See accompanying Notes to Condensed Consolidated Financial Statements (unaudited)

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

See accompanying 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~~10-Q and Article 10 of Regulation ~~S-X.~~S-X. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America ~~(“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~~10-K for the year ended December 31, ~~2018.~~2019.

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

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

Reclassification of Prior Period Amounts

Certain prior period amounts have been reclassified to conform to the current year presentation of reporting unrealized foreign currency (gain) loss, operating lease right-of-use assets, and operating lease liabilities on the Condensed Consolidated Statements of Cash Flows. This reclassification had no effect on the Company’s reported net loss or net cash used in operating activities.

Change in Presentation

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

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

	*For the Three Months Ended June 30, 2019*							*For the Six Months Ended June 30, 2019*
			*Change in*							*Change in*
	*Previously*		*Presentation*			*Current*		*Previously*		*Presentation*			*Current*
	*Reported*		*Reclassification*			*Presentation*		*Reported*		*Reclassification*			*Presentation*
Revenues:
Solutions	$	13,429	$	(13,429	)		N/A	$	30,090	$	(30,090	)		N/A
Gainshare performance incentives		7,139		(7,139	)		N/A		11,019		(11,019	)		N/A
Analytics		N/A		11,974		$	11,974		N/A		23,408		$	23,408
Integrated Yield Ramp		N/A		8,594			8,594		N/A		17,701			17,701
Total revenues	$	20,568	$	—		$	20,568	$	41,109	$	—		$	41,109

Since certain costs of revenues are attributed to both Analytics and Integrated Yield Ramp revenue categories, the Company believes it is more appropriate and meaningful to present the Condensed Consolidated Statements of Comprehensive Loss under a one-step presentation format that excludes any measure of gross margin. In the fourth quarter of 2019, the Company elected to change its Condensed Consolidated Statements of Comprehensive Loss presentation from a two-step presentation, where total costs of revenues was deducted from total revenues to report a gross profit line, to a one-step presentation, where total costs and expenses are deducted from total revenues. The change in presentation does not change previously presented amounts for costs of revenues, operating expenses and other expenses (income), or loss before income taxes.

Use of Estimates

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

~~Reclassification~~ The global COVID-19 pandemic has impacted the operations and purchasing decisions of ~~Prior Period Amount~~companies worldwide. It also has created and may continue to create significant uncertainty in the global economy. The Company has undertaken measures to protect its employees, partners, customers, and vendors. In addition, the Company’s personnel worldwide are subject to various travel restrictions, which limit the ability of the Company to provide services to customers and affiliates. This impacts the Company's normal operations. To date, the Company has been able to provide uninterrupted access to its products and services due to its globally distributed workforce, many of whom are working remotely, and its pre-existing infrastructure that supports secure access to the Company’s internal systems. If, however, the COVID-19 pandemic has a substantial impact on the productivity of the Company’s employees or its partners’ or customers’ decision to use the Company’s products and services, the results of the Company’s operations and overall financial performance may be adversely impacted. The duration and extent of the impact from the COVID-19 pandemic depends on future developments that cannot be accurately predicted at this time. As of the date of issuance of the financial statements, the Company is not aware of any specific event or circumstance that would require updates to the Company’s estimates and judgments or revisions to the carrying value of its assets or liabilities. These estimates may change, as new events occur and additional information is obtained, and are recognized in the condensed consolidated financial statements as soon as they become known. Actual results could differ from those estimates and any such differences may be material to the financial statements.

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

~~Leases~~Intangibles – Goodwill and Other

In ~~February 2016,~~ January 2017, the Financial Accounting Standards Board (or FASB) issued Accounting Standards Update (ASU) ~~2016-02, Leases~~No.2017-04, Intangibles – Goodwill and Other (Topic ~~842) and subsequent amendments to~~350). This standard eliminates step 2 from the initial guidance: ASU 2017-13, ASU 2018-10, ASU 2018-11, ASU 2018-20 and ASU 2019-01 (collectively, Topic 842). Topic 842 aims to increase transparency and comparability among organizations by requiring lessees to recognize leases with a term greater than 12 months as a right-of-use asset (“ROU”) and corresponding lease liabilities on the balance sheet, regardless of lease classification, and requiring disclosure of key information about leasing arrangements. The lease liability should be initially measured at the present value of the remaining contractual lease payments. Subsequently, the ROU assets will be amortized generally on a straight-line basis over the lease term, and the lease liability will bear interest expense and be reduced for lease payments. Topic 842 became effective for public companies’ financial statements issued for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective application is required with an option to not restate comparative periods in the period of adoption. The Company adopted Topic 842 on January 1, 2019 using the modified retrospective approach, and financial information for the comparative period was not updated.

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.

~~Table of Contents~~

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

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

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

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

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

~~In February 2018, the FASB issued ASU No. 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effect from Accumulated Other Comprehensive Income.~~annual goodwill impairment test. 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 becamewas 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. The Company adopted this standard on January 1, ~~2019,~~ 2020, 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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Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract

In ~~January 2017,~~ August 2018, 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~~ 2018-15, 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 August 2018, the FASB issued ASU No. 2018-15,~~ Intangibles – Goodwill and Other – Internal-Use Software (Subtopic ~~350-40)~~350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The new guidance clarifies the accounting for implementation costs incurred to develop or obtain internal-use software in cloud computing arrangements. Further, the standard also requires entities to expense the capitalized implementation costs of a hosting arrangement over the term of the hosting arrangement. This standard iswas effective for the Company beginning in the first quarter of 2020. ~~Early adoption is permitted.~~ ASU No. ~~2018-15~~2018-15 should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The Company adopted ASU No.2018-15 on January 1, 2020 on a prospective basis. There was no material impact on the Company’s condensed consolidated financial statements as a result of adoption of ASU No.2018-15. As of June 30, 2020, the implementation costs capitalized by the Company pertaining to a cloud computing arrangement related to sales order and customer relation management amounted to $0.2 million. The capitalized implementation costs were included in “Other noncurrent assets” on the Condensed Consolidated Balance sheet and within the operating activities section of the Company’s Condensed Consolidated Statement of Cash Flows for the six months ended June 30, 2020. When the module or component of the hosting arrangement is ready for its intended use, the Company expects to amortize the capitalized implementation costs over the respective noncancellable period of the arrangement plus the period covered by an option to extend the arrangement that is reasonably certain of being exercised. There has been 0 amortization expense related these assets for the three and six months ended June 30, 2020.

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

Accounting Standards Not Yet Effective

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

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

3.2. REVENUE FROM CONTRACTS WITH CUSTOMERS

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

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

The Company determines revenue recognition through the following five steps:

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

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

Contracts with multiple performance obligations

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

~~Solutions~~Analytics revenue ~~– The Company recognizes revenue~~is derived from the following primary offerings: licenses and services for ~~each element of solutions revenue as follows:~~Exensio Software, Exensio SaaS, DFI and CV systems that do not include performance incentives based on customers’ yield achievement.

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 standalone Exensio Software is recognized depending on whether the license is perpetual ~~(one-time~~or time-based. Perpetual (one-time charge) license software is recognized at ~~a point in~~the time atof the inception of the arrangement when control transfers to the ~~client,~~customers, if the software license is distinct from the services offered by ~~the Company.~~us. Revenue from post-contract support ~~subscription~~ is recognized over the contract term on a straight-line basis, because ~~the Company is~~we are providing ~~a service of standing ready to provide~~(i) support ~~when-and-if needed,~~ and ~~is providing~~(ii) unspecified software ~~upgrades~~updates on a when-and-if available basis over the contract term. Revenue from ~~time-based license~~time-based-licensed software is allocated to each performance obligation and is recognized either at a point in time or over ~~time.~~time as follows. The license component is recognized at ~~a point in~~the time atwhen control transfers to the ~~delivery of the software license,~~customer, with the post-contract support ~~subscription~~ component ~~being~~ recognized ratably over ~~for~~ the committed term of the contract. For contracts with any combination of licenses, support, and other services, distinct performance obligations are accounted for separately. For contracts with multiple performance obligations, we allocate the transaction price of the contract to each performance obligation on a relative basis using standalone selling price (or SSP) attributed to each performance obligation.

Revenue from ~~software hosting or~~Exensio SaaS arrangements, ~~that~~which allow for the use of a ~~hosted~~cloud-based software product or service over a contractually determined period of time without taking possession of software, is accounted for as subscriptions and is recognized as revenue ratably, on a straight-line basis, over the ~~coverage~~subscription period beginning on the date the service is firstmade available to customers.

~~The Company also licenses~~Revenue from DFI and CV systems that do not include performance incentives based on customers’ yield achievement is recognized primarily as services are performed. Where there are distinct performance obligations, the ~~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,~~SSPs. For these contracts with multiple performance obligations, the Company ~~applies judgment~~allocate the transaction price of the contract to ~~estimate the range of SSPs for~~ each performance ~~obligation.~~

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

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Integrated Yield Ramp Revenue

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

Revenue under these project–based contracts, which are delivered over a specific period of time, typically for a fixed fee component paid on a set schedule, is recognized as services are performed using a percentage of completion. Similar to the services provided in connection with CV systems that are contributing to Analytics revenue, due to the nature of the work performed in these arrangements, the estimation of ~~costs or hours at~~percentage of completion method is complex and subject to many variables and requires significant judgment. Key factors reviewed by the Company to estimate costs to complete each contract are future labor and product costs and expected productivity efficiencies. If circumstances arise that change the original estimates of revenues, costs, or extent of progress toward completion, revisions to the estimates are made. These revisions may result in increases or decreases in estimated revenues or costs. Losses on fixed-price solution implementation contracts are recognized in the period when they become probable. Revisions in profit estimates are reflected in the period in which the conditions that require ~~the revisions become known and can be estimated (the cumulative catch-up method).~~significant judgement. Please refer to “Significant Judgments” section of this Note for further discussion.

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

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

Disaggregation of ~~revenue~~Revenue

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

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

Three Months
Ended June 30,

Six Months
Ended June 30,

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
64 91 172 351
Total
$ 20,568 $ 21,119 $ 41,109 $ 45,856

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

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

	Three Months Ended June 30,						Six Months Ended June 30,						*Three Months Ended June 30,*						*Six Months Ended June 30,*
	2019			2018			2019			2018			*2020*			*2019*			*2020*			*2019*
Over time		58	%		68	%		66	%		68	%		64	%		58	%		61	%		66	%
Point-in-time		42	%		32	%		34	%		32	%		36	%		42	%		39	%		34	%
Total		100	%		100	%		100	%		100	%		100	%		100	%		100	%		100	%

International revenues accounted for approximately 54% and 56% of our total revenues for the three and six months ended June 30, 2020, respectively, compared to 58% and 56% of our total revenues for the three and six months ended June 30, 2019, ~~respectively, compared to 58% and 59% of our total revenues for the three and six months ended June 30, 2018,~~ respectively. See Note ~~11.~~10. Customer and Geographic Information.

Significant Judgments

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

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

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

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

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

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Contract Balances

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

The Company classifies the right to consideration in exchange for ~~products~~software or services transferred to a ~~client~~customer as either a receivable or a contract asset. A receivable is a right to consideration that is unconditional, as compared to a contract asset, which is a right to consideration that is conditional upon factors other than the passage of time. The majority of the Company’s contract assets represent unbilled amounts related to fixed-price ~~solution implementation~~ service contracts when the ~~costs or labor-hours input method of revenue recognition is utilized and~~ revenue recognized exceeds the amount billed to the ~~client, and the right to consideration is subject to milestone completion or client acceptance.~~customer. The contract assets are generally classified as current and are recorded on a net basis with deferred revenue (i.e., contract liabilities) at the contract level. At June 30, ~~2019~~ 2020 and December 31, ~~2018,~~ 2019, contract assets of ~~$2.3~~$3.4 million and ~~$2.7~~$3.6 million, respectively, are included in prepaid expenses and other current assets in the ~~condensed consolidated balance sheets.~~Condensed Consolidated Balance Sheets. The ~~change in the~~Company did not record any asset impairment charges related to contract assets ~~balance during~~for 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.periods presented.

