What changed in this filing

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Item 1. Financial Statements

2020-11-06 compared with 2020-08-06 · 467 added, 286 removed, 897 unchanged (46% of the section changed)

3 unchanged sentences

(in thousands, except par value)

September 30,

Current assets:

2 unchanged sentences

$ 97,605  

Short-term investments  

49,983  

Accounts receivable, net of allowance for doubtful accounts of $963 in 2020 and $213 in 2019

64 unchanged sentences

(in thousands, except per share amounts)

Three Months Ended June 30,

For the Six Months Ended June 30,

$ 15,172  

$ 11,974  

$ 28,420  

$ 23,408  

Three Months Ended September 30,

Nine Months Ended September 30,

Integrated Yield Ramp

14,147  

17,701  

Total revenues

21,409  

20,568  

42,567  

41,109  

Costs and Expenses:

Costs of revenues

17,433  

15,700  

Research and development

16,344  

15,558  

Selling, general and administrative

15,632  

13,950  

Amortization of other acquired intangible assets

1 unchanged sentence

Interest and other expense (income), net

( 111 )  

Loss before income taxes

( 3,352 )  

Income tax benefit

Other comprehensive income (loss):

Foreign currency translation adjustments, net of tax

Change in unrealized losses related to available-for-sale debt securities, net of tax

Total other comprehensive income (loss)

Comprehensive loss

Net loss per share:

Weighted average common shares:

 See accompanying Notes to Condensed Consolidated Financial Statements (unaudited)

PDF SOLUTIONS, INC.

CONDENDSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’

(in thousands)

Nine Months Ended September 30, 2020

Treasury Stock

Comprehensive

Stockholders’

Balances, December 31, 2019

32,503  

$ 325,197  

Income tax expense (benefit)

$ ( 91,695 )  

2 unchanged sentences

$ 196,157  

Issuance of common stock in connection with employee stock purchase plan

Issuance of common stock in connection with exercise of options

Vesting of restricted stock units

Purchases of treasury stock in connection with tax withholdings on restricted stock grants

( 1,478 )  

Other comprehensive income (loss):

Foreign currency translation adjustments, net of tax

Stock-based compensation expense

Comprehensive loss

1 unchanged sentence

( 166 )  

Balances, March 31, 2020

32,795  

Net loss per share:

329,681  

3 unchanged sentences

198,469  

Issuance of common stock in connection with exercise of options

Vesting of restricted stock units

Purchases of treasury stock in connection with tax withholdings on restricted stock grants

( 795 )  

Weighted average common shares:

Stock-based compensation expense

Comprehensive income (loss)

( 3,652 )  

Balances, June 30, 2020

32,982  

4 unchanged sentences

197,705  

Issuance of common stock, net of issuance costs of $0.1 million  

65,077  

 See accompanying Notes to Condensed Consolidated Financial Statements (unaudited)

PDF SOLUTIONS, INC.

CONDENDSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’

(in thousands)

Six Months Ended June 30, 2020

Treasury Stock

Comprehensive

Stockholders’

Balances, December 31, 2019

Issuance of common stock in connection with employee stock purchase plan

Issuance of common stock in connection with exercise of options

Vesting of restricted stock units

Purchases of treasury stock in connection with tax withholdings on restricted stock grants

Stock-based compensation expense

Comprehensive loss

Balances, March 31, 2020

65,077  

Issuance of common stock in connection with employee stock purchase plan  

Issuance of common stock in connection with exercise of options

1 unchanged sentence

Purchases of treasury stock in connection with tax withholdings on restricted stock grants

( 1,024 )  

Stock-based compensation expense

Comprehensive income (loss)

Balances, June 30, 2020

( 2,734 )  

Balances, September 30, 2020

36,626  

$ 403,450  

$ ( 94,992 )  

$ ( 42,784 )  

$ ( 902 )  

$ 264,777  

 See accompanying Notes to Condensed Consolidated Financial Statements (unaudited)

2 unchanged sentences

(in thousands)

Six Months Ended June 30, 2019

Nine Months Ended September 30, 2019

Treasury Stock

17 unchanged sentences

Balances, June 30, 2019

Issuance of common stock in connection with employee stock purchase plan

Issuance of common stock in connection with exercise of options

Vesting of restricted stock units

Purchases of treasury stock in connection with tax withholdings on restricted stock grants and exercise of options

Repurchases of common stock

Stock-based compensation expense

Comprehensive loss

Balances, September 30, 2019

See accompanying Notes to Condensed Consolidated Financial Statements (unaudited)

2 unchanged sentences

(in thousands)

For the Six Months Ended June 30,

Nine Months Ended September 30,

Cash flows from operating activities:

$ ( 6,914 )  

Adjustments to reconcile net loss to net cash provided by operating activities:

Depreciation and amortization

Stock-based compensation expense

1 unchanged sentence

Amortization of costs capitalized to obtain revenue contracts

Reversal of allowance for doubtful accounts

Adjustment to contingent consideration related to acquisition

Provision (reversal of allowance) for doubtful accounts and write-off of accounts receivable

( 50 )  

Loss on disposal and write-down in carrying value of property and equipment

Unrealized foreign currency (gain) loss

Unrealized gain on foreign currency forward contract

Accretion of discount on short-term investments  

Deferred taxes

( 5,309 )  

Changes in operating assets and liabilities:

Accounts receivable

16,946  

Prepaid expenses and other current assets

Operating lease right-of-use assets

Other non-current assets

Accounts payable

( 3,900 )  

Accrued compensation and related benefits

3 unchanged sentences

Operating lease liabilities

Net cash provided by operating activities

( 1,168 )  

Net cash provided by operating activities  

10,876  

23,011  

Cash flows from investing activities:

Purchases of short-term investments  

( 49,983 )  

Purchases of property and equipment

( 4,786 )  

Prepayment for the purchase of property and equipment  

( 579 )  

Payment for business acquisition

Cash used in investing activities

( 55,348 )  

Cash flows from financing activities:

Proceeds from issuance of common stock, net of issuance costs paid

64,995  

Proceeds from exercise of stock options

1 unchanged sentence

Payments for taxes related to net share settlement of equity awards

( 3,297 )  

Repurchases of common stock

Net cash used in financing activities

Repurchases of contingent consideration related to acquisition

Net cash provided by (used in) financing activities

65,202  

Effect of exchange rate changes on cash and cash equivalents

Net change in cash and cash equivalents

20,781  

Cash and cash equivalents, beginning of period

Cash and cash equivalents, end of period

97,605  

96,089  

Cash and cash equivalents, end of period  

$ 118,386  

$ 100,259  

Continued on next page.

PDF SOLUTIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED

(in thousands)

Nine Months Ended September 30,

Supplemental disclosure of cash flow information:

4 unchanged sentences

Property and equipment received and accrued in accounts payable and accrued and other liabilities

Advances for purchase of fixed assets transferred from prepaid assets to property and equipment

Operating lease liabilities arising from obtaining right-of-use assets

Issuance costs for common stock included in accounts payable and accrued and other liabilities

Common shares repurchased from a cashless exercise of stock options

See accompanying Notes to Condensed Consolidated Financial Statements (unaudited)

13 unchanged sentences

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.

Certain prior period amounts have been reclassified to conform to the current year presentation of reporting operating lease right-of-use assets, and operating lease liabilities on the Condensed Consolidated Statements of Cash Flows.

This reclassification had no effect on the Company’s reported net loss or net cash provided by operating activities.

Change in Presentation

10 unchanged sentences

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.

Software, Exensio SaaS, DFI™

and Characterization Vehicle (CV®) systems that do not include performance incentives based on customers’ yield achievement.

The change in presentation of revenue does not change the Company’s net revenues or total cost of net revenues.

The following table shows reclassified amounts to conform to the current period’s presentation (in thousands):

For the Three Months Ended June 30, 2019

For the Six Months Ended June 30, 2019

Three Months Ended September 30, 2019

Nine Months Ended September 30, 2019

Reclassification

40 unchanged sentences

Actual results could differ from those estimates and any such differences may be material to the financial statements.

Cash and Cash Equivalents and Short-term Investments 

The Company considers all highly liquid investments with an original maturity of 90  days or less or investments with a remaining maturity of 90  days or less at the time of purchase to be cash equivalents, and those investments with original maturities greater than 90 days and less than one year to be short-term investments.

The Company classifies securities with readily determinable market values as available-for-sale.

Short-term investments include available-for-sale securities and are carried at estimated fair value, with the unrealized gains and losses deemed temporary in nature, net of tax, reported as a component of accumulated other comprehensive loss in stockholders’

Realized gains and losses and declines in value determined to be other than temporary are based on the specific identification method and are included as a component of other expense, net in the Condensed Consolidated Statements of Operations and Comprehensive Loss.

The Company periodically reviews short-term investments for impairment.

In the event a decline in value is determined to be other-than-temporary, an impairment loss is recognized.

When determining if a decline in value is other-than-temporary, the Company takes into consideration the current market conditions, the duration and severity of and the reason for the decline, and the likelihood that it would need to sell the security prior to a recovery of par value.

September 30, 2020, short-term investments consisted solely of about $ 50.0 million of U.S. Treasury bills.

The cost of these securities approximated fair value and there was no material gross realized or unrealized gains or losses as of September 30, 2020.

December 31, 2019, the Company held 

no  short-term investments.

There were also no impairments in the investments’

value in the three and nine months ended September 30, 2020.

Refer to Note 12 “Fair Value Measurements”

for further discussion on the Company’s investments.

