2021		1,711
2022		1,526
2023		1,409
2024 and thereafter		4,750
Total future minimum lease payments	$	12,140
Less: Interest⁽²⁾		(2,158	)
Present value of operating lease liabilities⁽³⁾	$	9,982

	Six Months Ended June 30,
	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

	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 $4.54 per share)		37		$	11.43
Exercised		(156	)	$	5.42
Canceled		(70	)	$	14.64
Expired		(12	)	$	17.13
Outstanding, June 30, 2019		826		$	10.11		4.08	$	3,086
Vested and expected to vest, June 30, 2019		813		$	10.09		4.00	$	3,062
Exercisable, June 30, 2019		656		$	9.59		2.84	$	2,788

	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		162		$	12.28
Vested		(406	)	$	13.29
Forfeited		(113	)	$	11.78
Nonvested, June 30, 2019		1,478		$	11.61

	Three Months Ended June 30, 2019			Six Months Ended June 30, 2019
Beginning balance	$	91		$	244
Restructuring charges		—			92
Cash payments		(91	)		(336	)
Ending balance	$	—		$	—

	Three Months Ended June 30,						Change						Six Months Ended June 30,						Change
(Dollars in thousands)	2019			2018			$			%			2019			2018			$			%
Solutions	$	13,429		$	15,266		$	(1,837	)		(12	)%	$	30,090		$	33,456		$	(3,366	)		(10	)%
Gainshare performance incentives		7,139			5,853			1,286			22	%		11,019			12,400			(1,381	)		(11	)%
Total revenues	$	20,568		$	21,119		$	(551	)		(3	)%	$	41,109		$	45,856		$	(4,747	)		(10	)%
Solutions revenue as a percentage of total revenues		65	%		72	%								73	%		73	%
Gainshare performance incentives as a percentage of total revenues		35	%		28	%								27	%		27	%

	Three Months Ended September 30,								Nine Months Ended September 30,								Three Months Ended June 30,						Change					Six Months Ended June 30,						Change
(Dollars in thousands)	2018			2017			Percent Change		2018			2017			Percent Change		2019			2018			$		%			2019			2018			$		%
Research and development	$	6,755		$	7,875			(14%)	$	21,100		$	22,432			(6%)	$	7,312		$	7,100		$	212		3	%	$	15,558		$	14,345		$	1,213		8	%
As a percentage of total revenues		33	%		30	%				32	%		30	%
Research and development as a percentage of total revenues																		36	%		34	%							38	%		31	%

	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 six months)		2020		2021		2022		2023		2024 and thereafter		Total
Operating lease obligations(1)	$	882	$	1,862	$	1,711	$	1,526	$	1,167	$	3,673	$	10,821
Purchase obligations(2)		8,147		2,274		555		8		‒		‒		10,984
Total(3)	$	9,029	$	4,136	$	2,266	$	1,534	$	1,167	$	3,673	$	21,805

	(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 5 of ~~the new lease is ten years commencing on September~~“Notes to Condensed Consolidated Financial Statements (Unaudited)” (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) for further discussion.

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

	(3)	The contractual obligation table above excludes liabilities for uncertain tax positions of ~~$2.9~~$3.0 million, which are not practicable to assign to any particular years, due to the inherent uncertainty of the tax positions. See Note 59 of “Notes to Condensed Consolidated Financial ~~Statements”~~Statements (Unaudited)” (Item 1 of Part I of this Report) 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)
April 1, 2019 through April 30, 2019		—	$	—		—	$	21,084
May 1, 2019 through May 31, 2019		145	$	12.61		145	$	19,255
June 1, 2019 through June 30, 2019		155	$	12.66		155	$	17,293
Total		300	$	12.63		300

Exhibit Number		Description

3.1		Amended and Restated Bylaws of PDF Solutions, Inc. effective April 26, 2019, filed as Exhibit 3.1 to the Company’s Form 8-K filed on May 1, 2019, and incorporated herein by reference.

~~10.01~~10.1		~~Employment offer~~PDF Solutions, Inc.’s Fifth Amended and Restated 2011 Stock Incentive Plan, filed as Appendix A to ~~Christine A. Russell, dated July 31, 2018.~~ the Company’s Proxy Statement filed on April 30, 2019, and incorporated herein by reference.*

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

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

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

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

101.INS		XBRL Instance Document.†

101.SCH		XBRL Taxonomy Extension Schema Document.†

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document.†

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document.†

101.LAB		XBRL Taxonomy Extension Label Linkbase Document.†

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document.†

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

	PDF SOLUTIONS, INC.


Date: ~~November 8, 2018~~August 6, 2019	By:	/s/ JOHN K. KIBARIAN
		John K. Kibarian
		President and Chief Executive Officer
		(~~Principal~~principal executive officer)

Date: ~~November 8, 2018~~August 6, 2019	By:	/s/ CHRISTINE A. RUSSELL
		Christine A. Russell
		Executive Vice President, Finance and Chief Financial Officer
		(~~Principal~~principal financial and accounting officer)