~~Contract liabilities primarily consist of deferred revenues and billings in excess of recognized revenues.~~ Deferred revenues consist substantially of amounts invoiced in advance of revenue recognition and isare recognized as the revenue recognition criteria are met. Deferred revenues that will be recognized during the succeeding ~~twelve-month~~twelve-month period are 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~~Condensed Consolidated Balance Sheets. At June 30, 2020 and December 31, 2019, the non-current portion of deferred ~~revenue~~revenues included in ~~other~~ non-current liabilities was ~~$1.7~~$1.8 million and ~~$1.0~~$2.3 million, respectively, as of June 30, 2019 and December 31, 2018. 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.respectively. Revenue recognized for the three months ended June 30, ~~2019~~ 2020 and ~~2018,~~2019, that was included in ~~the~~ deferred revenues and billings in excess of recognized revenues balances at the beginning of each reporting period was ~~$4.7~~$5.9 million and ~~$5.0~~$4.7 million, respectively. Revenue recognized for the six months ended June 30, ~~2019,~~ 2020, and ~~2018,~~2019, 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~~$7.7 million and ~~$7.6~~$8.7 million, respectively.

At June 30, ~~2019,~~ 2020, the aggregate amount of the transaction price allocated to the remaining performance obligations related to customer contracts that were unsatisfied or partially unsatisfied was approximately ~~$37.4~~$63.5 million. Given the applicable contract terms, the majority of this amount is expected to be recognized as revenue over the next two years, with the remainder in the following five years. This amount does not include contracts to which the customer is not committed, ~~nor contracts with original expected lengths of one year or less,~~ nor contracts for which we recognize revenue equal to the amount we have the right to invoice for services performed, or future sales-based or usage-based royalty payments in exchange for a license of intellectual property. This amount is subject to change due to future revaluations of variable consideration, terminations, other contract modifications, or currency adjustments. The estimated timing of the recognition of remaining unsatisfied performance obligations is subject to change and is affected by changes to the scope, change in timing of delivery of products and services, or contract modifications.

~~Payment terms and conditions vary by contract type, although terms generally include a requirement~~

Table 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.

Contents

The adjustment to revenue recognized in the three months ended June 30, ~~2019~~ 2020 and ~~2018~~2019 from performance obligations satisfied (or partially satisfied) in previous periods was a decrease of $0.5 million and a decrease of $0.3 million, respectively. The adjustment to revenue recognized in the six months ended June 30, 2020 and 2019 from performance obligations satisfied (or partially satisfied) in previous periods was an increase of $0.3 million and a decrease of $0.2 million, respectively. 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$0.6 million and an increase of ~~$0.3~~$0.2 million, respectively. These amounts primarily represent changes in estimated percentage-of-completion based contracts and changes in estimated Gainshare ~~performance incentives~~royalty for those customers that reported actual Gainshare revenue with some time lag.

~~Table of Contents~~

Costs to obtain or fulfill a contract

The Company capitalizes the incremental costs to obtain or fulfill a contract with a customer, including direct sales commissions and related fees, when it expects to recover those costs. As a result, these costs will need to be capitalized and amortized over an appropriate period, which may exceed the initial contract term. The incremental costs of obtaining a contract are costs that would not have been incurred if the contract had not been obtained. The Company uses the portfolio method to recognize the amortizationAmortization expense related to these capitalized costs ~~related to initial contracts and renewals and such expense~~ is recognized over the period associated with the revenue offrom which the ~~related portfolio.~~cost was incurred. Total capitalized direct sales commission costs included in prepaid expenses and other current assets in the accompanying Condensed Consolidated Balance Sheets as of June 30, ~~2019~~ 2020 and December 31, ~~2018~~ 2019 were ~~$0.6~~$0.5 million and ~~$0.5~~$0.4 million, respectively. Total capitalized direct sales commission costs included in other non-current assets in the accompanying Condensed Consolidated Balance Sheets as of June 30, 2020 and December 31, 2019 was $0.8 million and $0.4 million, respectively. Amortization of these assets during each of the three months ended June 30, ~~2019~~ 2020 and ~~2018~~2019 was $0.1 million. Amortization of these assets during each of the six months ended June 30, ~~2019~~ 2020 and ~~2018~~2019 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 that will be used in satisfying the performance obligation in the future, and the costs are expected to be recovered.

These costs primarily consist of transition and set-up costs related to the installation of systems and processes and other deferred fulfillment costs eligible for capitalization. Capitalized costs are amortized consistent with the transfer to the ~~client~~customer of the services to which the asset relates and recorded as a component of cost of revenues. The Company also ~~incurred~~incurs certain direct costs to provide ~~solution implementation~~ services in relation to the specific anticipated contracts. The Company recognizes such costs as a component of ~~cost~~costs of revenues, the timing of which is dependent upon identification of a contract arrangement. The Company also defers costs from arrangements that required usit to defer the revenues, typically due to the pattern of transfer of the performance obligations in the contract. These costs are recognized in proportion to the related revenue. At the end of the reporting period, the Company evaluates its deferred costs for their probable recoverability. The Company recognizes impairment of deferred costs when it is determined that the costs no longer have future benefits and are no longer recoverable. There was no impairment loss in relation to the costs capitalized for the periods presented. Deferred costs balance ~~was $1.0 million and $0.2 million as of June 30, 2019 and December 31, 2018, respectively. The balance was~~ included in prepaid expenses and other current assets in the accompanying Condensed Consolidated Balance Sheets as of June 30, 2020 andDecember 31, 2019 was $0.2 million and $0.3 million, respectively. Deferred costs balance included in other non-current assets in the accompanying ~~condensed consolidated balance sheets.~~Condensed Consolidated Balance Sheets was immaterial as of June 30, 2020 and was $0.2 million as of December 31, 2019.

The Company does not adjust transaction price for the effects of a significant financing component when the period between the transfers of the promised good or service to the customer and payment for that good or service by the customer is expected to be one year or less. The Company assessed each of its revenue generating arrangements in order to determine whether a significant financing component exists, and determined its contracts did not include a significant financing component for the three and six months ended June 30, 2020 and 2019.

10.9. NET LOSS PER SHARE

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

	Three Months Ended June 30,						Six Months Ended June 30,						*Three Months Ended June 30,*						*Six Months Ended June 30,*
	2019			2018			2019			2018			*2020*			*2019*			*2020*			*2019*
Numerator:
Net loss	$	(710	)	$	(2,096	)	$	(3,401	)	$	(2,520	)	$	(3,652	)	$	(710	)	$	(4,180	)	$	(3,401	)
Denominator:
Basic weighted-average common shares outstanding		32,339			31,962			32,412			32,065
Effect of dilutive options and restricted stock		—			—			—			—
Basic weighted-average shares outstanding														32,886			32,339			32,795			32,412
Effect of dilutive options and restricted stock units														—			—			—			—
Diluted weighted average shares outstanding		32,339			31,962			32,412			32,065			32,886			32,339			32,795			32,412

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	)
Net loss per share - Basic													$	(0.11	)	$	(0.02	)	$	(0.13	)	$	(0.10	)
Net loss per share - Diluted													$	(0.11	)	$	(0.02	)	$	(0.13	)	$	(0.10	)

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

~~Table of Contents~~

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

	Three Months Ended June 30,				Six Months Ended June 30,				*Three Months Ended June 30,*				*Six Months Ended June 30,*
	2019		2018		2019		2018		*2020*		*2019*		*2020*		*2019*
Outstanding options		606		621		614		638		376		606		388		614
Nonvested restricted stock units		813		1,108		781		1,034		659		813		687		781
Employee Stock Purchase Plan		18		—		198		16		148		18		125		198
Total		1,437		1,729		1,593		1,688		1,183		1,437		1,200		1,593

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11.10. CUSTOMER AND GEOGRAPHIC INFORMATION

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

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

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

	Three Months Ended June 30,						Six Months Ended June 30,						Three Months Ended June 30,						Six Months Ended June 30,
Customer	2019			2018			2019			2018			2020			2019			2020			2019
A		33	%		40	%		34	%		39	%		24	%		33	%		25	%		34	%
B		*	%		10	%		*	%		*	%
D														13	%		*	%		*	%		*	%

__________________________

* represents less than 10%

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

							*June 30,*			*December 31,*
Customer	June 30, 2019			December 31, 2018			*2020*			*2019*
A		31	%		35	%		19	%		27	%
B		22	%		21	%		*	%		14	%
C								15	%		12	%

__________________________

* represents less than 10%

~~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 June 30,*
	Three Months Ended June 30,										*2020*					*2019*
	2019					2018							*Percentage*					*Percentage*
	Revenues		Percentage of Revenues			Revenues		Percentage of Revenues			*Revenues*		*of Revenues*			*Revenues*		*of Revenues*
United States	$	8,547		42	%	$	8,982		42	%	$	9,915		46	%	$	8,547		42	%
Taiwan												3,990		19			2,341		11
China		3,267		16			4,360		21			495		2			3,267		16
Taiwan		2,341		11			1,038		5
Rest of the world		6,413		31			6,739		32			7,009		33			6,413		31
Total revenue	$	20,568		100	%	$	21,119		100	%	$	21,409		100	%	$	20,568		100	%

	*Six Months Ended June 30,*
	*2020*					*2019*
			*Percentage*					*Percentage*
	*Revenues*		*of Revenues*			*Revenues*		*of Revenues*
United States	$	18,532		43	%	$	17,862		44	%
Taiwan		6,658		16			4,096		10
China		3,454		8			6,250		15
Rest of the world		13,923		33			12,901		31
Total revenue	$	42,567		100	%	$	41,109		100	%

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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):

					*June 30,*		*December 31,*
	June 30, 2019⁽¹⁾		December 31, 2018⁽²⁾		*2020*		*2019*
United States	$	41,379	$	35,173	$	45,285	$	46,000
Rest of the world		2,441		508		2,183		2,407
Total long-lived assets, net	$	43,820	$	35,681	$	47,468	$	48,407

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

12.11. FAIR VALUE MEASUREMENTS

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

Level 1 -

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


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


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

~~Table of Contents~~

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

											*Quoted*
											*Prices in*
											*Active*		*Significant*
											*Markets for*		*Other*		*Significant*
											*Identical*		*Observable*		*Unobservable*
											*Assets*		*Inputs*		*Inputs*
Assets	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		*Total*		*(Level 1)*		*(Level 2)*		*(Level 3)*
Money market mutual funds	$	27,375	$	27,375	$	—	$	—	$	27,771	$	27,771	$	—	$	—

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

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

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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~~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)~~expense (income), net, and offsets the change in fair value of the foreign currency denominated assets and liabilities, which is also recorded in other income (expense), net. For the three months ended June 30, 2019 and 2018, the Company recognized a realized loss of $22,000 and a realized loss of $551,000 on the contracts, respectively, which was recorded in other income (expense)expense (income), net in the Company’s Condensed Consolidated Statements of Operations and Comprehensive Loss. For the ~~six~~three months ended June 30, ~~2019~~ 2020 and ~~2018,~~2019, the Company recognized a realized gain of $98,000 and realized loss of $22,000 on the contracts, respectively. For the six months ended June 30, 2020 and 2019, the Company recognized a realized loss of ~~$292,000~~$170,000 and a realized loss of ~~$365,000~~$292,000 on the contracts, ~~respectively, which was recorded in other income (expense), net in the Company’s Condensed Consolidated Statements of Operations and Comprehensive Loss.~~respectively.