Recently Adopted Accounting Standards

20 unchanged sentences

There was no material impact on the Company’s condensed consolidated financial statements as a result of adoption of ASU 

 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. 

 As of September 30, 2020, the implementation costs capitalized by the Company pertaining to a cloud computing arrangement, which related to sales order and customer relation management, amounted to $ 0.2  million.

The capitalized implementation costs were included in other noncurrent assets on the Condensed Consolidated Balance Sheet and within the operating activities section of the Company’s Condensed Consolidated Statement of Cash Flows for the nine months ended September 30, 2020. 

When the module or component of the hosting arrangement is ready for its intended use, the Company expects to amortize the capitalized implementation costs over the respective noncancellable period of the arrangement plus the period covered by an option to extend the arrangement that is reasonably certain of being exercised.

There has been no amortization expense related these assets for the three and six months ended June 30, 2020. 

The amortization expense related to these assets for the three and nine months ended September 30, 2020 was immaterial. 

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

23 unchanged sentences

Early adoption is permitted.

Topic 326 requires a modified retrospective approach by recording a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. While the Company is currently evaluating the impact of Topic 326, the Company does not expect the adoption of this ASU to have a material impact on its condensed consolidated financial statements and the related disclosure.

In December 2019, the FASB issued ASU No.

8 unchanged sentences

The Company does not anticipate that the adoption of this ASU will have a significant impact on its condensed consolidated financial statements or the related disclosures.

In August 2020, the FASB issued ASU No.

2020 - 16, Debt –

Debt with Conversion and Other Options (Subtopic 470 - 20 ) and Derivatives and Hedging –

Contracts in Entity’s Own Equity (Subtopic 8150 - 20 ):

Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which is intended to simplify the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity.

The guidance allows for either full retrospective adoption or modified retrospective adoption.

Additionally, the ASU will require entities to use the “if-converted”

method when calculating diluted earnings per share for convertible instruments.

The ASU will be effective for annual reporting periods beginning after December 15, 2023 for SRCs and interim periods within those annual periods.

Early adoption is permitted.

The Company does not anticipate that the adoption of this ASU will have a significant impact on its condensed consolidated financial statements or the related disclosures.

REVENUE FROM CONTRACTS WITH CUSTOMERS

17 unchanged sentences

Analytics revenue is derived from the following primary offerings:

licenses and services for Exensio Software, Exensio SaaS, DFI and CV systems that do not include performance incentives based on customers’

licenses and services for Exensio Software, Exensio SaaS, DFI™

systems that do not include performance incentives based on customers’

yield achievement.

7 unchanged sentences

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

Revenue from DFI and CV systems that do not include performance incentives based on customers’

Revenue from DFI™

systems that do not include performance incentives based on customers’

yield achievement is recognized primarily as services are performed.

Where there are distinct performance obligations, the Company allocates revenue to all deliverables based on their SSPs.

For these contracts with multiple performance obligations, the Company allocate the transaction price of the contract to each performance obligation on a relative basis using SSP attributed to each performance obligation. Where there are not discrete performance obligations, historically, revenue is primarily recognized as services are performed using a percentage of completion method based on costs or labor-hours inputs, whichever is the most appropriate measure of the progress towards completion of the contract.

The estimation of percentage of completion method is complex and subject to many variables that require significant judgement.

Please refer to “Significant Judgements”

section of this Note for further discussion.

Integrated Yield Ramp Revenue

The Integrated Yield Ramp revenue is derived from the Company’s fixed-fee engagements that include performance incentives based on customers’ yield achievement and Gainshare royalties, typically based on customer’s wafer shipments, pertaining to these fixed-price 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 percentage of completion method is complex and subject to many variables that require significant judgement.

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 method based on costs or labor-inputs, whichever is the most appropriate measure of the progress towards completion of the contract. Where there are distinct performance obligations, the Company allocates revenue to all deliverables based on their SSPs and allocates the transaction price of the contract to each performance obligation on a relative basis using SSP.

Similar to the services provided in connection with DFI™

systems that are contributing to Analytics revenue, due to the nature of the work performed in these arrangements, the estimation of percentage of completion method is complex and subject to many variables that require significant judgement.

Please refer to “Significant Judgments” section of this Note for further discussion.

8 unchanged sentences

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 September 30,

Nine Months Ended September 30,

Point-in-time

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.

International revenues accounted for approximately 67 % and 60 % of our total revenues for the three and nine months ended September 30, 2020, respectively, compared to 66 % and 60 % of our total revenues for the three and nine months ended September 30, 2019, respectively.

Customer and Geographic Information.

22 unchanged sentences

The majority of the Company’s contract assets represent unbilled amounts related to fixed-price service contracts when the revenue recognized exceeds the amount billed to the customer. The contract assets are generally classified as current and are recorded on a net basis with deferred revenue (i.e. contract liabilities) at the contract level.

At June 30, 2020 and December 31, 2019, contract assets of $ 3.4 million and $ 3.6 million, respectively, are included in prepaid expenses and other current assets in the Condensed Consolidated Balance Sheets.

At September 30, 2020 and December 31, 2019, contract assets of $ 3.8 million and $ 3.6 million, respectively, are included in prepaid expenses and other current assets in the Condensed Consolidated Balance Sheets.

The Company did not record any asset impairment charges related to contract assets for the periods presented.

1 unchanged sentence

Deferred revenues that will be recognized during the succeeding twelve -month period are recorded as current deferred revenues and the remaining portion is recorded in the other non-current liabilities in the Condensed Consolidated Balance Sheets.

At June 30, 2020 and December 31, 2019, the non-current portion of deferred revenues included in non-current liabilities was $ 1.8 million and $ 2.3 million, respectively.  Revenue recognized for the 

At September 30, 2020 and December 31, 2019, the non-current portion of deferred revenues included in non-current liabilities was $ 0.8 million and $ 2.3 million, respectively.  Revenue recognized for the 

three  months ended 

June 30, 2020 and 2019, that was included in deferred revenues and billings in excess of recognized revenues balances at the beginning of each reporting period was $ 5.9 million and $ 4.7 million, respectively.

September 30, 2020 and 2019, that was included in deferred revenues and billings in excess of recognized revenues balances at the beginning of each reporting period was $ 4.7  million and $ 4.4 million, respectively.

Revenue recognized for the 

six months ended 

June 30, 2020, and 2019, that was included in deferred revenues and billings in excess of recognized revenues balances at the beginning of each reporting period was $ 7.7 million and $ 8.7 million, respectively.

At June 30, 2020, the aggregate amount of the transaction price allocated to the remaining performance obligations related to customer contracts that were unsatisfied or partially unsatisfied was approximately $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 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. 

nine months ended 

September 30, 2020, and 2019, that was included in deferred revenues and billings in excess of recognized revenues balances at the beginning of each reporting period was $ 9.5 million and $ 13.0 million, respectively.

At September 30, 2020, the aggregate amount of the transaction price allocated to the remaining performance obligations related to customer contracts that were unsatisfied or partially unsatisfied was approximately $ 113.2 million. Given the applicable contract terms, the majority of this amount is expected to be recognized as revenue over the next three years, with the remainder in the following two years. This amount does not include contracts to which the customer is not committed, nor contracts for which we recognize revenue equal to the amount we have the right to invoice for services performed, or future sales-based or usage-based royalty payments in exchange for a license of intellectual property. 

This amount is subject to change due to future revaluations of variable consideration, terminations, other contract modifications, or currency adjustments. 

The estimated timing of the recognition of remaining unsatisfied performance obligations is subject to change and is affected by changes to the scope, change in timing of delivery of products and services, or contract modifications.

The adjustment to revenue recognized in the three months ended June 30, 2020 and 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 $ 0.6 million and an increase of $ 0.2 million, respectively.

The adjustment to revenue recognized in the three months ended September 30, 2020 and 2019 from performance obligations satisfied (or partially satisfied) in previous periods was a decrease of $ 1.2  million and an increase of $ 0.3 million, respectively.

The adjustment to revenue recognized in the nine months ended September 30, 2020 and 2019 from performance obligations satisfied (or partially satisfied) in previous periods was an increase of $ 0.4 million and an increase of $ 0.1 million, respectively.

These amounts primarily represent changes in estimated percentage-of-completion based contracts and changes in estimated Gainshare royalty for those customers that reported actual Gainshare revenue with some time lag.

3 unchanged sentences

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, 2020 and December 31, 2019 

were $ 0.5 million and $ 0.4  million, respectively.

September 30, 2020 and December 31, 2019 

were $ 0.4  million.

Total capitalized direct sales commission costs included in other non-current assets in the accompanying Condensed Consolidated Balance Sheets as of 

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, 2020 and 2019 was $ 0.1 million.

Amortization of these assets during each of the six months ended June 30, 2020 and 2019 was $ 0.2 million.

September 30, 2020 and December 31, 2019 were $ 1.2 million and $ 0.4 million, respectively.

Amortization of these assets during each of the three months ended September 30, 2020 and 2019 was $ 0.1 million. Amortization of these assets for the nine months ended September 30, 2020 and 2019 was $ 0.4 million and $ 0.3 million, respectively.

There was no impairment loss in relation to the costs capitalized for the periods presented.

8 unchanged sentences

There was no impairment loss in relation to the costs capitalized for the periods presented.

Deferred costs balance included in prepaid expenses and other current assets in the accompanying Condensed Consolidated Balance Sheets as of June 30, 2020 and December 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 was immaterial as of June 30, 2020 and was $ 0.2 million as of 

Deferred costs balance included in prepaid expenses and other current assets in the accompanying Condensed Consolidated Balance Sheets  

was immaterial as of September 30, 2020 and was $ 0.3 million as of December 31, 2019.