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

~~Table of Contents~~

13.12. COMMITMENTS AND CONTINGENCIES

Indemnifications — The Company generally provides a warranty to its customers that its software will perform substantially in accordance with documented specifications typically for a period of 90 days following initial delivery of its products. The Company also indemnifies certain customers from ~~third-party~~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 June 30, ~~2019,~~ 2020, total outstanding purchase obligations were ~~$11.0~~$12.7 million, the majority of which ~~are primarily~~ due within the next 1224 months.

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

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

~~Litigation~~Legal Proceedings — From time to time, the Company is subject to various claims and legal proceedings that arise in the ordinary course of business. The Company accrues for losses related to litigation when a potential loss is probable and the loss can be reasonably estimated in accordance with FASB requirements. As of June 30, ~~2019,~~ 2020, the Company was not party to any material legal proceedings, thus no loss was probable and no amount was accrued.

On May 6, 2020, the Company initiated an arbitration proceeding with the Hong Kong International Arbitration Center against SMIC New Technology Research & Development (Shanghai) Corporation (“SMIC”) due to SMIC’s failure to pay fees due to PDF under a series of contracts. The Company seeks to recover the unpaid fees, a declaration requiring SMIC to pay fees under the contracts in the future, and costs associated with bringing the arbitration proceeding.

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13. SUBSEQUENT EVENT

On July 29, 2020, Advantest Corporation and the Company entered into a strategic partnership, through its wholly-owned subsidiary, Advantest America, Inc., which includes: (i) a significant agreement for the Company’s assistance in development of cloud-based applications for Advantest tools that leverage the Company’s Exensio software analytics platform; (ii) a commercial agreement providing for the license to third parties of solutions that result from the development work that combine Advantest’s testing applications and the Company’s Exensio platform; (iii) a 5-year cloud-based license for the Company’s Exensio platform and related hosted management services and DEX services, which provide tool data collected from certain OSAT facilities; and (iv) the purchase of 3,306,924 shares of the Company’s common stock, at a purchase price of $19.7085 per share, for aggregate gross proceeds of $65.2 million. Concurrent with the share purchase, Advantest Corporation has entered into multi-year voting and lock-up agreements.

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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, prospects, or ~~prospects, and~~strategic partnerships, possible actions taken by us or our subsidiaries, and the potential impact of the COVID-19 pandemic on our business, which may be provided by us are also forward-looking statements. These forward-looking statements are only predictions. Forward-looking statements are based on current expectations and projections about future events and are inherently subject to a variety of risks and uncertainties, many of which are beyond our control, which could cause actual results to differ materially from those anticipated or projected. All forward-looking statements included in this document are based on information available to us on the date of filing and we further caution investors that our business and financial performance are subject to substantial risks and uncertainties. We assume no obligation to update any such forward-looking statements. In evaluating these statements, you should specifically consider various factors, including the risk factors set forth in Item 1. “Business” and Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, ~~2018,~~2019, filed with the Securities and Exchange Commission on March ~~8, 2019.~~10, 2020. All references to “we”, “us”, “our”, “PDF”, “PDF Solutions” or “the Company” refer to PDF Solutions, Inc.

Overview

We ~~analyze our customers’ integrated circuit (“IC”) design~~offer products and ~~manufacturing processes~~services designed to ~~identify, quantify,~~empower engineers and ~~correct~~data scientists across the ~~issues that cause yield loss~~semiconductor ecosystem to improve the yield, quality, and profitability of their products. We derive revenues from two sources: Analytics and Integrated Yield Ramp. Our offerings combine proprietary software, physical intellectual property (IP) for Integrated Circuits (or IC) designs, electrical measurement hardware tools, proven methodologies, and professional services. We primarily monetize our ~~customers’ profitability by improving time-to-market, increasing~~offerings through time-based license fees, contract revenue for professional services, and increasingly recently, software as a service (or SaaS). In some cases, especially on our historical integrated yield and reducing total design and manufacturing costs. We package our solutions in various ways to meet our customers’ specific business and budgetary needs, each of which provides us various revenue streams. Weramp (or IYR) engagements, we also 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 hardwarevalue-based royalty that we ~~license on a stand-alone basis.~~call Gainshare. Our products, services, and solutions have been sold to integrated device manufacturers (or IDMs), fabless semiconductor companies, foundries, out-sourced semiconductor assembly and test (or OSATs), and system houses.

Industry Trend

The global COVID-19 pandemic has impacted the operations and purchasing decisions of companies worldwide. While the full potential economic impact brought by the COVID-19 pandemic may be difficult to assess or predict, the pandemic has resulted in significant disruption of global financial markets and on June 8, 2020, the National Bureau of Economic Research announced that the U.S. was in a recession. The COVID-19 pandemic has significantly affected how we and our customers are operating our business. For example, most U.S. states and countries worldwide have imposed and may continue to impose from time-to-time for the foreseeable future, restrictions on the physical movement of our employees, partners, and customers to limit the spread of COVID-19, including travel restrictions and shelter-in-place orders. As a result, our Shanghai office was temporarily shut down and the restrictions limited the ability of our local employees to travel to customer sites or visit our other offices from January to April 2020. Our corporate headquarters in the United States and several other impacted locations were temporarily closed but our US R&D facility partially reopened in June 2020 and our offices in Canada, France and Korea have reopened on various dates during the second quarter of 2020. We are closely monitoring the COVID-19 situation and currently preparing plans to reopen our other offices with focused on our employees’ safety. In addition, our personnel worldwide are subject to various country to country travel restrictions, which limit our ability to provide services to customers at their facilities. To date, we have been able to provide uninterrupted access to our products and services due to our globally distributed workforce, many of whom are already working remotely, and our pre-existing infrastructure, which supports secure access to our internal systems. If, however, the COVID-19 pandemic has a substantial impact on our employees’ productivity or our partners or customers decision to use our products and services, our ability to deliver on current commitments, to secure future bookings, or achieve expected financial performance may be harmed. The duration and extent of the impact from the COVID-19 pandemic depends on future developments that cannot be accurately predicted at this time, such as the severity and transmission rate of the virus, the extent and effectiveness of containment actions and the impact of these and other factors on our employees, customers, partners and vendors.

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Certain general business trends may affect our Analytics revenue. In particular, the confluence of Industry 4.0 (i.e. the fourth industrial revolution, or the automation and data exchange in manufacturing technologies and processes) and cloud computing (i.e. the on-demand availability of computing resources and data storage without direct active management by the user) is driving increased innovation in semiconductor and electronics manufacturing and analytics, as well as in the organization of IT networks and computing at those same companies. First, the ubiquity of connectivity and sensor technology enables any manufacturing company to augment its factories and visualize its entire production line. In parallel, the cost per terabyte of data storage has continually decreased year to year. The combination of these two trends means that more data is collected and stored than ever before. Semiconductor companies are striving to analyze these very large data sets in real-time to make rapid decisions that measurably improve manufacturing efficiency and quality. In parallel, the traditional practice of on-site data storage, even for highly sensitive data, is changing. The ability to cost-effectively and securely store, analyze, and retrieve massive quantities of data from the cloud versus on-premise enables data to be utilized across a much broader population of users, frequently resulting in greater demands on analytics programs. The combination of these two trends means that cloud-based, analytic programs that effectively manage identity management, physical security and data protection are increasingly in demand for insights and efficiencies across the organizations of these companies. We believe that all these trends will continue for the next few years, and the challenges involved in adopting Industry 4.0 and secure cloud computing will create opportunities for companies that have a combination of advanced analytics capabilities, proven and established data infrastructures, and professional services to optimize their environment to customers’ specialized needs.

Other business trends may continue to affect our Integrated Yield Ramp revenue. The logic foundry market at the ~~leading edge~~leading-edge nodes, such as 10nm and 7nm ~~is undergoing~~has undergone significant ~~change.~~change over the past few years. The leading foundry ~~has increased~~continues to increase market share as other foundries have either suspended 7nm development, forecasted a later start of mass production, or started later than originally forecast in some cases. This trend will likely continue to negatively impact our ~~future yield ramp solutions~~Integrated Yield Ramp business on these 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. Foundries that participate at leading edge nodes are expected to continue to invest in new technologies such as memory, packaging, and multi-patterned and ~~EUV~~extreme ultraviolet lithography, as well as new innovations in process control and variability management. We expect China’s investment in semiconductors to ~~continue for at least the next few years.~~continue. In order for these trends to provide opportunities for us to increase our business in process control and electrical characterization, Chinese semiconductors manufacturers will need to increase their production volumes on advanced technology nodes and continue to engage foreign suppliers. As a result of these market developments, we have chosen to focus our resources and investments in products, services, and solutions for analytics.

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

Our Strategic Partnership

On July 29, 2020, we entered into a strategic partnership with Advantest Corporation through its wholly-owned subsidiary, Advantest America, Inc., that includes: (i) a significant agreement for our assistance in development of cloud-based applications for Advantest tools that leverage our Exensio software analytics platform; (ii) a commercial agreement providing for the license to third parties of solutions that result from the development work that combine Advantest’s testing applications and our Exensio platform; (iii) a 5-year cloud-based license for our Exensio platform and related hosted management services and DEX services, which provide tool data collected from certain OSAT facilities; and (iv) the purchase of 3,306,924 shares of our common stock, at a purchase price of $19.7085 per share, for aggregate gross proceeds of $65.2 million. Concurrent with the share purchase, Advantest Corporation also entered into multi-year voting and lock-up agreements.

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The interest in Industry 4.0 (i.e., the fourth industrial revolution or the digital transformation of manufacturing technologies) is another trend that 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 is concentrated in a small number of customers, the total revenues for each of these customers in any period is the result of 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 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. For example, during the third quarter of 2018, a major customer publicly announced that it was indefinitely suspending the development and production of its 7nm technology node. This customer’s decision negatively impacted our Solutions revenue in the fourth quarter of 2018 and Gainshare performance incentives revenues in the first quarter of 2019. In March 2019, we entered into an amendment to the 7nm technology development agreement with this customer. Even though we were able to recognize Solutions revenue from this customer during the first quarter of 2019 as a result of this 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, 2018, and in Item 1A, “Risk Factors,” on pages 12 through 21 of our Annual Report on Form 10-K for the year ended December 31, 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 June 30, ~~2019,~~2020, were as follows:

●•

Total revenues were ~~$20.6~~$21.4 million, ~~which was a decrease~~an increase of ~~$0.6~~$0.8 million, or 3%4%, compared to the ~~year-ago period. Solutions~~three months ended June 30, 2019. Analytics revenue was ~~$13.4~~$15.2 million, which was ~~a decrease~~an increase of ~~$1.8~~$3.2 million, ~~or 12%,~~ compared to the ~~year-ago period.~~three months ended June 30, 2019. The ~~decrease~~increase in ~~Solutions~~Analytics revenue was primarily driven by $4.1 million increase in CV services due to higher hours worked across multiple contracts and customers, partially offset by the expiration of an Exensio contract for a customer that ceased 7nm production in 2019. Integrated Yield Ramp revenue decreased $2.4 million for the three months ended June 30, 2020, compared to the three months ended June 30, 2019, due primarily to a $1.2 million decrease in revenue from ~~our yield ramp solutions resulting~~services from lower hours worked across multiple contracts and customers, ~~which was partially offset by increases~~and a $1.2 million decrease in ~~Exensio big data solution revenues that were driven by higher business activity. Deferred revenue for~~Gainshare royalty from 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 and 28nm technology ~~node.~~nodes.

●	~~Gross margin~~
	•	Costs of revenues increased $1.1 million for the three months ended June 30, ~~2019 was 62%,~~2020, 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~~primarily due ~~primarily~~ to an(i) a $0.7 million increase in ~~Gainshare performance incentives~~direct costs due mainly to the timing of deferral of contract costs, and ~~reduction~~(ii) a $0.8 million increase in ~~headcount primarily~~cloud-delivery related costs and depreciation expense of test equipment, partially offset by a $0.5 million decrease in travel expenses resulting from reduced business travel in the second quarter of 2020 due to ~~our yield ramp business, which is a cost of revenues. Cost of solutions decreased~~the global COVID-19 pandemic.

	•	Gross margin was 58%, compared to 62% 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. 2019.

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	●•	Net loss was ~~$0.7~~$3.7 million, compared to ~~a net loss of $2.1~~$0.7 million for the ~~year-ago period.~~three months ended June 30, 2019. The ~~decrease~~increase in net loss was primarily attributable to ~~(i)~~ a ~~$1.8~~$1.1 million increase in costs of revenues, a $1.3 million increase in operating expenses as we continued to make investments in research and development sales and marketing activities, a $0.3 million increase in interest and other expense (income), net, and a $1.1 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 higherincome 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~~$0.8 million ~~decrease~~increase 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~~and investments increased $5.8 million to ~~$86.8~~$103.4 million at June 30, ~~2019,~~2020, from ~~$96.1~~$97.6 million at December 31, ~~2018,~~2019, primarily due to the collection of accounts receivables, partially offset by cash used in investing activities primarily related to ~~the~~additions to property and equipment ~~purchased~~ for ~~the development~~ our ~~Design-for-Inspection (DFI)~~DFI solution, ~~expansion~~including construction 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.~~additional eProbe tools.

Financial highlights for the six months ended June 30, ~~2019,~~2020, were as follows:

●•

Total revenues were ~~$41.1~~$42.6 million, which was ~~a decrease~~an increase of ~~$4.7~~$1.5 million, or ~~10%~~4%, compared to the six months ended June 30, 2019. Analytics revenue was $28.4 million, which was an increase of $5.0 million, compared to the ~~year-ago period. Solutions revenues were $30.1~~six months ended June 30, 2019. The increase in Analytics revenue was primarily driven by $6.2 million ~~which was~~increase in CV services and Exensio licenses and services, partially offset by the expiration of an Exensio contract for a customer that ceased 7nm production in 2019 and decrease ~~of $3.4~~in DFI revenue.Integrated Yield Ramp revenue decreased $3.6 million ~~or 10%,~~for the six months ended June 30, 2020, compared to the ~~year-ago period. The~~six months ended June 30, 2019, due primarily to a $1.2 million decrease in ~~solutions~~ revenue ~~was primarily related to~~from lower hours worked across multiple contracts and customers, ~~which was~~and the effect $3.3 million in nonrecurring revenue from a customer contract amendment recognized in the first quarter of 2019, 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~~a $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 $11.0 million, a decrease of $1.4 million, or 11%, compared to the year-ago period. The decreaseincrease in Gainshare ~~performance incentives revenue was primarily due to lower incentives revenue~~royalty from the ~~28nm~~14nm technology ~~node.~~nodes.

●	~~Gross margin~~
	•	Costs of revenues increased $1.7 million for the six months ended June 30, ~~2019 was 62%,~~2020, compared to ~~51% for the year-ago period. During~~ the six months ended June 30, 2019, ~~our gross profit was significantly higher than~~primarily due to (i) a $1.3 million increase in direct costs related to third-party software royalty and licenses expense, equipment and hardware expense related to a new customer engagement, and the ~~prior period due primarily to recognition~~timing of ~~Solutions revenue~~deferral of ~~$3.3~~contract costs, and (ii) a $1.6 million increase in cloud-delivery related costs and depreciation expense of test equipment, partially offset by (i) a $0.4 million decrease in personnel-related costs, and (ii) a $0.7 million decrease in travel expenses resulting from ~~a customer contract amendment during~~reduced business travel in the first ~~quarter~~half of ~~fiscal year 2019, without which our gross~~2020 due to the global COVID-19 pandemic.

•

Gross margin ~~would be approximately 3.5% lower, and a reduction in headcount primarily related~~was 59%, compared to ~~our yield ramp business, which is a cost of revenues. Cost of solutions decreased~~62% 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.2019.

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●•

Net loss was ~~$3.4~~$4.2 million, compared to ~~a net loss of $2.5~~$3.4 million for the ~~year-ago period.~~six months ended June 30, 2019. The increase in net loss was primarily attributable to ~~10% lower~~a $1.7 million increase in costs of revenues, a $2.6 million increase in operating expenses as we continued to make investments in research and development sales and marketing activities, and a $0.3 million increase in interest and other expense (income), net, partially offset by ~~(i)~~ a ~~$3.7~~$1.5 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~~revenues and ~~legal fees, facilities and depreciation and amortization expenses, and (ii)~~ a ~~higher~~$2.2 million increase in income 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.~~benefit.

●	Net loss per basic and diluted share was $(0.10) for the six months ended June 30, 2019, compared to net loss per basic and diluted share of $(0.08), for the six months ended June 30, 2018, an increase of $0.02 per basic and diluted share.

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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, ~~2018.~~2019.

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

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

General

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

Revenue Recognition

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

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

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

Revenue from standalone Exensio Software is recognized depending on whether the license is perpetual or time-based. Perpetual (one-time charge) license software is recognized at ~~a point in~~the time atof the inception of the arrangement when control transfers to the ~~client,~~customers, if the software license is distinct from the services offered by us. Revenue from post-contract support ~~subscription~~ is recognized over the contract term on a straight-line basis, because we are providing ~~a service of standing ready to provide~~(i) support ~~when-and-if needed,~~ and ~~is providing~~(ii) unspecified software ~~upgrades~~updates on a when-and-if available basis over the contract term. Revenue from ~~time-based license~~time-based-licensed software is allocated to each performance obligation and is recognized either at a point in time or over ~~time.~~time as follows. The license component is recognized at ~~a point in~~the time ~~at the delivery of the software license,~~when control transfers to customers, with the post-contract support ~~subscription~~ component ~~being~~ recognized ratably over ~~for~~ the committed term of the contract. For contracts with any combination of licenses, support, and other services, distinct performance obligations are accounted for separately. For contracts with multiple performance obligations, we allocate the transaction price of the contract to each performance obligation on a relative basis using standalone selling price (or SSP) attributed to each performance obligation.

Revenue from ~~software hosting or~~Exensio SaaS arrangements, ~~that~~which allow for the use of a ~~hosted~~cloud-based software product or service over a contractually determined period of time without taking possession of software, ~~are~~is accounted for as subscriptions and is recognized as revenue ratably, on a straight-line basis, over the ~~coverage~~subscription period beginning on the date the service is first made available to customers.

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~~We also license our~~

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

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

Integrated Yield Ramp Revenue

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

Revenue under these project–based contracts, which are delivered over a specific period of time typically for a fixed fee component paid on a set schedule, is recognized as services are performed using a percentage of completion. Similar to the services provided in connection with CV systems that are contributing to Analytics revenue, due to the nature of the work performed in these arrangements, the estimation of ~~costs or hours at~~percentage of completion method is complex and subject to many variables and requires significant judgment. Key factors reviewed by us to estimate costs to complete each contract are future labor and product costs and expected productivity efficiencies. If circumstances arise that change the original estimates of revenues, costs, or extent of progress toward completion, revisions to the estimates are made. These revisions may result in increases or decreases in estimated revenues or costs. Losses on fixed-price solution implementation contracts are recognized in the period when they become probable. Revisions in profit estimates are reflected in the period in which the conditions that require ~~the revisions become known and can be estimated (the cumulative catch-up method).~~significant judgement.

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

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

Income Taxes

We are required to assess whether it is "more-likely-than-not" that we will realize our deferred tax assets. If we believe that they are not likely to be fully realizable before the expiration dates applicable to such assets, then to the extent we believe that recovery is not likely, we must establish a valuation allowance. The ~~Company's provision for income~~valuation allowance was approximately $11.2 million and $10.5 million as of June 30, 2020 and December 31, 2019 respectively, which was related to California R&D tax ~~comprises its current tax liability~~credits and California net operating losses (NOLs) related to an acquisition that we currently do not believe to be “more-likely-than-not” to be ultimately realized. If we conclude at a future financial reporting period that there has been a change in our ability to realize our California R&D credit and net operating loss carry forward deferred tax assets, and ~~liabilities. Deferred tax assets and liabilities are recognized for the expected tax consequences of temporary differences between~~it is at such time “more-likely-than-not” that we will realize the tax ~~bases of assets and liabilities. The measurement of current and~~credits before applicable expiration dates, our tax provision will decrease in the period in which we make such determination.

We evaluate our deferred tax assets for realizability considering both positive and ~~liabilities is~~negative evidence, including our historical financial performance, projections of future taxable income, future reversals of existing taxable temporary differences, tax planning strategies and any carryback availability. In evaluating the need for a valuation allowance, we estimate future taxable income based on ~~provisions of enacted tax laws; the effect of future~~management approved business plans. This process involves significant management judgment about assumptions that are subject to change from period to period based on changes in tax laws or ~~rates is not factored in. Valuation allowances are provided to reduce~~variances between future projected operating performance and actual results. Changes in the net deferred tax assets, ~~to an amount that~~less offsetting valuation allowance, in ~~management’s judgment is more likely than not to be recoverable against future taxable income. No U.S. taxes~~a period are ~~provided~~recorded through the income tax provision and could have a material impact on ~~earnings~~the Condensed Consolidated Statements of ~~non-U.S. subsidiaries, to the extent such earnings are deemed to be permanently invested. The Company's~~Comprehensive Loss.

Our income tax calculations are based on application of ~~the respective~~applicable U.S. federal, state, or foreign tax ~~laws. The Company’s~~law. Our tax filings, however, are subject to audit by the respective tax authorities. Accordingly, ~~the Company recognizes~~we recognize tax liabilities based upon ~~its~~our estimate of whether, and the extent to which, additional taxes will be due when such estimates are more-likely-than-not to be sustained. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. To the extent the final tax liabilities are different ~~from~~than the amounts originally accrued, the increases or decreases are recorded as income tax expense or benefit in the ~~condensed consolidated statements~~Condensed Consolidated Statements of Comprehensive Loss. At June 30, 2020, no deferred taxes have been provided on undistributed earnings from our international subsidiaries. We intend to reinvest the earnings of its non-U.S. subsidiaries in those operations indefinitely. As such, we have not provided for any foreign withholding taxes on the earnings of foreign subsidiaries as of June 30, 2020. The earnings of our foreign subsidiaries are taxable in the U.S. in the year earned under the Global Intangible Low-Taxed Income rules implemented under 2017 Tax Cuts and ~~comprehensive loss.~~ Jobs Act.

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On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted. The CARES Act includes, among other things, refundable payroll tax credits, deferment of some employer FICA taxes, allowance of net operating loss carrybacks for up to five years, alternative minimum tax credit refunds, and technical amendments regarding the income tax depreciation of qualified improvement property placed in service after December 31, 2017. The removal of certain limitations on the utilization of NOLs resulted in our recognition of an income tax benefit of $2.2 million from the carryback of federal NOLs during the six months ended June 30, 2020.

Valuation of Long-lived Assets including Goodwill and Intangible Assets

We record goodwill when the purchase consideration of an acquisition exceeds the fair value of the net tangible and identified intangible assets as of the date of acquisition. We have one operating segment and one operating unit. We perform an annual impairment assessment of goodwill during the fourth quarter of each calendar year or more frequently, if required to determine if any events or circumstances exist, such as an adverse change in business climate or a decline in the overall industry demand, that would indicate that it would more likely than not reduce the fair value of a reporting unit below its carrying amount, including goodwill. If events or circumstances do not indicate that the fair value of a reporting unit is below its carrying amount, then goodwill is not considered to be impaired and no further testing is required. If the carrying amount exceeds its fair value, an impairment loss would be recognized equal to the amount of excess, limited to the amount of total goodwill. There was no goodwill impairment for the three and six months ended June 30, 2020.