Deferred costs balance included in other non-current assets in the accompanying Condensed Consolidated Balance Sheets was immaterial as of September 30, 2020 and was $ 0.2 million as of 

December 31, 2019.

1 unchanged sentence

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 

STRATEGIC PARTNERSHIP AGREEMENT WITH ADVANTEST AND RELATED PARTY TRANSACTIONS

On July 29, 2020, the Company entered into a long-term strategic partnership with Advantest Corporation through its wholly-owned subsidiary, Advantest America, Inc. (collectively referred to herein as “Advantest”) that includes:

Securities Purchase Agreement and Stockholder Agreement

Pursuant to the Securities Purchase Agreement (“SPA”), the Company issued an aggregate of 3,306,924 shares of its common stock, par value $ 0.00015 per share (the “SPA Shares”), at a purchase price equal to $ 19.7085 per share to Advantest for aggregate gross proceeds of $ 65.2 million.

In connection with the SPA, the Company entered into a Stockholder Agreement (the “Stockholder Agreement”) with Advantest on July 30, 2020.

Pursuant to the Stockholder Agreement, Advantest agreed that the Shares will be subject to a five -year lock-up period and Advantest will be subject to a five -year standstill period.

The lock-up periods shall terminate upon occurrence of certain events (“Termination Event”) stipulated in the Stockholder Agreement. 

Advantest is permitted to sell, transfer or dispose of the SPA Shares at any time to an affiliate or in order to maintain Advantest’s equivalent percentage beneficial ownership at 9.9% of the Company’s outstanding shares of common stock.

Prior to the expiration of the lock-up period, upon the occurrence of certain events, for so long as the SPA Shares constitute at least 2.0% of the Company’s outstanding shares of common stock, if Advantest proposes to sell, transfer or dispose of any SPA Shares, the SPA Shares can be repurchased by the Company in its sole option at a repurchase price to be determined pursuant to the SPA.

Pursuant to the Stockholder Agreement, for so long as a Termination Event has not occurred, Advantest agreed to vote the SPA Shares in the manner recommended by the Board of Directors as reflected in any Company proxy statement, except on matters of:

(i) the issuance of Company securities subject to Nasdaq Rule 5635 (b), (ii) the approval of any merger, consolidation, or amalgamation (or similar business combination) of the Company, (iii) an amendment of the Company’s Certificate of Incorporation that would disproportionately and adversely affect Advantest, or (iv) any voluntary or involuntary bankruptcy, dissolution, insolvency, reorganization, rehabilitation or similar event of the Company.

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

ii. Amendment #1 to Software License & Related Services Agreement

The Company entered into Amendment #1 to that certain Software License and Related Services Agreement (“SLA”), dated as of March 25, 2020 ( “Amendment #1 to SLA”) with Advantest.

Amendment #1 to SLA provides for an exclusive commercial arrangement in which the Company and Advantest will collaborate on, and the Company will initially host, develop and maintain, an Advantest-specific cloud layer on the Exensio platform.

Amendment #1 to SLA provides for a renewable five -year cloud-based subscription by Advantest to the Company’s Exensio analytics platform and related services to be provided by the Company for an aggregate subscription price of over $ 50.0 million over the initial five -year term, subject to the achievement of certain milestones and the Company’s standard warranty and service level commitments.

Revenue recognized from this agreement during the three and nine months ended September 30, 2020 was $1.0 million.

Accounts receivable from Advantest, comprised of billed and unbilled accounts receivable, amounted to $ 9.0 million, and Deferred revenue amounted to $ 8.0 million as of September 30, 2020.

Development Agreement

The Company also entered into a multi-year Amended and Restated Master Development Agreement (the “Development Agreement”) with Advantest, pursuant to which the Company and Advantest agreed to collaborate on extensions to or combinations of both of their existing technology and new technology to address mutual customers’

needs (the “Integrated Products”) through one or more development phases subject to certain conditions as set forth therein.

The Development Agreement includes the Company’s assistance in the development of a cloud-based software solution for Advantest’s customers that is based on the Company’s Exensio software analytics platform for both Advantest’s internal use as well as use by Advantest’s customers.

Except as may be separately set forth in a statement of work, each party will bear its own costs and expenses incurred in connection with its development thereunder.

Either party may terminate the Development Agreement or any statement of work thereunder at any time upon thirty ( 30 ) days’

prior written notice.

Costs and expenses incurred related to the Development Agreement have 

not been significant for the three and nine months ended September 30, 2020.

Commercial Agreement

The Company also entered into a multi-year Master Commercial Terms and Support Services Agreement (the “Commercial Agreement”) with Advantest.

Pursuant to the Commercial Agreement, the Company and Advantest agreed to (i) commercialize and sell Integrated Products that are generated from the Development Agreement according to revenue sharing for each Integrated Product (as defined in the Commercial Agreement) as generally set forth in the Commercial Agreement and Integrated-Product specific revenue sharing and other terms agreed by the parties from time to time in addenda entered into thereunder;

and (ii) provide technical services to support end customers’

use of the Integrated Products according to agreed-upon technical support sharing principles as set forth in the Commercial Agreement.

Either party may terminate the Commercial Agreement at any time upon ninety ( 90 ) days’

prior written notice.

Notwithstanding the foregoing, each party agreed to provide continuing technical support services for Integrated Products sold prior to termination as generally set forth in the Commercial Agreement.

No costs and expenses incurred related to the Commercial Agreement with Advantest for the three and nine months ended September 30, 2020.

The Company carries out transactions with Advantest on customary terms.

BALANCE SHEET COMPONENTS

Accounts receivable

Accounts receivable include amounts that are unbilled at the end of the period that are expected to be billed and collected within 12 -month period.

Unbilled accounts receivable, included in accounts receivable, totaled $ 8.8 million and $ 7.4 million as of June 30, 2020, and December 31, 2019, respectively.

Unbilled accounts receivable that are not expected to be billed and collected during the succeeding 12 -month period are recorded in other non-current assets and totaled $ 2.6 million and $ 4.1 million as of June 30, 2020, and December 31, 2019, respectively.

Accounts receivable include amounts that are unbilled at the end of the period that are expected to be billed and collected within a 12 -month period.

Unbilled accounts receivable, included in accounts receivable, totaled $ 6.6 million and $ 7.4 million as of September 30, 2020, and December 31, 2019, respectively.

Unbilled accounts receivable that are not expected to be billed and collected during the succeeding 12 -month period are recorded in other non-current assets and totaled $ 2.3 million and $ 4.1 million as of September 30, 2020, and December 31, 2019, respectively.

Property and equipment

Property and equipment, net consist of the following (in thousands):

September 30,

Computer equipment

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$ 40,798  

Test equipment includes DFI assets at customer sites that are contributing to DFI revenues.

The construction-in-progress balance related to construction of DFI assets totaled $ 18.1 million and $ 16.6 million as of 

June 30, 2020 and December 31, 2019, 

respectively.

Depreciation and amortization expense for the three months ended June 30, 2020 and 2019  was $ 1.7  million and $ 1.3  million, respectively.

Depreciation and amortization expense for the six months ended June 30, 2020 and 2019 was $ 3.4 million and $ 2.6 million, respectively.

Test equipment includes DFI™ assets at customer sites that are contributing to DFI™ revenues.

The construction-in-progress balance related to construction of DFI™ assets totaled $ 18.5 million and $ 16.6 million as of 

September 30, 2020 and December 31, 2019, 

respectively. Depreciation and amortization expense was $ 1.7  million during each of the 

three months ended September 30, 2020 and 2019.

Depreciation and amortization expense for the nine months ended September 30, 2020 and 2019 was $ 5.0 million and $ 4.3 million, respectively.

Goodwill and Intangible Assets

As of June 30, 2020, and December 31, 2019, the carrying amount of goodwill was $ 2.3 million.

Intangible assets balance was $ 5.6 million and $ 6.2 million as of June 30, 2020 

As of September 30, 2020, and December 31, 2019, the carrying amount of goodwill was $ 2.3 million.

Intangible assets balance was $ 5.3 million and $ 6.2 million as of September 30, 2020 

and December 31, 2019, respectively.

Intangible assets as of June 30, 2020 and December 31, 2019 consist of the following (in thousands):

June 30, 2020

Intangible assets as of September 30, 2020 and December 31, 2019 consist of the following (in thousands):

September 30, 2020

December 31, 2019

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$ 6,221  

The weighted average amortization period for acquired identifiable intangible assets was 5.9 years as of June 30, 2020. 

Intangible asset amortization expense was $ 0.3 million during each of the three months ended June 30, 2020 and 2019.

Intangible asset amortization expense for the six  months ended June 30, 2020 and 2019  was $ 0.6 million and $ 0.5  million, respectively.

The weighted average amortization period for acquired identifiable intangible assets was 5.7 years as of September 30, 2020. 

Intangible asset amortization expense was $0.3 million during each of the three months ended September 30, 2020 and 2019.

Intangible asset amortization expense for the nine  months ended September 30, 2020 and 2019  was $ 1.0 million and $ 0.9  million, respectively.

The Company expects annual amortization of acquired identifiable intangible assets to be as follows (in thousands):

Year Ending December 31,

2020 (remaining six months)

2020 (remaining three months)

2025 and thereafter

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Intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable.

During the three and six months ended June 30, 2020, there were no indicators of impairment related to the Company’s intangible assets.

During the three and nine months ended September 30, 2020, there were no indicators of impairment related to the Company’s intangible assets.