Our long-lived assets, excluding goodwill, consist of property and equipment and intangible assets. We periodically review our long-lived assets for impairment. For assets to be held and used, we initiate our review whenever events or changes in circumstances indicate that the carrying amount of a long-lived asset group may not be recoverable. Recoverability of an asset group is measured by comparison of its carrying amount to the expected future undiscounted cash flows that the asset group is expected to generate. If it is determined that an asset group is not recoverable, an impairment loss is recorded in the amount by which the carrying amount of the asset group exceeds its fair value. There was no impairment of long-lived assets for the three and six months ended June 30, 2020.

Recent Accounting Pronouncements and Accounting Changes

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.~~Condensed Consolidated Financial Statements.

Results of Operations

Income Statement Presentation

In the fourth quarter of 2019, in order to enhance the transparency of our revenue reporting, we updated our Condensed Consolidated Statements of Comprehensive Loss to change our historical presentation of revenue categories. Previously, we presented revenue on two lines: Solutions and Gainshare performance incentives. Included within Solutions, was revenue from software and related revenue, SaaS solutions, DFI licenses, and fixed-price project-based solution implementation services. The previous Gainshare performance incentive category included only revenue from performance incentive programs. We now present revenue in the following categories: Analytics and Integrated Yield Ramp. Integrated Yield Ramp revenue is comprised of all revenue from our Integrated Yield Ramp services engagements that include performance incentives based on customers’ yield achievement, i.e. both fixed-fees and Gainshare royalty from such engagements. Analytics comprises all other revenue, including from our licenses and services for Exensio Software, Exensio SaaS, DFI and CV systems that do not include performance incentives based on customers’ yield achievement.

Table of Contents

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

	For the Three Months Ended June 30, 2019							For the Six Months Ended June 30, 2019
			Change in							Change in
	Previously		Presentation			Current		Previously		Presentation			Current
	Reported		Reclassification			Presentation		Reported		Reclassification			Presentation
Revenues:
Solutions	$	13,429	$	(13,429	)		N/A	$	30,090	$	(30,090	)		N/A
Gainshare performance incentives		7,139		(7,139	)		N/A		11,019		(11,019	)		N/A
Analytics		N/A		11,974		$	11,974		N/A		23,408		$	23,408
Integrated Yield Ramp		N/A		8,594			8,594		N/A		17,701			17,701
Total revenues	$	20,568	$	—		$	20,568	$	41,109	$	—		$	41,109

Since certain costs of revenues are attributed to both Analytics and Integrated Yield Ramp revenue categories, we believe it is more appropriate and meaningful to present the Condensed Consolidated Statements of Comprehensive Loss under a one-step presentation format that excludes any measure of gross margin. In the fourth quarter of 2019, we elected to change our Condensed Consolidated Statements of Comprehensive Loss presentation from a two-step presentation, where total costs of revenues was deducted from total revenues to report a gross profit line, to a one-step presentation, where total costs and expenses are deducted from total revenues. The change in presentation does not change previously presented amounts for costs of revenues, operating expenses and other expenses (income), or loss before income taxes.

Discussion of Financial Data for the Three and Six Months Ended June 30, ~~2019~~2020 and ~~2018~~2019

Revenues, Costs of Revenues, and Gross Margin

	Three Months Ended June 30,						Change						Six Months Ended June 30,						Change
	2020			2019			$			%			2020			2019			$			%
(Dollars in thousands)
Revenues:
Analytics	$	15,172		$	11,974		$	3,198			27	%	$	28,420		$	23,408		$	5,012			21	%
Integrated Yield Ramp		6,237			8,594			(2,357	)		(27	)%		14,147			17,701			(3,554	)		(20	)%
Total revenues	$	21,409		$	20,568		$	841			4	%	$	42,567		$	41,109		$	1,458			4	%
Costs of revenues		8,946			7,832			1,114			14	%		17,433			15,700			1,733			11	%
Gross profit	$	12,463		$	12,736		$	(273	)		(2	)%	$	25,134		$	25,409		$	(275	)		(1	)%
Gross margin		58	%		62	%								59	%		62	%

Analytics revenue as a percentage of total revenues		71	%		58	%								67	%		57	%
Integrated Yield Ramp revenue as a percentage of total revenues		29	%		42	%								33	%		43	%

Analytics Revenue

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
%

~~Solutions~~Analytics 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. Solutions revenue decreased $1.8 million and $3.4increased $3.2 million for the three months ended June 30, 2020, compared to the three months ended June 30, 2019. The increase in Analytics revenue was primarily driven by $4.1 million increase in CV services due to higher hours worked across multiple contracts and customers, partially offset by the expiration of an Exensio contract for a customer that ceased 7nm production in 2019.

Analytics revenue increased $5.0 million for the six months ended June 30, ~~2019,~~2020, compared to the ~~year-ago periods,~~six months ended June 30, 2019. The increase in Analytics revenue was primarily driven by $6.2 million increase in CV services and Exensio licenses and services, partially offset by the expiration of an Exensio contract for a customer that ceased 7nm production in 2019 and decrease in DFI revenue.

Table of Contents

Integrated Yield Ramp Revenue

Integrated Yield Ramp revenue decreased $2.4 million for the three months ended June 30, 2020, compared to the three months ended June 30, 2019, due primarily to ~~the~~a $1.2 million decrease in ~~the~~ revenue from ~~our yield ramp solutions resulting~~services from lower hours worked across multiple contracts and customers, ~~which was~~and a $1.2 million decrease in Gainshare royalty from the 14nm and 28nm technology nodes. Integrated Yield Ramp revenue decreased $3.6 million for the six months ended June 30, 2020, compared to the six months ended June 30, 2019, due primarily to a $1.2 million decrease in revenue from lower hours worked across multiple contracts and customers, and a $3.3 million in nonrecurring revenue from a customer contract amendment recognized in the first quarter of 2019, 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~~a $1.0 million ~~associated with one customer~~increase in ~~China~~Gainshare royalty from the 14nm technology nodes. Our Integrated Yield Ramp revenue may continue to fluctuate from period to period primarily due to the contribution of Gainshare royalty, which is dependent on many factors that ~~is significantly delinquent in payments,~~are outside our control, including among others, continued production of ICs by our customers at facilities at which ~~revenue~~ we ~~expect~~generate Gainshare, sustained yield improvements by our customers, and our ability to ~~recognize in the future when it is more than likely that such payments will be made in the near term.~~ enter into new contracts containing Gainshare.

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

~~Gainshare performance incentives~~Costs of Revenues

Costs of revenues ~~represent royalties~~consist of costs incurred to provide and ~~performance incentives earned contingent upon~~support our services, costs recognized in connection with licensing our software, and amortization of acquired technology. Services costs consist of material, employee compensation and related benefits, overhead costs, travel and allocated facilities-related costs. Software license costs consist of costs associated with licensing third-party software used by us in providing services to our customers ~~reaching certain defined operational levels. Revenue derived from Gainshare performance incentives increased by $1.3~~in solution engagements, or sold in conjunction with our software products.

The increase in costs of revenues of $1.1 million for the three months ended June 30, ~~2019,~~2020, compared to the ~~year-ago period,~~three months ended June 30, 2019, was primarily due ~~primarily~~ to ~~higher Gainshare performance incentives~~(i) a $0.7 million increase in direct costs due mainly to the timing of deferral of contract costs, and (ii) a $0.8 million increase in cloud-delivery related costs and depreciation expense of test equipment, partially offset by a $0.5 million decrease in travel expenses resulting from reduced business travel in the second quarter of 2020 due to the global COVID-19 pandemic.

The increase in costs of revenues ~~from 14nm technology node. Revenue derived from Gainshare performance incentives decreased by $1.4~~of $1.7 million ~~for~~the six months ended June 30, 2020, compared to the six months ended June 30, 2019, ~~compared~~was primarily due to (i) a $1.3 million increase in direct costs related to third-party software royalty and licenses expense, equipment and hardware expense related to a new customer engagement, and lower deferral of contract costs, and (ii) a $1.6 million increase in cloud-delivery related costs and depreciation expense of test equipment, partially offset by (i) a $0.4 million decrease in personnel-related costs, and (ii) a $0.7 million decrease in travel expenses resulting from reduced business travel in the first half of 2020 due to the year-ago period, due primarily to lower Gainshare performance incentives revenues from 28nm technology node during the 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 solutions contracts containing Gainshare performance incentives. global COVID-19 pandemic.

Gross Margin

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
%

~~Table of Contents~~

Gross margin ~~increased~~ for the three months ended June 30, ~~2019~~2020 was 58% compared to 62% for the year-ago period, ~~due primarily to an increase~~or a decrease of 4%. The decrease 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~~gross margin during the three months ended June 30, ~~2019, compared to the year-ago period,~~2020 was primarily due to ~~(i) a $2.2 million decrease~~an increase in ~~personnel-related cost driven by lower headcount~~cloud-delivery service costs, depreciation expense related to our test equipment and ~~lower chargeable hours incurred across multiple contracts~~increases in certain third-party royalty 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. licensing costs.

Gross margin ~~increased~~ for the six months ended June 30, ~~2019~~2020 was 59% compared to 62% for the year-ago period, or a decrease of 3%. The higher gross margin during the first half of 2019 was primarily due ~~primarily~~ to ~~recognition of Solutions revenue of~~ $3.3 million in nonrecurring revenue from a customer contract amendment, partially offset by an overall increase in Analytics revenue during the first ~~quarter~~half of ~~fiscal year 2019, without~~2020, which ~~our gross margin would be approximately 3.5%~~revenue is comprised of software and term-based licenses that include lower ~~and reduction in headcount primarily related~~direct costs of revenues to ~~our yield ramp business, which is a cost~~deliver than IYR offerings.

Table 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 lesser 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 incentivesContents

Operating Expenses:

Research and Development

	Three Months Ended June 30,						Change					Six Months Ended June 30,						Change					Three Months Ended June 30,						Change					Six Months Ended June 30,						Change
(Dollars in thousands)	2019			2018			$		%			2019			2018			$		%			2020			2019			$		%			2020			2019			$		%
Research and development	$	7,312		$	7,100		$	212		3	%	$	15,558		$	14,345		$	1,213		8	%	$	7,754		$	7,312		$	442		6	%	$	16,344		$	15,558		$	786		5	%
Research and development as a percentage of total revenues		36	%		34	%							38	%		31	%
As a percentage of total revenues																								36	%		36	%							38	%		38	%

Research and development expenses consist primarily of personnel-related costs to support product development activities, including compensation and benefits, outside development services, travel, facilities cost allocations, and stock-based compensation charges.

Research and development expenses ~~slightly~~ increased for the three months ended June 30, ~~2019,~~2020, compared to the year-ago period, primarily due to (i) a $0.2 million increase in personnel-related costs, (ii) a $0.2 million increase in depreciation expense, (iii) a $0.1 million increase in ~~personnel-related cost driven primarily by salary expenses~~cloud-services related ~~to our annual merit performance program,~~costs, and ~~higher payroll expenses charged due to the shifting of more resources from our yield ramp business to research and development activities, and (ii)~~(iv) a ~~$0.3~~$0.1 million increase in ~~facilities~~software licenses and ~~other expenses. These increases in research and development~~maintenance expense, ~~were~~ partially offset by a $0.2 million decrease in ~~subcontractor expenses that is primarily related to our DFI and Exensio solutions.~~travel expenses.

Research and development expenses increased for the six months ended June 30, ~~2019,~~2020, compared to the year-ago period, primarily due ~~primarily~~ to (i) a ~~$1.4~~$0.4 million increase in ~~personnel-related~~depreciation expense, driven by an increase in stock based compensation expense of $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 related to our worldwide merit increases, and (ii) a ~~$0.3~~$0.2 million increase in ~~facilities expense. These increases in research and development expense were partially offset by~~cloud-services related costs, (iii) a ~~$0.6~~$0.2 million ~~decrease~~increase in subcontractor expenses that is primarily related to our DFI and Exensio ~~solutions.~~solutions, and (iv) a $0.2 million increase in software licenses and maintenance expense, partially offset by a $0.2 million decrease in travel expenses.

We anticipate our expenses in research and development will fluctuate in absolute dollars from period to period ~~as a result of cost control initiatives and~~due to the timing of product development ~~projects and revenue generating activity requirements.~~projects.

~~Table of Contents~~

Selling, General and Administrative

	Three Months Ended June 30,						Change					Six Months Ended June 30,						Change					Three Months Ended June 30,						Change					Six Months Ended June 30,						Change
(Dollars in thousands)	2019			2018			$		%			2019			2018			$		%			2020			2019			$		%			2020			2019			$		%
Selling, general and administrative	$	6,940		$	5,919		$	1,021		17	%	$	13,950		$	12,294		$	1,656		13	%	$	7,737		$	6,940		$	797		11	%	$	15,632		$	13,950		$	1,682		12	%
Selling, general and administrative as a percentage of total revenues		34	%		28	%							34	%		27	%
As a percentage of total revenues																								36	%		34	%							37	%		34	%

Selling, general and administrative expenses consist primarily of compensation and benefits for sales, marketing and general and administrative personnel, legal and accounting services, marketing communications, travel and facilities cost allocations, and stock-based compensation charges.

Selling, general and administrative expenses increased for the three months ended June 30, ~~2019,~~2020, compared to the year-ago period, primarily due to (i) a ~~$0.9~~$0.5 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,legal fees, (ii) a $0.4 million increase in ~~legal expense due primarily to~~subcontractor expenses, (iii) a ~~business acquisition,~~$0.2 million write-down in carrying value of property and ~~(iii) $0.2~~equipment, and (iv) a $0.1 million increase in ~~facilities and depreciation and amortization expense. These increases in selling, general and administrative expenses were~~cloud-services related costs, partially offset by a $0.2 million decrease in ~~professional fees due to lower audit fees,~~personnel-related costs, and a $0.2 million decrease in travel ~~expenses resulting from our cost management effort, and a $0.1 million decrease in operating lease expense.~~expenses.

Selling, general and administrative expenses increased for the six months ended June 30, ~~2019,~~2020, compared to the year-ago period, primarily due to (i) a ~~$1.6~~$0.8 million increase in ~~personnel-related expenses driven by higher payroll expenses allocated to selling and marketing activities as~~legal fees, (ii) a ~~result of the shifting of resources from our yield ramp business, a provision for discretionary employee bonuses for fiscal year 2019 and~~$0.7 million increase in ~~accrued vacation benefits, partially offset by a decrease in stock-based compensation, (ii)~~subcontractor expenses, (iii) a $0.3 million increase in ~~legal expense due primarily related to a business acquisition, (iii)~~personnel-related costs, (iv) a $0.2 million increase in ~~recruiting expense,~~cloud-services related costs, and ~~(iv)~~(v) a ~~$0.3~~$0.2 million increase ~~in facilities and depreciation and amortization expense. These increases in selling, general and administrative expenses were~~from a write-down of equipment, partially offset by a ~~$0.4 million decrease in professional fees due to lower audit fees, a $0.2~~$0.3 million decrease in travel expenses, ~~resulting from our cost management effort,~~ and a $0.2 million decrease in ~~operating lease expense.~~depreciation and maintenance expenses.

We anticipate our selling, general and administrative expenses will fluctuate in absolute dollars from period to period as a result of cost control initiatives and to support our selling efforts in the future.

Table of Contents

Amortization of Other Acquired Intangible Assets

	Three Months Ended June 30,				Change					Six Months Ended June 30,				Change					Three Months Ended June 30,				Change					Six Months Ended June 30,				Change
(Dollars in thousands)	2019		2018		$		%			2019		2018		$		%			2020		2019		$		%			2020		2019		$		%
Amortization of other acquired intangible assets	$	154	$	108	$	46		43	%	$	262	$	217	$	45		21	%	$	174	$	154	$	20		13	%	$	347	$	262	$	85		32	%

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

~~Table of Contents~~

Interest and Other ~~Income (Expense)~~Expense (Income), Net

	Three Months Ended June 30,				Change						Six Months Ended June 30,				Change					Three Months Ended June 30,					Change					Six Months Ended June 30,					Change
(Dollars in thousands)	2019		2018		$			%			2019		2018		$		%			2020		2019			$		%			2020		2019			$		%
Interest and other income (expense), net	$	111	$	390	$	(279	)		(72	)%	$	105	$	59	$	46		78	%
Interest and other expense (income), net																				$	150	$	(111	)	$	261		235	%	$	170	$	(105	)	$	275		262	%

Interest and other ~~income (expense)~~expense (income), net, primarily consists of interest income, gains and losses from foreign currency forward contracts, and foreign currency transaction exchange ~~gain (loss).~~ gains and losses.

Interest and other ~~income (expense)~~expense (income), net ~~decreased~~increased for the three months ended June 30, ~~2019,~~2020, compared to the year-ago period, primarily due to a decrease in interest income due to lower interest rates, and higher net unfavorable fluctuations in foreign exchange rates.

Interest and other ~~income (expense)~~expense (income), net ~~slightly~~ increased for the six months ended June 30, ~~2019,~~2020, compared to the year-ago period, primarily due to ~~increase~~a decrease in interest income ~~and decrease in other charges.~~due to lower interest rates.

Income Tax ~~Benefit~~Expense (Benefit)

	Three Months Ended June 30,						Change					Six Months Ended June 30,						Change					Three Months Ended June 30,					Change					Six Months Ended June 30,						Change
(Dollars in thousands)	2019			2018			$		%			2019			2018			$		%			2020		2019			$		%			2020			2019			$			%
Income tax benefit	$	(849	)	$	(439	)	$	410		93	%	$	(947	)	$	(820	)	$	127		15	%
Income tax expense (benefit)																							$	300	$	(849	)	$	1,149		135	%	$	(3,179	)	$	(947	)	$	(2,232	)		236	%

Income tax expense increased for the three months ended June 30, 2020, compared to the year-ago period, primarily due to the results of changes in the excess tax benefit from employee stock compensation expense and the tax benefit from forecasted operating losses.

Income tax benefit increased for the ~~three and~~ six months ended June 30, ~~2019,~~2020, compared to the year-ago ~~periods,~~period, primarily due ~~to the changes~~favorable increase in ~~forecasted income/loss between fiscal year 2019 and 2018, and higher~~ excess tax ~~benefit for~~benefits related to employee stock compensation ~~compared~~expense and as a result of the provisions of the CARES Act. During the six months ended June 30, 2020, we recorded an income tax benefit of $2.2 million from the carryback of federal NOLs pursuant to the ~~year-ago periods.~~provisions of the CARES Act.

Liquidity and Capital Resources

As of June 30, ~~2019,~~2020, our working capital, defined as total current assets less total current liabilities, was ~~$126.7~~$118.9 million, compared to ~~$137.7~~$119.6 million as of December 31, ~~2018.~~2019. Cash and cash equivalents were ~~$86.8~~$103.4 million as of June 30, ~~2019,~~2020, compared to ~~$96.1~~$97.6 million as of December 31, ~~2018.~~2019. As of June 30, ~~2019,~~2020, and December 31, ~~2018,~~2019, cash and cash equivalents held by our foreign subsidiaries were ~~$5.3~~$2.2 million and ~~$4.1~~$3.8 million, respectively. We believe that our existing cash resources and anticipated funds from operations will satisfy our cash requirements to fund our operating activities, capital expenditures, and other obligations for at least the next twelve months.

Six Months Ended
June 30,

2019

2018

$ Change

(In thousands)

Net cash flows provided by (used in):

Operating activities
$ 4,966 $ 9,719 $ (4,753
)
Investing activities
(6,664
)
(4,810
)
(1,854
)
Financing activities
(7,556
)
(5,201
)
(2,355
)
Effect of exchange rate changes on cash and cash equivalents
(18
)
(59
)
41
Net decrease in cash and cash equivalents
$ (9,272
)
$ (351
)
$ (8,921
)

There has been no significant impact in respect to Liquidity and Capital Resources from the global COVID-19 pandemic. For risk discussion about the potential impact of global COVID-19 pandemic on our operations or demand for our products, refer to Item 1A, Risk Factors on Part II of this Report.

Table of Contents

Cash Flow Data

	Six Months Ended June 30,
	2020			2019			$ Change
(In thousands)
Net cash flows provided by (used in):
Operating activities	$	10,630		$	4,966		$	5,664
Investing activities		(3,940	)		(6,664	)		2,724
Financing activities		(839	)		(7,556	)		6,717
Effect of exchange rate changes on cash and cash equivalents		(15	)		(18	)		3
Net increase (decrease) in cash and cash equivalents	$	5,836		$	(9,272	)	$	15,108

Net Cash Flows Provided by Operating Activities

Cash flow from operating activities during the six months ended June 30, ~~2019~~2020 mostly consisted of net loss, adjusted for certain non-cash items which primarily consisted of depreciation and amortization, share-based compensation expense and deferred tax assets. The ~~$4.8~~$5.7 million ~~decrease~~increase in cash flows from operating activities for the six months ended June 30, ~~2019,~~2020, compared to the year-ago period, was driven primarily by ~~(i)~~ a ~~$0.9~~$7.1 million increase in net change from operating assets and liabilities, which was offset by a $0.8 million increase in net loss, ~~(ii)~~and a $0.6 million decrease in non-cash adjustments to net loss, ~~by $0.1 million~~which was primarily due to (i) an increase in deferred tax assets of $2.0 million, (ii) an increase in depreciation and amortization of $0.7 million, and (iii) an increase in ~~stock-based~~share-based compensation expense of $0.4 ~~million, and (iii) a $3.8 million decrease in net change from operating assets and liabilities.~~ million.

The major contributors to the net change in operating assets and liabilities for the six months ended June 30, ~~2019~~2020 were as follows:

●

Accounts receivable, net, decreased by $12.0 million, primarily due to increased ~~by $0.8 million for~~collections and lower contractual invoicing activity during the six months ended 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 in the year ago period. Our daysfirst half of sales outstanding, or DSO, increased from 135 days at December 31, 2018 to 172 days at June 30, 2019, and 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 are being resolved. Accounts receivable balances from these customers when combined represent 67 days of DSO.2020.


	●	~~Deferred revenue~~Other noncurrent assets increased by ~~$1.2~~$1.6 million, primarily due to a decrease in the noncurrent portion of unbilled receivables due to the timing of billing and revenue recognition.

	●	Accounts payable decreased by $4.0 million primarily due to the timing of payments of invoices and payment of an invoice for a multi-year licensing and distribution agreement related to our Exensio software.

	●	Deferred revenues and billings in excess of recognized revenues decreased by a total of $1.7 million primarily due to timing of billing and revenue recognition.

~~Net~~ Cash Flows Used in Investing Activities

~~Net cash~~Cash used in investing activities ~~increased~~decreased by $2.7 million for the six months ended June 30, ~~2019~~2020 compared to the year-ago period. For the six months ended June 30, 2020, cash used in investing activities primarily related to property and equipment purchased for our DFI solution, including construction of additional eProbe tools. For the six months ended June 30, 2019, cash flows used in investing activities related to (i) a ~~$4.1~~$4.0 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 six months ended June 30, 2018, cash flows used in investing activities related to property and equipment purchased for the development of our DFI solution.~~

Net Cash Flows Used in Financing Activities

Net cash used in financing activities ~~increased~~decreased by ~~$2.4~~$6.7 million for the six months ended June 30, ~~2019,~~2020 compared to the year-ago period. For the six months ended June 30, 2020, net cash used in financing activities primarily consisted of $2.3 million in cash payments for taxes related to net share settlement of equity awards, partially offset by $1.4 million of proceeds from our Employee Stock Purchase Plan and exercise of stock options. For the six months ended June 30, 2019, net cash used in financing activities primarily consisted of $7.7 million in cash used to repurchase shares of our common stock and $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 $1.4 million of proceeds from our Employee Stock Purchase Plan and exercise of stock options.