The Company leases administrative and sales offices and certain equipment under noncancellable operating leases, which contain various renewal options and, in some cases, require payment of common area costs, taxes and utilities.

These operating leases expire at various times through 2028.

The Company had no leases that were classified as a financing lease as of June 30, 2020 and December 31, 2019.

The Company had no leases that were classified as a financing lease as of September 30, 2020 and December 31, 2019.

Leases with an initial term of 12 months or less are not recorded on the balance sheets, and the Company recognizes lease expense for these leases on a straight-line basis over the lease term.

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The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option.

Operating lease expense for lease payments is recognized on a straight-line basis over the lease term. Variable lease payment amounts that cannot be determined at the commencement of the lease such as increases in lease payments based on changes in index rates or usage, and common area maintenance costs are not included in the ROU assets or operating lease liabilities.

Operating lease expense for lease payments is recognized

on a straight-line basis over the lease term. Variable lease payment amounts that cannot be determined at the commencement of the lease such as increases in lease payments based on changes in index rates or usage, and common area maintenance costs are not included in the ROU assets or operating lease liabilities.

These are expensed as incurred and recorded as variable lease expense. 

Lease expense was comprised of the following (in thousands):

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

Operating lease expense

$ 1,362  

$ 1,402  

Short-term lease and variable lease expense

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Supplemental balance sheets information related to leases was as follows:

September 30,

Weighted average remaining lease term under operating ROU leases (in years)

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Operating lease ROU assets obtained (in thousands)

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

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

Year Ending December 31,

2020 (remaining six months)

$ 1,046  

2020 (remaining three months)

2025 and thereafter

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$ 8,527  

As of June 30, 2020, the total operating lease liability includes approximately $ 1.0 million related to an option to extend a lease term that is reasonably certain to be exercised.

As of September 30, 2020, the total operating lease liability includes approximately $ 1.0 million related to an option to extend a lease term that is reasonably certain to be exercised.

Calculated using incremental borrowing interest rate for each lease.

Includes the current portion of operating lease liabilities of $ 1.9 million as of June 30, 2020.

Includes the current portion of operating lease liabilities of $ 1.8 million as of September 30, 2020.

STOCKHOLDERS’

Issuance of Common Stok

On July 30, 2020, the Company issued 3,306,924 shares of common stock, at a purchase price of $ 19.7085 per share, for aggregate gross proceeds of $ 65.2 million pursuant to a Securities Purchase Agreement with Advantest dated July 29, 2020.

Issuance costs related to this private placement aggregated $ 0.1 million.

See Note 3, Securities Purchase Agreement with Advantest, for further details.

Stock Repurchase Program  

On May 28, 2020, the Company’s 2018 stock repurchase program (the “2018 Program”) that was originally adopted on May 29, 2018, expired.

On June 4, 2020, the Company’s Board of Directors adopted a new stock repurchase program (the “2020 Program”) to repurchase up to $ 25.0 million of the Company’s common stock both on the open market and in privately negotiated transactions, including through Rule 10b5 - 1 plans, over the next two years.  During the three and six months ended June 30, 2020, no shares were repurchased under the 2020 and 2018 programs. During the three and six months ended June 30, 2019, the Company repurchased approximately 300,000 shares and 614,000 shares, respectively, under the 2018 Program.

On June 4, 2020, the Company’s Board of Directors adopted a new stock repurchase program (the “2020 Program”) to repurchase up to $ 25.0 million of the Company’s common stock both on the open market and in privately negotiated transactions, including through Rule 10b5 - 1 plans, over the next two years. During the three and nine months ended September 30, 2020, no shares were repurchased under the 2020 and 2018 programs. During the three and nine months ended September 30, 2019, Company repurchased approximately 171,000 shares and 785,000 shares, respectively, under the 2018 Program.

As of May 28, 2020, 

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EMPLOYEE BENEFIT PLANS

On June 30, 2020, the Company had the following stock-based compensation plans:

On September 30, 2020, the Company had the following stock-based compensation plans:

Employee Stock Purchase Plan

In July 2001, the Company adopted a ten -year Employee Stock Purchase Plan (as amended, the “Purchase Plan”) under which eligible employees can contribute up to 10 % of their compensation, as defined in the Purchase Plan, towards the purchase of shares of PDF common stock at a price of 85 % of the lower of the fair market value at the beginning of the offering period or the end of the purchase period.

The Purchase Plan consists of twenty-four -month offering periods with four six -month purchase periods in each offering period.

The Purchase Plan provided for twenty-four -month offering periods with four six -month purchase periods in each offering period.

Under the Purchase Plan, on January 1 of each year, starting with 2002, the number of shares reserved for issuance will automatically increase by the lesser of ( 1 ) 

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2 % of the Company’s outstanding common stock on the last day of the immediately preceding year, or ( 3 ) the number of shares determined by the board of directors.

At the annual meeting of stockholders on May 18, 2010, the Company’s stockholders approved an amendment to the Purchase Plan to extend it through 

At the annual meeting of stockholders on May 18, 2010, the Company’s stockholders approved an amendment to the Purchase Plan to extend it through 

May 17, 2020.

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

Six Months Ended June 30,

Nine Months Ended September 30,

Expected life (in years)

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$ 4.08  

During the three months ended June 30, 2020 and 2019, no shares were issued under the Purchase Plan.

During the six months ended June 30, 2020 and 2019, a total of approximately 89,000 and 87,000 shares, respectively, were issued at a weighted-average purchase price of $ 9.02  and $ 8.93 per share, respectively.

As of June 30, 2020, there was $ 0.5 million of unrecognized compensation cost related to the Purchase Plan.

That cost is expected to be recognized over a weighted average period of 0.8 year. As of June 30, 2020, 5.8 million shares were available for future issuance under the Purchase Plan.

During the three months ended September 30, 2020 and 2019, a total of approximately 93,000 and 85,000  shares, respectively issued under the Purchase Plan.

During the nine months ended September 30, 2020 and 2019, a total of approximately 183,000 and 172,000 shares, respectively, were issued at a weighted-average purchase price of $ 9.12  and $ 8.92 per share, respectively.

As of September 30, 2020, there was $ 0.3 million of unrecognized compensation cost related to the Purchase Plan.

That cost is expected to be recognized over a weighted average period of 0.6 year. As of September 30, 2020, 5.7 million shares were available for future issuance under the Purchase Plan.

Stock Incentive Plans

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Stock options generally expire ten years from the date of grant and become vested and exercisable over a four -year period.

In 2003, in connection with its acquisition of IDS Systems Inc., the Company assumed IDS’

2001 Stock Option / Stock Issuance Plan (the “IDS Plan”).

The IDS Plan expired in 2011.

Stock options granted under the 2001 Plan and IDS Plan generally expire ten years from the date of grant and become vested and exercisable over a four -year period.

Although no new awards may be granted under the 2001 Plan or IDS Plan, awards made under the 2001 Plan and IDS Plan that are currently outstanding remain subject to the terms of each such plan.

As of June 30, 2020, 12.1 million shares of common stock were reserved to cover stock-based awards under the 2011 Plan, of which 4.6 million shares were available for future grant.

The number of shares reserved and available under the 2011 Plan includes 0.5 million shares that were subject to awards previously made under the 2001 Plan and were forfeited, expired or repurchased by the Company after the adoption of the 2011 Plan through June 30, 2020.

As of June 30, 2020, there were no outstanding awards that had been granted outside of the 2011, 2001 or the IDS Plans (collectively, the “Stock Plans”).

Stock options granted under the 2001 Plan generally expire 

ten years from the date of grant and become vested and exercisable over a four -year period.

Although no new awards may be granted under the 2001 Plan, awards made under the 2001 Plan that are currently outstanding remain subject to the terms of each such plan.

As of September 30, 2020, 12.1 million shares of common stock were reserved to cover stock-based awards under the 2011 Plan, of which 4.1 million shares were available for future grant.

As of September 30, 2020, there were no outstanding awards that had been granted outside of the 2011 or 2001 Plans (collectively, the “Stock Plans”).

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

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

Expected life (in years)

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Stock-based compensation expense before taxes related to the Company’s stock plans and employee stock purchase plan was allocated as follows (in thousands): 

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

Costs of revenues

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The Company accounted for these awards as liability awards and the amount was included in accrued compensation and related benefits.

Stock-based compensation capitalized in the capitalized software development costs included in Property and Equipment, net, was approximately $ 0.1 million and $ 0.2 million for the three and six months ended June 30, 2020, respectively. Stock-based compensation capitalized in the capitalized software development costs included in Property and Equipment, net, was approximately $ 0.2 million during the three and six months ended June 30, 2019.

 Additional information with respect to options under the Stock Plans during the six months ended June 30, 2020, was as follows:

SARs were fully exercised as of September 30, 2020.

There was no stock-based compensation capitalized for the three months ended September 30, 2020.

Stock-based compensation capitalized in the capitalized software development costs included in property and equipment, net, was approximately $ 0.2 million for the 

nine months ended September 30, 2020. 

Stock-based compensation capitalized in the capitalized software development costs included in property and equipment, net, was approximately $0.2 million during the three and nine months ended September 30, 2019.

 Additional information with respect to options under the Stock Plans during the nine months ended September 30, 2020, was as follows:

(in thousands)

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( 10 )  

Outstanding, June 30, 2020

$ 10.06  

Outstanding, September 30, 2020

$ 11.02  

Vested and expected to vest, June 30, 2020

$ 4,188  

Vested and expected to vest, September 30, 2020

$ 10.96  

Exercisable, June 30, 2020

$ 4,158  

Exercisable, September 30, 2020

$ 10.08  

The aggregate intrinsic value in the table above represents the total intrinsic value based on the Company’s closing stock price of $ 19.56 per share as of June 30, 2020.