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Off-Balance Sheet Agreements

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

Contractual Obligations

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

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

	Payments Due by Period
	2020										2025
	(remaining										and
Contractual Obligations	six months)		2021		2022		2023		2024		thereafter		Total
Operating lease obligations⁽¹⁾	$	1,046	$	1,852	$	1,606	$	1,113	$	807	$	2,976	$	9,400
Purchase obligations⁽²⁾		7,651		3,300		719		369		321		321		12,681
Total⁽³⁾	$	8,697	$	5,152	$	2,325	$	1,482	$	1,128	$	3,297	$	22,081

	(1)	Refer to Note 54, Leases of ~~“Notes~~the Notes to Condensed Consolidated Financial Statements ~~(Unaudited)”~~ (Item 1 of Part I of this Report) ~~for further discussion.~~

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

	(3)	The contractual obligation table above excludes liabilities for uncertain tax positions of $3.0 million, which are not practicable to assign to any particular years, due to the inherent uncertainty of the tax positions. See Note 98 of “Notes to Condensed Consolidated Financial ~~Statements (Unaudited)” (Item 1 of Part I of this Report)~~Statements” for further discussion.

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 June 30, ~~2019,~~2020, we had cash and cash equivalents of ~~$86.8~~$103.4 million. Cash and cash equivalents consisted of cash and highly liquid money market instruments. We would not expect our operating results or cash flows to be affected to any significant degree by the effect of a sudden change in market interest on our portfolio. A hypothetical increase in market interest rates of 100 basis points from the market rates in effect at June 30, ~~2019,~~2020, would cause the fair value of these investments to decrease by an immaterial amount, which would not have significantly impacted our financial position or results of operations.

Foreign Currency and Exchange Risk. Certain of our payables for our international offices are denominated in the local currency, including the Euro, Yen and RMB. Therefore, a portion of our operating expenditures is subject to foreign currency risks. WeFrom time to time, we enter into foreign currency forward contracts to reduce the exposure to foreign currency exchange rate fluctuations on certain foreign currency denominated monetary assets and liabilities. We do not use foreign currency forward contracts for speculative or trading purposes. We record these forward contracts at fair value. The counterparty to these foreign currency forward contracts is a ~~large global~~ financial institution that we believe is creditworthy, and therefore, we believe the credit risk of counterparty non-performance is not significant. The change in fair value of these contracts is recorded into earnings as a component of other income (expense), net and offsets the change in fair value of foreign currency denominated monetary assets and liabilities, which is also recorded in other income (expense), net. As of June 30, ~~2019,~~2020, 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 $8.3 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.~~

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Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

Changes in Internal Control over Financial Reporting

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

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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 June 30, ~~2019.~~2020.

On May 6, 2020, we initiated an arbitration proceeding with the Hong Kong International Arbitration Center against SMIC New Technology Research & Development (Shanghai) Corporation (“SMIC”) due to SMIC’s failure to pay fees due to PDF under a series of contracts. We seek to recover the unpaid fees, a declaration requiring SMIC to pay fees under the contracts in the future, and costs associated with bringing the arbitration proceeding.

Item 1A. Risk Factors

Item 1A, “Risk Factors,” on pages 1312 through 1920 of the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2018,~~2019, provides information on the significant risks associated with our business. Except as set forth below, there have been no subsequent material changes to these risks.

We ~~have a limited number of customers with significant past due receivable balances,~~The COVID-19 pandemic has significantly affected how we and our ~~failure~~customers are operating our business and the duration and extent to ~~collect~~which this will impact our future results of operations and overall financial performance remains uncertain.

The COVID-19 pandemic has significantly affected how we and our customers are operating our business. For example, most U.S. states and countries worldwide have imposed and may continue to impose from time-to-time for the foreseeable future, restrictions on the physical movement of our employees, partners, and customers to limit the spread of COVID-19, including travel restrictions and shelter-in-place orders. As a ~~significant portion~~result, our Shanghai office was temporarily shut down and the restrictions limited the ability of ~~such balances~~our local employees to travel to customer sites or visit our other offices from January to April 2020. Our offices in Italy and Germany were closed in February 2020 and by March 2020, our corporate headquarters in the United States and several other impacted locations were temporarily closed as well. In addition, our personnel worldwide are subject to various country to country travel restrictions, which limit our ability to provide services to customers at their facilities. These impacts have disrupted our normal operations. If the COVID-19 pandemic has a substantial impact on our employees’ productivity, our results of operations and overall financial performance may be harmed.

Moreover, the conditions caused by the COVID-19 pandemic could adversely affect our ~~cash, require us~~customers’ ability or willingness to ~~write-off receivables~~purchase our products or ~~increase~~services, delay prospective customers’ purchasing decisions, adversely impact our ~~bad debt allowance,~~ability to provide or deliver products and ~~lose~~on-site services to our customers, delay the provisioning of our offerings, lengthen payment terms, reduce the value or duration of their subscriptions, or affect attrition rates, all of which could adversely affect our future ~~business with these customers.~~sales, operating results and overall financial performance.

~~We recognized revenue~~While the potential economic impact brought by the COVID-19 pandemic may be difficult to assess or predict, the pandemic has resulted in significant disruption of global financial markets and on June 8, 2020, the National Bureau of Economic Research announced that the U.S. was in a recession. A long-term recession or long-term market downturn resulting from ~~a limited number~~the spread of ~~customers~~COVID-19 could materially impact the value of our common stock, impact our access to capital and affect our business in ~~2017, 2018~~the near and ~~2019 for services~~long-term.

The duration 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 endextent of the ~~second quarter~~impact from the COVID-19 pandemic depends on future developments that cannot be accurately predicted at this time, such as the severity and transmission rate of ~~fiscal 2019 was 172 days. Two customers accounted for 56%~~the virus, the extent and effectiveness of ~~our gross accounts receivable as of December 31, 2018~~containment actions and 2017, and one customer accounted for 37% and 40% of our revenues 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 ~~financial ability~~impact of these and other factors on our employees, customers, partners and vendors. If we are not able to ~~pay~~respond to and ~~on-going services by PDF under valid contracts, customers may delay payments~~manage the impact of such events effectively, or ~~make claims regarding our performance~~if the macroeconomic conditions of the general economy continue to worsen or the ~~validity of~~industries in which we operate are negatively impacted over 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 be insufficient, and we may need to adjustlong-term, our ~~allowance for doubtful accounts from current estimates or write-off receivables depending on such claims in the future. Any adjustments could be material to our consolidated~~business, operating results, financial ~~statements~~condition and cash flows ~~and, if, contrary to our judgment, it is later determined that an allowance should have been recorded earlier, we may~~could be ~~required to restate prior periods. Moreover, if we are forced to pursue legal remedies to collect receivables, our business relationship and future business with these customers could suffer.~~

adversely affected.

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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 June 30, 2019 (in thousands except per share amounts):

~~ISSUER PURCHASES OF EQUITY SECURITIES~~

Period

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

Average
Price Paid
Per Share

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

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

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

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

None.

Item 5. Other Information

None.

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Item 6. Exhibits

Exhibit Number		Description

~~3.1~~10.1		~~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.~~

~~10.1~~		~~PDF Solutions, Inc.’s Fifth~~Sixth Amended and Restated 2011 Stock Incentive Plan ~~filed as~~(incorporated herein by reference to Appendix A to the Company’s Proxy Statement filed on April 30, 2019, and incorporated herein by reference.*registrant’s proxy statement dated May 8, 2020

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

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~~ 101		~~XBRL Instance Document.~~The following financial statements from the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2020, formatted in Inline XBRL: (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Comprehensive Loss, (iii) Condensed Consolidated Statements of Stockholders' Equity, (iv) Condensed Consolidated Statements of Cash Flows and (v) Notes to Condensed Consolidated Financial Statements, tagged as blocks of text and including detailed tags.†

~~101.SCH~~ 104		Cover Page Interactive Data File (formatted as Inline XBRL ~~Taxonomy Extension Schema Document.~~and contained in Exhibit 101).†

~~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.

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

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

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

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

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

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

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

	Page
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets	3
Condensed Consolidated Statements of ~~Operations and~~ Comprehensive Loss	4
Condensed Consolidated Statements of Stockholders’ Equity	5
Condensed Consolidated Statements of Cash Flows	67
Notes to Condensed Consolidated Financial Statements	78
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	2526
Item 3. Quantitative and Qualitative Disclosures About Market Risk	35 37
Item 4. Controls and Procedures	36 38
PART II OTHER INFORMATION
Item 1. Legal Proceedings	36 39
Item 1A. Risk Factors	36 39
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	37 40
Item 3. Defaults Upon Senior Securities	3740
Item 4. Mine Safety Disclosures	3740
Item 5. Other Information	3740
Item 6. Exhibits	3840
SIGNATURES	3941
INDEX TO EXHIBITS	38 40

							*June 30,*			*December 31,*
	June 30, 2019			December 31, 2018			*2020*			*2019*
ASSETS
Current assets:
Cash and cash equivalents	$	86,817		$	96,089		$	103,441		$	97,605
Accounts receivable, net of allowance for doubtful accounts of $332 in 2019 and 2018		52,381			51,570
Accounts receivable, net of allowance for doubtful accounts of $190 in 2020 and $213 in 2019								28,666			40,651
Prepaid expenses and other current assets		8,843			9,562			8,627			9,320
Total current assets		148,041			157,221			140,734			147,576
Property and equipment, net		35,846			35,681			40,412			40,798
Operating lease right-of-use assets, net		7,974			—			7,056			7,609
Goodwill		2,293			1,923			2,293			2,293
Intangible assets, net		6,855			5,064			5,586			6,221
Deferred tax assets		21,378			19,044
Deferred tax assets, net								29,522			25,327
Other non-current assets		7,284			6,972			8,093			9,720
Total assets	$	229,671		$	225,905		$	233,696		$	239,544
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	1,813		$	2,454		$	2,763		$	7,636
Accrued compensation and related benefits		5,158			4,727			5,285			5,072
Accrued and other current liabilities		2,404			3,235			1,368			1,665
Operating lease liabilities – current portion		1,875			—			1,880			1,867
Deferred revenues – current portion		9,026			8,477			10,087			10,639
Billings in excess of recognized revenues		1,088			635			497			1,117
Total current liabilities		21,364			19,528			21,880			27,996
Long-term income taxes payable		3,571			3,751			5,264			5,368
Non-current operating lease liabilities		8,107			—			7,033			7,677
Other non-current liabilities		1,737			2,831			1,814			2,346
Total liabilities		34,779			26,110			35,991			43,387
Commitments and contingencies (Note 13)
Commitments and contingencies (Note 12)
Stockholders’ equity:
Preferred stock, $0.00015 par value, 5,000 shares authorized, no shares issued and outstanding		—			—		$	—		$	—
Common stock, $0.00015 par value, 70,000 shares authorized: shares issued 41,326 and 40,677, respectively; shares outstanding 32,291 and 32,382, respectively		5			5
Common stock, $0.00015 par value, 70,000 shares authorized; shares issued 42,421 and 41,797, respectively; shares outstanding 32,982 and 32,503, respectively								5			5
Additional paid-in-capital		318,356			310,660			333,157			325,197
Treasury stock at cost, 9,035 and 8,295 shares, respectively		(88,324	)		(79,142	)
Treasury stock at cost, 9,439 and 9,294 shares, respectively								(93,968	)		(91,695	)
Accumulated deficit		(33,853	)		(30,452	)		(40,050	)		(35,870	)
Accumulated other comprehensive loss		(1,292	)		(1,276	)		(1,439	)		(1,480	)
Total stockholders’ equity		194,892			199,795			197,705			196,157
Total liabilities and stockholders’ equity	$	229,671		$	225,905		$	233,696		$	239,544