The total intrinsic value of options exercised during the six months ended June 30, 2020, was $ 0.6 million.

As of June 30, 2020, there was $ 0.6 million of total unrecognized compensation cost related to unvested stock options.

$ 3,779  

The aggregate intrinsic value in the table above represents the total intrinsic value based on the Company’s closing stock price of $ 18.71 per share as of September 30, 2020.

The total intrinsic value of options exercised during the nine months ended September 30, 2020, was $ 1.5  million.

As of September 30, 2020, there was $ 0.5 million of total unrecognized compensation cost related to unvested stock options.

That cost is expected to be recognized over a weighted average period of 2.7 years.

The total fair value of shares vested during the six months ended June 30, 2020, was $ 0.2 million.

Nonvested restricted stock units activity during the six months ended June 30, 2020, was as follows:

The total fair value of shares vested during the nine months ended September 30, 2020, was $ 0.2 million.

Nonvested restricted stock units activity during the nine months ended September 30, 2020, was as follows:

Average Grant

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$ 12.61  

Nonvested, June 30, 2020

Nonvested, September 30, 2020

$ 15.83  

As of June 30, 2020, there was $ 16.5 million of total unrecognized compensation cost related to nonvested restricted stock units.

As of September 30, 2020, there was $ 25.1 million of total unrecognized compensation cost related to nonvested restricted stock units.

That cost is expected to be recognized over a weighted average period of 2.7 years. Restricted stock units do not have rights to dividends prior to vesting.

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October 24, 2018.

From inception of the restructuring plan to June 30, 2020, the Company has recorded restructuring charges of $ 0.7 million, primarily consisting of employee separation charges. 

As of June 30, 2020, 

From inception of the restructuring plan to September 30, 2020, the Company has recorded restructuring charges of $ 0.7 million, primarily consisting of employee separation charges. 

As of September 30, 2020, 

the Company has substantially completed the implementation of the restructuring plan, and the remaining charges expected to be incurred are not expected to be significant.

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

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

Beginning balance

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INCOME TAXES   

Income tax benefit increased $ 2.3  million for the six months ended June 30, 2020, to a $ 3.2 million income tax benefit as compared to an income tax benefit of $ 0.9 million for the six months ended June 30, 2019.

The Company’s effective tax rate benefit was 43 % and 22 % for the six months ended June 30, 2020 and 2019, respectively.

The Company’s effective tax rate benefit increased in the six months ended June 30, 2020, as compared to the same period in 2019, primarily due to a 

favorable increase in excess tax benefits related to employee stock compensation and an income tax benefit recorded to carryback net operating losses (NOLs), pursuant to the provisions of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) passed on March 27, 2020, which allows any federal net operating losses generated in years beginning after December 31, 2017 and before January 1, 2021 to be carried back up to five taxable years to offset taxable income in the prior periods. 

The Company’s total amount of unrecognized tax benefits, excluding interest and penalties, as of June 30, 2020, was $ 14.3 million, of which $ 8.2 million, if recognized, would affect the Company’s effective tax rate.

Income tax benefit increased $ 2.6 million for the nine months ended September 30, 2020, to a $ 4.1 million income tax benefit as compared to an income tax benefit of $ 1.5 million for the nine months ended September 30, 2019.

The Company’s effective tax rate benefit was 37 % and 26 % for the nine months ended September 30, 2020 and 2019, respectively.

The Company’s effective tax rate benefit increased in the nine months ended September 30, 2020, as compared to the same period in 2019, primarily due to a 

favorable increase in excess tax benefits related to employee stock compensation and an income tax benefit recorded to carryback net operating losses (“NOLs”), pursuant to the provisions of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) passed on March 27, 2020, which allows any federal net operating losses generated in years beginning after December 31, 2017 and before January 1, 2021 to be carried back up to five taxable years to offset taxable income in the prior periods. 

The Company’s total amount of unrecognized tax benefits, excluding interest and penalties, as of September 30, 2020, was $ 14.1 million, of which $ 8.0 million, if recognized, would affect the Company’s effective tax rate.

The Company’s total amount of unrecognized tax benefits, excluding interest and penalties, as of December 31, 2019, was $ 13.6 million, of which $ 7.9 million, if recognized, would affect the Company’s effective tax rate.

As of June 30, 2020, the Company has recorded unrecognized tax benefits of $ 3.0 million, including interest and penalties of $ 0.7 million, as long-term taxes payable in its Condensed Consolidated Balance Sheet.

As of September 30, 2020, the Company has recorded unrecognized tax benefits of $ 2.8 million, including interest and penalties of $ 0.8 million, as long-term taxes payable in its Condensed Consolidated Balance Sheet.

The remaining $ 12.0 million has been recorded net of our deferred tax assets, of which $ 6.1 million is subject to a full valuation allowance. 

The 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 credits and California net operating losses related to our acquisition of Syntricity that we currently do not believe are more likely than not to be ultimately realized.

The valuation allowance was approximately $ 11.2 million and $ 10.5 million as of September 30, 2020, and December 31, 2019, respectively, which was related to California R&D tax credits and California net operating losses related to our acquisition of Syntricity that we currently do not believe are more likely than not to be ultimately realized.

The Company conducts business globally and, as a result, files numerous consolidated and separate income tax returns in the U.S. federal, various state and foreign jurisdictions.

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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 September 30,

Nine Months Ended September 30,

Basic weighted-average shares outstanding

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Diluted weighted average shares outstanding

Net loss per share - Basic

Net loss per share - Diluted

For the three and six months ended 

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

Net loss per share ‒

For the three and nine months ended 

September 30, 2020 and 2019,  because the Company was in a loss position, basic net loss per share is the same as diluted net loss per share as the inclusion of the potential common shares would have been anti-dilutive.

The following table sets forth potential shares of common stock that are not included in the diluted net 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 September 30,

Nine Months Ended September 30,

Outstanding options

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Employee Stock Purchase Plan

CUSTOMER AND GEOGRAPHIC INFORMATION

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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 September 30,

Nine Months Ended September 30,

__________________________

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

September 30,

__________________________

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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,

work sites are as follows (amounts in thousands):

Three Months Ended September 30,

United States

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$ 21,914  

Six Months Ended June 30,

Nine Months Ended September 30,

United States

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$ 25,203  

10,200  

11,369  

Taiwan  

Rest of the world

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

September 30,

United States

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

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

Money market mutual funds

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

Cash equivalents  

Money market mutual funds  

$ 102,977  

Short-term investments (available-for-sale debt securities)  

Treasury bills (1)  

49,983  

$ 152,960  

__________________________

( 1 )  

The carrying amount of the Company’s investments in U.S. Treasury bills approximate fair value due to their short-term maturities, and there have been no events or changes in circumstances that would have had a significant effect on the fair value of these securities at September 30, 2020.

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

Cash equivalents  

Money market mutual funds

The Company enters into foreign currency forward contracts to reduce the exposure to foreign currency exchange rate fluctuations on certain foreign currency denominated monetary assets and liabilities, primarily on third -party accounts payables and intercompany balances.

$ 27,644  

From time to time, the Company enters into foreign currency forward contracts to reduce the exposure to foreign currency exchange rate fluctuations on certain foreign currency denominated monetary assets and liabilities, primarily on third -party 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.

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Therefore, the change in fair value of these contracts is recorded into earnings as a component of other expense (income), net, and offsets the change in fair value of the foreign currency denominated assets and liabilities, which is also recorded in other expense (income), net in the Company’s Condensed Consolidated Statements of Operations and Comprehensive Loss.

For the three months ended June 30, 2020 and 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 $ 170,000 and a realized loss of $ 292,000 on the contracts, respectively.

For the three months ended September 30, 2020, there was no realized gain or loss from foreign currency forward contracts.

For the three months ended September 30, 2019, the Company recognized a realized loss of $ 0.4 million on the contract. For the nine months ended September 30, 2020 and 2019, the Company recognized a realized loss of $ 0.2 million and $ 0.7 million on the contracts, respectively.

The Company carries these derivatives financial instruments on its 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 contracts.

As of September 30, 2020 and December 31, 2019, the Company had no  outstanding forward contracts.

COMMITMENTS AND CONTINGENCIES

Strategic Partnership with Advantest —

See Note 3 for the discussion about the Company’s commitments under the strategic partnership with Advantest. 

Operating Leases  

Refer to Note 5, Leases, for the discussion about the Company’s lease commitments.

Indemnifications —

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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, 2020, total outstanding purchase obligations were $ 12.7 million, the majority of which due within the next 24  months.

As of September 30, 2020, total outstanding purchase obligations were $ 15.1  million, the majority of which due within the next 15 months.

Indemnification of Officers and Directors  —

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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, 2020, the Company was not party to any material legal proceedings, thus no loss was probable and 

As of September 30, 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.

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.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

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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 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.

Any statement concerning future financial performance (including future revenues, earnings or growth rates), ongoing business strategies, prospects, or the time required of our executive management for, and expenses related to, as well as the success of the our strategic growth opportunities and partnerships,  including our partnership with Advantest Corporation, possible actions taken by us or our subsidiaries, and the potential impact of the COVID-19 pandemic on our business, which may be provided by us are also forward-looking statements.

These forward-looking statements are only predictions.

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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.

Our offerings combine proprietary software, physical intellectual property (or IP) for Integrated Circuits (or IC) designs, electrical measurement hardware tools, proven methodologies, and professional services.

We primarily monetize our offerings through time-based license fees, contract revenue for professional services, and increasingly recently, software as a service (or SaaS).

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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.

Several other impacted locations were temporarily closed but our US R&D facility partially reopened in June 2020, and our offices in Canada, France, Korea and Japan have reopened on various dates during the second and third quarter of 2020.

Our corporate headquarters in the United States partially reopened in the fourth quarter of 2020.

We are closely monitoring the COVID-19 situation and currently preparing plans to reopen our other offices with focused on our employees’

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We believe that these difficulties will continue to create a 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:

Our Strategic Partnership with Advantest

On July 29, 2020, we entered into a strategic partnership with Advantest Corporation through its wholly-owned subsidiary, Advantest America, Inc., (collectively, “Advantest”) that includes:

(i) a significant agreement for our assistance in development of cloud-based applications for Advantest tools that leverage our Exensio software analytics platform;

(ii) a commercial agreement providing for the license to third parties of solutions that result from the development work that combine Advantest’s testing applications and 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.

(iii) a 5-year cloud-based subscription for our Exensio analytics platform and related services;

and (iv) the purchase of 3,306,924 shares of our common stock, for aggregate gross proceeds of $65.2 million.

Concurrent with the share purchase, Advantest Corporation also entered into multi-year voting and lock-up agreements. 

Financial Highlights   

Financial highlights for the three months ended June 30, 2020, were as follows: 

Total revenues were $21.4 million, an increase of $0.8 million, or 4%, compared to the three months ended June 30, 2019.

Analytics revenue was $15.2 million, which was an increase of $3.2 million, 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. 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 services from lower hours worked across multiple contracts and customers, and a $1.2 million decrease in Gainshare royalty from the 14nm and 28nm technology nodes.

Costs of revenues increased $1.1 million for the three months ended June 30, 2020, compared to the three months ended June 30, 2019, primarily due to (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.

Gross margin was 58%, compared to 62% for the three months ended June 30, 2019.

Net loss was $3.7 million, compared to $0.7 million for the three months ended June 30, 2019.

The increase in net loss was primarily attributable to a $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 income tax benefit, partially offset by a $0.8 million increase in revenues.

Cash, cash equivalents and investments increased $5.8 million to $103.4 million at June 30, 2020, from $97.6 million at December 31, 2019, primarily due to the collection of accounts receivables, partially offset by cash used in investing activities primarily related to additions to property and equipment for our DFI solution, including construction of additional eProbe tools.

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

Total revenues were $42.6 million, which was an increase of $1.5 million, or 4%, compared to the six months ended June 30, 2019.

Financial highlights for the three months ended September 30, 2020, were as follows: 

Total revenues were $23.1 million, an increase of $1.2 million, or 5%, compared to the three months ended September 30, 2019.

Analytics revenue was $14.3 million, which was an increase of $1.7 million, compared to the three months ended September 30, 2019.

The increase in Analytics revenue was primarily driven by a $2.1 million increase in Exensio licenses and Characterization Vehicle (CV®) services due to higher hours worked across multiple contracts and customers, partially offset by a $0.4 million decrease in Design-for-Inspection (DFI™) revenue.

Integrated Yield Ramp revenue decreased $0.5 million for the three months ended September 30, 2020, compared to the three months ended September 30, 2019, due primarily to decrease in Gainshare royalty from the 14nm and 28nm technology nodes. 

Costs of revenues increased $0.8 million for the three months ended September 30, 2020, compared to the three months ended September 30, 2019, primarily due to (i) a $1.0 million increase in personnel-related costs, (ii) a $0.7 million increase in cloud-delivery related costs, and (iii) a $0.1 million increase in subcontractor expenses, partially offset by (i) a $0.5 million decrease in direct costs due mainly to hardware expense, shipping costs and the timing of deferral of contract costs, and (ii) a $0.5 million decrease in travel expenses resulting from reduced business travel due to the global COVID-19 pandemic.

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

Net loss was $2.7 million, compared to $0.7 million for the three months ended September 30, 2019.

The increase in net loss was primarily attributable to (i) a $0.8 million increase in costs of revenues, (ii) a $2.3 million increase in operating expenses due primarily to our sales and marketing activities, and an increase in general and administrative expenses related to subcontractor costs, legal fees, and accounting and related fees, and (iii) $0.6 million increase in interest and other expense (income), net, partially offset by a $1.2 million increase in revenues, and a $0.4 million increase in income tax benefit.

Cash, cash equivalents and short-term investments increased $70.8 million to $168.4 million at September 30, 2020, from $97.6 million at December 31, 2019, primarily due to the proceeds from the issuance of our common stock in connection with our strategic partnership with Advantest, partially offset by cash used in investing activities primarily related to additions to property and equipment for our DFI™ solution, including investments in constructing eProbe tools. 

Financial highlights for the nine months ended September 30, 2020, were as follows: 

Total revenues were $65.7 million, which was an increase of $2.7 million, or 4%, compared to the nine months ended September 30, 2019.

Analytics revenue was $42.8

million, which was an increase of $5.0 million, compared to the 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.

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 the effect $3.3 million in nonrecurring revenue from a customer contract amendment recognized in the first quarter of 2019, partially offset by a $1.0 million increase in Gainshare royalty from the 14nm technology nodes.

Costs of revenues increased $1.7 million for the six months ended June 30, 2020, compared to the six months ended June 30, 2019, 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 timing of 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 global COVID-19 pandemic.

Gross margin was 59%, compared to 62% for the six months ended June 30, 2019.

Net loss was $4.2 million, compared to $3.4 million for the six months ended June 30, 2019.

The increase in net loss was primarily attributable to 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 a $1.5 million increase in revenues and a $2.2 million increase in income tax benefit.

million, which was an increase of $6.7 million, compared to the nine months ended September 30, 2019. The increase in Analytics revenue was primarily driven by an $8.4 million increase in Exensio licenses and CV®

services due to higher hours worked across multiple contracts and customers, partially offset by the expiration of an Exensio contract for a customer that ceased 7nm production in 2019 and a $1.7 million decrease in DFI™

revenue. Integrated Yield Ramp revenue decreased $4.0 million for the nine months ended September 30, 2020, compared to the nine months ended September 30, 2019, due primarily to a $1.1 million decrease in revenue from lower hours worked across multiple contracts and customers, and a $3.3 million in nonrecurring revenue from a customer contract amendment recognized in the first quarter of 2019, partially offset by a $0.5 million increase in Gainshare royalty from the 14nm technology node. 

Costs of revenues increased $2.5 million for the nine months ended September 30, 2020, compared to the nine months ended September 30, 2019, primarily due to (i) a $2.3 million increase in cloud-delivery related costs and depreciation expense of test equipment, (ii) a $0.8 million increase in direct costs related to third-party software royalty and licenses expense, equipment and hardware expense, and the timing of deferral of contract costs, and (iii) a $0.6 million increase in personnel-related costs, partially offset by a $1.2 million decrease in travel expenses resulting from reduced business travel due to the global COVID-19 pandemic.

Gross margin was 59%, compared to 61% for the nine months ended September 30, 2019.

Net loss was $6.9 million, compared to $4.1 million for the nine months ended September 30, 2019.

The increase in net loss was primarily attributable to (i) a $2.5 million increase in costs of revenues, (ii) a $4.8 million increase in operating expenses as we continued to make investments in research and development, sales and marketing activities, and due to an increase in general and administrative expenses related to subcontractor expenses, legal fees, and accounting and related fees, and (iii) a $0.8 million increase in interest and other expense (income), net, partially offset by a $2.7 million increase in revenues, and a $2.7 million increase in income tax benefit.

Critical Accounting Policies and Estimates

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There were no material changes during the six months ended June 30, 2020 to the items that we disclosed as our critical accounting policies and estimates in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2019.

During the third quarter of 2020, we added an accounting policy disclosure for our short-term investments in Note 1 of “Notes to Condensed Consolidated Financial Statements (Unaudited)”

of this Quarterly Report on Form 10-Q. 

Other than the aforementioned additional disclosure, there were no material changes during the nine months ended September 30, 2020 to the items that we disclosed as our critical accounting policies and estimates in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2019.

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

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licenses and services for Exensio® Software, Exensio SaaS, DFI™

and Characterization Vehicle (CV®) systems that do not include performance incentives based on customers’

and CV® systems that do not include performance incentives based on customers’

yield achievement.

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Revenue from DFI and CV systems that do not include performance incentives based on customers’

Revenue from DFI™

and CV®

systems that do not include performance incentives based on customers’

yield achievement is recognized primarily as services are performed. Where there are distinct performance obligations, we allocate revenue to all deliverables based on their SSPs.

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Where there are not discrete performance obligations, historically, revenue is primarily recognized as services are performed using a percentage of completion method based on costs or labor-hours inputs, whichever is the most appropriate measure of the progress towards completion of the contract.

The estimation of percentage of completion method is complex and subject to many variables that require significant judgement. 

Integrated Yield Ramp Revenue

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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 percentage of completion method is complex and subject to many variables that require significant judgement.

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 method based on costs or labor-inputs, whichever is the most appropriate measure of the progress towards completion of the contract. Where there are distinct performance obligations, we allocate revenue to all deliverables based on their SSPs and allocate the transaction price of the contract to each performance obligation on a relative basis using SSP.

Similar to the services provided in connection with DFI™

and CV®

The Gainshare royalty contained in yield ramp contracts is a variable fee related to continued usage of our IP after the fixed-fee service period ends, based on the customers’ yield achievement. Revenue derived from Gainshare is contingent upon our customers reaching certain defined production yield levels.