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

	For the Quarterly Period ended June 30,~~, 2019~~ 2020

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

	For the transition period from _______________ to ______________

	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018			*Three Months Ended June 30,*						*For the Six Months Ended June 30,*
													*2020*			*2019*			*2020*			*2019*
Revenues:
Solutions	$	13,429		$	15,266		$	30,090		$	33,456
Gainshare performance incentives		7,139			5,853			11,019			12,400
Analytics													$	15,172		$	11,974		$	28,420		$	23,408
Integrated Yield Ramp														6,237			8,594			14,147			17,701
Total revenues		20,568			21,119			41,109			45,856			21,409			20,568			42,567			41,109

Cost of Solutions
Direct costs of solutions		7,689			10,774			15,413			22,112
Amortization of acquired technology		143			143			287			287
Total cost of solutions		7,832			10,917			15,700			22,399
Gross profit		12,736			10,202			25,409			23,457

Operating expenses:
Costs and Expenses:
Costs of revenues														8,946			7,832			17,433			15,700
Research and development		7,312			7,100			15,558			14,345			7,754			7,312			16,344			15,558
Selling, general and administrative		6,940			5,919			13,950			12,294			7,737			6,940			15,632			13,950
Amortization of other acquired intangible assets		154			108			262			217			174			154			347			262
Restructuring charges		—			—			92			—			—			—			—			92
Total operating expenses		14,406			13,127			29,862			26,856
Interest and other expense (income), net														150			(111	)		170			(105	)
Loss before income taxes														(3,352	)		(1,559	)		(7,359	)		(4,348	)
Income tax expense (benefit)														300			(849	)		(3,179	)		(947	)
Net loss													$	(3,652	)	$	(710	)	$	(4,180	)	$	(3,401	)

Loss from operations		(1,670	)		(2,925	)		(4,453	)		(3,399	)
Interest and other income (expense), net		111			390			105			59
Loss before income taxes		(1,559	)		(2,535	)		(4,348	)		(3,340	)
Income tax benefit		(849	)		(439	)		(947	)		(820	)
Net loss	$	(710	)	$	(2,096	)	$	(3,401	)	$	(2,520	)
Other comprehensive income (loss):
Foreign currency translation adjustments, net of tax														207			36			41			(16	)
Comprehensive loss													$	(3,445	)	$	(674	)	$	(4,139	)	$	(3,417	)

Net loss per share:
Basic	$	(0.02	)	$	(0.07	)	$	(0.10	)	$	(0.08	)	$	(0.11	)	$	(0.02	)	$	(0.13	)	$	(0.10	)
Diluted	$	(0.02	)	$	(0.07	)	$	(0.10	)	$	(0.08	)	$	(0.11	)	$	(0.02	)	$	(0.13	)	$	(0.10	)

Weighted average common shares:
Basic		32,339			31,962			32,412			32,065			32,886			32,339			32,795			32,412
Diluted		32,339			31,962			32,412			32,065			32,886			32,339			32,795			32,412


Net loss	$	(710	)	$	(2,096	)	$	(3,401	)	$	(2,520	)
Other comprehensive income (loss):
Foreign currency translation adjustments, net of tax		36			(771	)		(16	)		(246	)
Comprehensive loss	$	(674	)	$	(2,867	)	$	(3,417	)	$	(2,766	)

	Six Months Ended June 30, 2019																					*Six Months Ended June 30, 2020*
																Accumulated																				*Accumulated*
						Additional										Other										*Additional*										*Other*			*Total*
	Common Stock					Paid-In		Treasury Stock					Accumulated			Comprehensive						*Common Stock*				*Paid-In*		*Treasury Stock*					*Accumulated*			*Comprehensive*			*Stockholders’*
	Shares			Amount		Capital		Shares		Amount			Deficit			Loss			Total			*Shares*		*Amount*		*Capital*		*Shares*		*Amount*			*Deficit*			*Loss*			*Equity*
Balances, December 31, 2018		32,382		$	5	$	310,660		8,295	$	(79,142	)	$	(30,452	)	$	(1,276	)	$	199,795
Balances, December 31, 2019																							32,503	$	5	$	325,197		9,294	$	(91,695	)	$	(35,870	)	$	(1,480	)	$	196,157
Issuance of common stock in connection with employee stock purchase plan		87			-		782		-		-			-			-			782			89		-		810		-		-			-			-			810
Issuance of common stock in connection with exercise of options		87			-		518		-		-			-			-			518			21		-		161		-		-			-			-			161
Vesting of restricted stock units		104			-		-		-		-			-			-			-			182		-		-		-		-			-			-			-
Purchases of treasury stock in connection with tax withholdings on restricted stock grants		-			-		-		54		(557	)		-			-			(557	)		-		-		-		93		(1,478	)		-			-			(1,478	)
Repurchases of common stock		(314	)		-		-		314		(3,917	)		-			-			(3,917	)
Stock-based compensation		-			-		3,469		-		-			-			-			3,469
Stock-based compensation expense																							-		-		3,513		-		-			-			-			3,513
Comprehensive loss		-			-		-		-		-			(2,691	)		(52	)		(2,743	)		-		-		-		-		-			(528	)		(166	)		(694	)
Balances, March 31, 2019		32,346			5		315,429		8,663		(83,616	)		(33,143	)		(1,328	)		197,347
Issuance of common stock in connection with employee stock purchase plan		-			-		-		-		-			-			-			-
Balances, March 31, 2020																							32,795		5		329,681		9,387		(93,173	)		(36,398	)		(1,646	)		198,469
Issuance of common stock in connection with exercise of options		69			-		326		-		-			-			-			326			56		-		463		-		-			-			-			463
Vesting of restricted stock units		176			-		-		-		-			-			-			-			131		-		-		-		-			-			-			-
Purchases of treasury stock in connection with tax withholdings on restricted stock grants		-			-		-		72		(918	)		-			-			(918	)		-		-		-		52		(795	)		-			-			(795	)
Repurchases of common stock		(300	)		-		-		300		(3,790	)		-			-			(3,790	)
Stock-based compensation		-			-		2,601		-		-			-			-			2,601
Stock-based compensation expense																							-		-		3,013		-		-			-			-			3,013
Comprehensive income (loss)		-			-		-		-		-			(710	)		36			(674	)		-		-		-		-		-			(3,652	)		207			(3,445	)
Balances, June 30, 2019		32,291	��	$	5	$	318,356		9,035	$	(88,324	)	$	(33,853	)	$	(1,292	)	$	194,892
Balances, June 30, 2020																							32,982	$	5	$	333,157		9,439	$	(93,968	)	$	(40,050	)	$	(1,439	)	$	197,705

	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

	(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

	June 30, 2019			December 31, 2018			*June 30,*			*December 31,*
Property and equipment, net:
							*2020*			*2019*
Computer equipment	$	10,660		$	10,536		$	10,997		$	10,880
Software		4,214			4,112			5,018			4,690
Furniture, fixtures and equipment		4,836			4,688			2,423			2,395
Leasehold improvements		5,996			5,474			6,129			6,095
Laboratory and other equipment								5,000			4,933
Test equipment		21,952			14,697			24,103			22,980
Construction-in-progress		14,262			20,293			19,490			18,245
		61,920			59,800			73,160			70,218
Less: accumulated depreciation and amortization		(26,074	)		(24,119	)		(32,748	)		(29,420	)
Total	$	35,846		$	35,681		$	40,412		$	40,798

																			*June 30, 2020*							*December 31, 2019*
																		*Amortization*	*Gross*					*Net*		*Gross*					*Net*
				June 30, 2019							December 31, 2018							*Period*	*Carrying*		*Accumulated*			*Carrying*		*Carrying*		*Accumulated*			*Carrying*
	Amortization Period (Years)			Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		*(Years)*	*Amount*		*Amortization*			*Amount*		*Amount*		*Amortization*			*Amount*
Acquired identifiable intangibles:
Customer relationships	1	‒	9	$	7,440	$	(4,712	)	$	2,728	$	6,740	$	(4,514	)	$	2,226	1 ‒ 9	$	7,440	$	(5,158	)	$	2,282	$	7,440	$	(4,935	)	$	2,505
Developed technology	4	‒	9		17,460		(13,723	)		3,737		15,820		(13,404	)		2,416	4 ‒ 9		17,460		(14,480	)		2,980		17,460		(14,101	)		3,359
Tradename	2	‒	7		790		(660	)		130		790		(648	)		142	2 ‒ 7		790		(686	)		104		790		(673	)		117
Patent	7	‒	10		1,800		(1,540	)		260		1,800		(1,520	)		280	7 ‒ 10		1,800		(1,580	)		220		1,800		(1,560	)		240
Total				$	27,490	$	(20,635	)	$	6,855	$	25,150	$	(20,086	)	$	5,064		$	27,490	$	(21,904	)	$	5,586	$	27,490	$	(21,269	)	$	6,221

Year ending December 31,	Amount
2019 (remaining six months)	$	634
2020		1,269
Year Ending December 31,			*Amount*
2020 (remaining six months)			$	634
2021		1,093		1,093
2022		886		886
2023		886		886
2024 and thereafter		2,087
2024				747
2025 and thereafter				1,340
Total future amortization expense	$	6,855	$	5,586

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

	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

						*Weighted*
				*Weighted*		*Average*
				*Average*		*Remaining*		*Aggregate*
	*Number of*			*Exercise*		*Contractual*		*Intrinsic*
	*Options*			*Price per*		*Term*		*Value*
	*(in thousands)*			*Share*		*(years)*		*(in thousands)*
Outstanding, January 1, 2020		745		$	10.64
Granted (weighted average fair value of $5.42 per share)		19		$	16.03
Exercised		(77	)	$	8.13
Canceled		(3	)	$	10.66
Expired		(10	)	$	10.06
Outstanding, June 30, 2020		674		$	11.09		4.38	$	5,743
Vested and expected to vest, June 30, 2020		663		$	11.04		4.30	$	5,673
Exercisable, June 30, 2020		518		$	10.36		3.12	$	4,794

	Shares (in thousands)			Weighted Average Grant Date Fair Value Per Share					*Weighted*
Nonvested, January 1, 2019		1,835		$	11.93
									*Average Grant*
						*Shares*			*Date Fair Value*
						*(in thousands)*			*Per Share*
Nonvested, January 1, 2020							1,887		$	12.30
Granted		162		$	12.28		307		$	15.60
Vested		(406	)	$	13.29		(457	)	$	13.04
Forfeited		(113	)	$	11.78		(48	)	$	13.80
Nonvested, June 30, 2019		1,478		$	11.61
Nonvested, June 30, 2020							1,689		$	12.66

Year Ending December 31,	*Amount(a)*
2020 (remaining six months)	$	1,046
2021		1,852
2022		1,606
2023		1,355
2024		1,071
2025 and thereafter		3,789
Total future minimum lease payments	$	10,719
Less: Interest(b)		(1,806	)
Present value of future minimum lease payments operating lease liabilities(c)	$	8,913

	⁽¹⁾(a)	As of June 30, ~~2019,~~ 2020, the total operating lease liability includes approximately $1.0 million related to an option to extend a lease term that is reasonably certain to be exercised.
	⁽²⁾(b)	Calculated using incremental borrowing interest rate for each lease.
	⁽³⁾(c)	Includes the current portion of operating lease liabilities of $1.9 million as of June 30, ~~2019.~~2020.

							Three Months Ended June 30,					Six Months Ended June 30,
	Three Months Ended June 30, 2019			Six Months Ended June 30, 2019			2020		2019			2020		2019
Beginning balance	$	91		$	244		$	—	$	91		$	—	$	244
Restructuring charges		—			92			—		—			—		92
Cash payments		(91	)		(336	)		—		(91	)		—		(336	)
Ending balance	$	—		$	—		$	—	$	—		$	—	$	—

	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

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