Gainshare royalty periods are generally subsequent to the delivery of all contractual services and performance obligations.

We record Gainshare as a usage-based royalty derived from customers' usage of intellectual property and record it in the same period in which the usage occurs.

We are required to assess whether it is "more-likely-than-not" that we will realize our deferred tax assets.

We record Gainshare as a usage-based royalty derived from customers’

usage of intellectual property and record it in the same period in which the usage occurs.

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 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 credits and California net operating losses (NOLs) related to an acquisition that we currently do not believe to be “more-likely-than-not”

The valuation allowance was approximately $11.2 million and $10.5 million as of September 30, 2020 and December 31, 2019 respectively, which was related to California R&D tax credits and California net operating losses (NOLs) related to an acquisition that we currently do not believe to be “more-likely-than-not”

to be ultimately realized.

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An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained.

To the extent the final tax liabilities are different than the amounts originally accrued, the increases or decreases are recorded as income tax expense or benefit in the Condensed Consolidated Statements of Comprehensive Loss. At June 30, 2020, no deferred taxes have been provided on undistributed earnings from our international subsidiaries.

To the extent the final tax liabilities are different than the amounts originally accrued, the increases or decreases are recorded as income tax expense or benefit in the Condensed Consolidated Statements of Comprehensive Loss. At September 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.

As such, we have not provided for any foreign withholding taxes on the earnings of foreign subsidiaries as of September 30, 2020.

The earnings of our foreign subsidiaries are taxable in the U.S.

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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

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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.

There was no goodwill impairment for the three and nine months ended September 30, 2020.

Our long-lived assets, excluding goodwill, consist of property and equipment and intangible assets.

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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.

There was no impairment of long-lived assets for the three and nine months ended September 30, 2020.

Recent Accounting Pronouncements and Accounting Changes

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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.

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.

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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.

Analytics comprises all other revenue, including from our licenses and services for Exensio Software, Exensio SaaS, DFI™

and CV®

systems that do not include performance incentives based on customers’ yield achievement.

The change in presentation of revenue does not change our net revenues or total cost of net revenues.

The following table shows reclassified amounts to conform to the current period’s presentation (in thousands):

For the Three Months Ended June 30, 2019

For the Six Months Ended June 30, 2019

Three Months Ended September 30, 2019

Nine Months Ended September 30, 2019

Reclassification

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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 , 2020 and 2019

Discussion of Financial Data for the Three and Nine Months Ended September 30 , 2020 and 2019

Revenues, Costs of Revenues, and Gross Margin

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

(Dollars in thousands)

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Analytics Revenue

Analytics revenue increased $3.2 million for the three months ended June 30, 2020, compared to the three months ended June 30, 2019.

Analytics revenue increased $5.0 million for the six months ended June 30, 2020, compared to the 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.

Analytics revenue increased $1.7 million for the three months ended September 30, 2020, compared to the three months ended September 30, 2019.

The increase in Analytics revenue was primarily driven by a $2.1 million increase in Exensio licenses and CV®

services due to higher hours worked across multiple contracts and customers, partially offset by a $0.4 million decrease in DFI™

Analytics revenue increased $6.7 million for the nine months ended September 30, 2020, compared to the nine months ended September 30, 2019. The increase in Analytics revenue was primarily driven by an $8.4 million increase in Exensio licenses and CV®

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 a $1.2 million decrease in revenue from services from lower hours worked across multiple contracts and customers, 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 a $1.0 million increase in Gainshare royalty from the 14nm technology nodes.

Integrated Yield Ramp revenue decreased $4.0 million for the nine months ended September 30, 2020, compared to the nine months ended September 30, 2019, due primarily to a $1.1 million decrease in revenue from lower hours worked across multiple contracts and customers, and a $3.3 million in nonrecurring revenue from a customer contract amendment recognized in the first quarter of 2019, partially offset by a $0.5 million increase in Gainshare royalty from the 14nm technology node.

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 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 contracts containing Gainshare.

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Software license costs consist of costs associated with licensing third-party software used by us in providing services to our customers 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, 2020, compared to the three months ended June 30, 2019, was primarily due to (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 of $1.7 million the six months ended June 30, 2020, compared to the six months ended June 30, 2019, 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 global COVID-19 pandemic.

Gross margin for the three months ended June 30, 2020 was 58% compared to 62% for the year-ago period, or a decrease of 4%.

The decrease in gross margin during the three months ended June 30, 2020 was primarily due to an increase in cloud-delivery service costs, depreciation expense related to our test equipment and increases in certain third-party royalty and licensing costs.

Gross margin for the six months ended June 30, 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 to $3.3 million in nonrecurring revenue from a customer contract amendment, partially offset by an overall increase in Analytics revenue during the first half of 2020, which revenue is comprised of software and term-based licenses that include lower direct costs of revenues to deliver than IYR offerings.

The increase in costs of revenues of $0.8 million for the three months ended September 30, 2020, compared to the three months ended September 30, 2019, was primarily due to (i) a $1.0 million increase in labor or personnel-related costs, (ii) a $0.7 million increase in cloud-delivery related costs, and (iii) a $0.1 million increase in subcontractor expenses, partially offset by (i) a $0.5 million decrease in direct costs due mainly to to hardware expense, shipping costs and the timing of deferral of contract costs, and (ii) a $0.5 million decrease in travel expenses resulting from reduced business travel due to the global COVID-19 pandemic.

The increase in costs of revenues of $2.5 million the nine months ended September 30, 2020, compared to the nine months ended September 30, 2019, was primarily due to (i) a $2.3 million increase in cloud-delivery related costs and depreciation expense of test equipment, (ii) a $0.8 million increase in direct costs related to third-party software royalty and licenses expense, equipment and hardware expense, and the timing of deferral of contract costs, and (iii) a $0.6 million increase in personnel-related costs, partially offset by a $1.2 million decrease in travel expenses resulting from reduced business travel due to the global COVID-19 pandemic.

Gross margin for the three months ended September 30, 2020 was 59% compared to 60% for the year-ago period. Gross margin for the nine months ended September 30, 2020 was 59% compared to 61% for the year-ago period, or a decrease of 2%.

The higher gross margin during nine months ended September 30, 2019 was primarily due to $3.3 million in nonrecurring revenue from a customer contract amendment.

Operating Expenses:

Research and Development

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

(Dollars in thousands)

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

Research and development expenses increased for the three months ended June 30, 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 cloud-services related costs, and (iv) a $0.1 million increase in software licenses and maintenance expense, partially offset by a $0.2 million decrease in travel expenses.

Research and development expenses increased for the six months ended June 30, 2020, compared to the year-ago period, primarily due to (i) a $0.4 million increase in depreciation expense, (ii) a $0.2 million increase in cloud-services related costs, (iii) a $0.2 million increase in subcontractor expenses that is primarily related to our DFI and Exensio 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 due to the timing of product development projects.

Research and development expenses decreased for the three months ended September 30, 2020, compared to the year-ago period, primarily due to (i) a $0.1 million decrease in personnel-related costs, and (ii) a $0.2 million decrease in travel expenses resulting from reduced business travel due to the global COVID-19 pandemic, partially offset by a $0.2 million increase in subcontractor expenses that is primarily related to our DFI™ and Exensio solutions. 

Research and development expenses increased for the nine months ended September 30, 2020, compared to the year-ago period, primarily due to (i) a $0.4 million increase in subcontractor expenses that is primarily related to our DFI™ and Exensio solutions, (ii) a $0.4 million increase in depreciation expense, and (iii) a $0.3 million increase in software licenses and maintenance expense, partially offset by a $0.4 million decrease in travel expenses resulting from reduced business travel due to the global COVID-19 pandemic.

We anticipate our expenses in research and development will fluctuate in absolute dollars from period to period due to the timing of product development projects.  

Selling, General and Administrative

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

(Dollars in thousands)

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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, 2020, compared to the year-ago period, primarily due to (i) a $0.5 million increase in legal fees, (ii) a $0.4 million increase in subcontractor expenses, (iii) a $0.2 million write-down in carrying value of property and equipment, and (iv) a $0.1 million increase in cloud-services related costs, partially offset by a $0.2 million decrease in personnel-related costs, and a $0.2 million decrease in travel expenses.

Selling, general and administrative expenses increased for the six months ended June 30, 2020, compared to the year-ago period, primarily due to (i) a $0.8 million increase in legal fees, (ii) a $0.7 million increase in subcontractor expenses, (iii) a $0.3 million increase in personnel-related costs, (iv) a $0.2 million increase in cloud-services related costs, and (v) a $0.2 million increase from a write-down of equipment, partially offset by a $0.3 million decrease in travel expenses, and a $0.2 million decrease in depreciation and maintenance expenses.

Selling, general and administrative expenses increased for the three months ended September 30, 2020, compared to the year-ago period, primarily due to (i) a $1.0 million increase in legal fees, primarily related to fees for legal services, including the Advantest partnership, and for the arbitration proceeding over a disputed customer contract,  (ii) a $0.7 million increase in personnel-related costs, (iii) a $0.5 million increase in subcontractor expenses, (iv) a $0.3 million increase in accounting and related fees, and (v) a $0.2 million increase in cloud-services related costs, partially offset by a $0.1 million decrease in travel expenses.

Selling, general and administrative expenses increased for the nine months ended September 30, 2020, compared to the year-ago period, primarily due to (i) a $1.2 million increase in subcontractor expenses, (ii) a $1.8 million increase in fees for legal services, including the Advantest partnership, and for the arbitration proceeding over a disputed customer contract, (iii) a $0.9 million increase in personnel-related costs, (iv) a $0.2 million increase in accounting and related fees, (v) a $0.4 million increase in cloud-services related costs, and (vi) a $0.2 million increase from a write-down of equipment, partially offset by (i) a $0.4 million decrease in travel expenses, and (ii) a $0.1 million decrease in depreciation expenses.

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

Amortization of Other Acquired Intangible Assets  

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

(Dollars in thousands)

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Interest and Other Expense (Income), Net

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

(Dollars in thousands)

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

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

Income Tax Expense (Benefit)

Three Months Ended June 30,

Six Months Ended June 30,

Interest and other expense (income), net increased for the three and nine months ended September 30, 2020, compared to the year-ago periods, primarily due to a decrease in interest income due to lower interest rates, and a higher net unfavorable fluctuations in foreign exchange rates, partially offset by a decrease in loss related to foreign currency forward contracts, and an increase in other income.

Income Tax Benefit

Three Months Ended September 30,

Nine Months Ended September 30,

(Dollars in thousands)

Income tax expense (benefit)

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 six months ended June 30, 2020, compared to the year-ago period, primarily due favorable increase in excess tax benefits related to employee stock compensation 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 provisions of the CARES Act.

Income tax benefit

Income tax benefit increased for the three months ended September 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 nine months ended September 30, 2020, compared to the year-ago period, primarily due to favorable increase in excess tax benefits related to employee stock compensation expense and as a result of the provisions of the CARES Act. During the nine months ended September 30, 2020, we recorded an income tax benefit of $2.2 million from the carryback of federal NOLs pursuant to the provisions of the CARES Act.

Liquidity and Capital Resources

As of June 30, 2020, our working capital, defined as total current assets less total current liabilities, was $118.9 million, compared to $119.6 million as of December 31, 2019.

Cash and cash equivalents were $103.4 million as of June 30, 2020, compared to $97.6 million as of December 31, 2019. As of June 30, 2020, and December 31, 2019, cash and cash equivalents held by our foreign subsidiaries were $2.2 million and $3.8 million, respectively.

As of September 30, 2020, our working capital, defined as total current assets less total current liabilities, was $185.2 million, compared to $119.6 million as of December 31, 2019.

Total cash and cash equivalents, and short-term investments were $168.4 million as of September 30, 2020, compared to cash and cash equivalents of $97.6 million as of December 31, 2019. As of September 30, 2020, and December 31, 2019, cash and cash equivalents held by our foreign subsidiaries were $2.2 million and $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.

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For risk discussion about the potential impact of global COVID-19 pandemic on our operations or demand for our products, refer to Item 1A, Risk Factors on Part II of this Report.

Private Placement

On July 29, 2020, we entered into a strategic partnership with Advantest, which includes, among others, a Securities Purchase Agreement wherein we issued and sold to Advantest America, Inc., an aggregate of 3,306,924 shares of our common stock, at a purchase price of $19.7085 per share, for aggregate gross proceeds of $65.2 million on July 30, 2020.

All of the shares were offered and sold by us pursuant to an exemption from the registration requirements of the Securities Act 1933, as amended, provided by Section 4(a)(2) as a transaction with an accredited investor not involving a public offering.

The increase in the combined balance of our cash and cash equivalents, and short-term investments during the nine months ended September 30, 2020 was primarily driven by the proceeds from the issuance of our common stock.

Cash Flow Data

Six Months Ended June 30,

Nine Months Ended September 30,

(In thousands)

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Effect of exchange rate changes on cash and cash equivalents

Net increase (decrease) in cash and cash equivalents

Net increase in cash and cash equivalents

Net Cash Flows Provided by Operating Activities

Cash flow from operating activities during the six months ended June 30, 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 $5.7 million increase in cash flows from operating activities for the six months ended June 30, 2020, compared to the year-ago period, was driven primarily by a $7.1 million increase in net change from operating assets and liabilities, which was offset by a $0.8 million increase in net loss, and a $0.6 million decrease in non-cash adjustments to net loss, 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 share-based compensation expense of $0.4 million.

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

Accounts receivable, net, decreased by $12.0 million, primarily due to increased collections and lower contractual invoicing activity during the first half of 2020.

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

Cash flow from operating activities during the nine months ended September 30, 2020 were 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, and net change in operating assets and liabilities.

The $12.1 million decrease in cash flows from operating activities for the nine months ended September 30, 2020, compared to the year-ago period, was driven primarily by a $9.7 million decrease in net change from operating assets and liabilities, and a $2.8 million increase in net loss, partially offset by a $0.4 million increase in non-cash adjustments to net loss, which was primarily due to (i) an increase in deferred tax assets of 1.3 million, 

partially offset by an increase in depreciation and amortization of $0.7 million, and an increase in share-based compensation expense of $0.8 million.

The major contributors to the net change in operating assets and liabilities for the nine months ended September 30, 2020 were as follows:

Other noncurrent assets decreased by $1.4 million, primarily due to a decrease in the noncurrent portion of unbilled receivables due to the timing of billing and revenue recognition.

Accounts payable decreased by $3.9 million primarily due to the timing of payments of invoices and payment of an invoice for a multi-year licensing and distribution agreement related to our Exensio software.

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.

Accrued and other liabilities increased by $1.6 million primarily due to increase in accrued legal fees and accrued cloud-services related costs.

Deferred revenues increased by a total of $6.9 million primarily due to timing of billing and revenue recognition.

Cash Flows Used in Investing Activities

Cash used in investing activities decreased by $2.7 million for the six months ended June 30, 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 $4.0 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.

Net Cash Flows Used in Financing Activities

Net cash used in financing activities decreased by $6.7 million for the six months ended June 30, 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.  

Cash used in investing activities increased by $45.8 million for the nine months ended September 30, 2020 compared to the year-ago period.

For the nine months ended September 30, 2020, cash used in investing activities primarily related to purchases of about $50.0 million short-term investments and property and a $5.4 million equipment purchased and prepayment for our DFI™ solution, including construction of additional eProbe tools. For the nine months ended September 30, 2019, cash flows used in investing activities related to (i) a $6.8 million property and equipment purchased primarily related to the construction of our DFI™ solution and expansion of our research and development laboratory and clean room, and (ii) a $2.7 million payment for a business acquisition that closed in the second quarter of 2019.

Net Cash Flows Provided by (Used in) Financing Activities

Net cash provided by financing activities increased by $74.4 million for the nine months ended September 30, 2020 compared to the year-ago period. For the nine months ended September 30, 2020, net cash provided by financing activities primarily consisted of $65.0 million net proceeds from issuance of common stock in connection with the Securities Purchase Agreement with Advantest, and $3.5 million of proceeds from our Employee Stock Purchase Plan and exercise of stock options, partially offset by $3.3 million in cash payments for taxes related to net share settlement of equity awards. For the nine months ended September 30, 2019, net cash used in financing activities primarily consisted of $9.6 million in cash used to repurchase shares of our common stock, and $1.9 million in cash payments for taxes related to net share settlement of equity awards, partially offset by $2.5 million of proceeds from our Employee Stock Purchase Plan and exercise of stock options. 

Related Party Transactions

Refer to Note 3, Strategic Partnership Agreement with Advantest and Related Party Transactions of the Notes to Condensed Consolidated Financial Statements (Item 1 of Part I of this Report) for a discussion on related party transactions between the Company and Advantest.

Off-Balance Sheet Agreements  

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Contractual Obligations

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

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

Payments Due by Period

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

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 8 of “Notes to Condensed Consolidated Financial Statements”

The contractual obligation table above excludes liabilities for uncertain tax positions of $2.8 million, which are not practicable to assign to any particular years, due to the inherent uncertainty of the tax positions.

See Note 9 of “Notes to Condensed Consolidated Financial Statements”

for further discussion. 

Quantitative and Qualitative Disclosures about Market Risk

We are exposed to three primary types of market risks:

credit risk and counterparty risk, foreign currency exchange rate risk and interest rate risk.

The following discusses our exposure to market risk related to changes in interest rates and foreign currency exchange rates.

We do not currently own any equity investments, nor do we expect to own any in the foreseeable future.

This discussion contains forward-looking statements that are subject to risks and uncertainties.

Actual results could vary materially as a result of a number of factors.

Interest Rate Risk and Credit Risk.

  As of September 30, 2020, we had cash and cash equivalents and short-term investments of $168.4 million.

Cash and cash equivalents consisted of cash and highly liquid money market instruments, and short-term investments consisted of U.S.

Treasury bills.

We would not expect our operating results or cash flows to be affected to any significant degree by the effect of a sudden change in market interest on our portfolio.

A hypothetical increase in market interest rates of 100 basis points from the market rates in effect at September 30, 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.

At September 30, 2020 and periodically throughout the year, we have maintained cash balances in various operating accounts in excess of federally insured limits.

We limit the amount of credit exposure with any one financial institution by evaluating the creditworthiness of the financial institutions with which we invest.

Foreign Currency and Exchange Risk.

  Certain of our payables for our international offices are denominated in the local currency, including the Euro, Yen and RMB.

Therefore, a portion of our operating expenditures is subject to foreign currency risks.

From 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 financial institution that we believe is creditworthy, and therefore, we believe the credit risk of counterparty non-performance is not significant.

The change in fair value of these contracts is recorded into earnings as a component of other income (expense), net and offsets the change in fair value of foreign currency denominated monetary assets and liabilities, which is also recorded in other income (expense), net.

As of September 30, 2020, we had no outstanding forward contracts.

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What changed 10-Q

Item 1. Financial Statements