What changed in this filing

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Item 1. Financial Statements

2021-05-06 compared with 2020-11-06 · 517 added, 642 removed, 722 unchanged (62% of the section changed)

3 unchanged sentences

(in thousands, except par value)

September 30,

Current assets:

4 unchanged sentences

57,999  

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

114,981  

Accounts receivable, net of allowance for doubtful accounts of $963 in 2021 and 2020

34,785  

34,140  

Prepaid expenses and other current assets

11,375  

13,944  

Total current assets

5 unchanged sentences

Operating lease right-of-use assets, net

15,305  

15,774  

Intangible assets, net

Deferred tax assets, net

23,724  

24,573  

Deferred tax assets, net

Other non-current assets

5 unchanged sentences

$ 4,399  

$ 7,636  

Accrued compensation and related benefits

41 unchanged sentences

(in thousands, except per share amounts)

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

$ 19,393  

$ 13,248  

Integrated Yield Ramp

Total revenues

24,200  

21,158  

Costs and Expenses:

Costs of revenues

10,663  

Research and development

10,841  

Selling, general and administrative

Amortization of other acquired intangible assets

Restructuring charges

Interest and other expense (income), net

( 441 )  

Loss before income taxes

Income tax benefit

Other comprehensive income (loss):

( 6,641 )  

Income tax expense (benefit)

$ ( 7,597 )  

Other comprehensive loss:

Foreign currency translation adjustments, net of tax

( 530 )  

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

Total other comprehensive income (loss)

Total other comprehensive loss

( 528 )  

Comprehensive loss

Net loss per share:

Weighted average common shares:

$ ( 8,125 )  

Net loss per share, basic and diluted

$ ( 0.21 )  

Weighted average common shares used to calculate net loss per share, basic and diluted

36,974  

32,703  

 See accompanying Notes to Condensed Consolidated Financial Statements (unaudited)

2 unchanged sentences

(in thousands)

Nine Months Ended September 30, 2020

Three Months Ended March 31, 2021

Treasury Stock

13 unchanged sentences

( 1,463 )  

Repurchase of common stock  

( 251 )  

( 4,523 )  

Stock-based compensation expense

9 unchanged sentences

$ 225,253  

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 )  

Stock-based compensation expense

Comprehensive income (loss)

( 3,652 )  

Balances, June 30, 2020

32,982  

333,157  

Three Months Ended March 31, 2020

Treasury Stock

Comprehensive

Stockholders’

Balances, December 31, 2019

32,503  

2 unchanged sentences

$ ( 35,870 )  

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

$ ( 1,480 )  

$ 196,157  

Issuance of common stock in connection with employee stock purchase plan  

Issuance of common stock in connection with exercise of options

3 unchanged sentences

Stock-based compensation expense

Comprehensive income (loss)

Comprehensive loss

( 528 )  

Balances, September 30, 2020

( 166 )  

Balances, March 31, 2020

32,795  

3 unchanged sentences

$ ( 1,646 )  

 See accompanying Notes to Condensed Consolidated Financial Statements (unaudited)

PDF SOLUTIONS, INC.

CONDENDSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’

(in thousands)

Nine Months Ended September 30, 2019

Treasury Stock

Comprehensive

Stockholders’

Balances, December 31, 2018

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

Repurchases of common stock

Stock-based compensation expense

Comprehensive loss

Balances, March 31, 2019

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

Repurchases of common stock

Stock-based compensation expense

Comprehensive income (loss)

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

$ 198,469  

See accompanying Notes to Condensed Consolidated Financial Statements (unaudited)

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(in thousands)

Nine Months Ended September 30,

Three Months Ended March 31,

Cash flows from operating activities:

$ ( 7,597 )  

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

Depreciation and amortization  

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

Depreciation and amortization

Stock-based compensation expense

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Amortization of costs capitalized to obtain revenue contracts

Adjustment to contingent consideration related to acquisition

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

Reversal of allowance for doubtful accounts

Loss on disposal of property and equipment  

Accretion of discount on short-term investments

( 20 )  

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

Accretion of discount on short-term investments  

Deferred taxes

( 5,309 )  

Changes in operating assets and liabilities:

2 unchanged sentences

Prepaid expenses and other current assets

Operating lease right-of-use assets  

Other non-current assets

2 unchanged sentences

Accrued compensation and related benefits

( 2,059 )  

Accrued and other liabilities

( 162 )  

Deferred revenues

( 1,994 )  

Billings in excess of recognized revenues

Operating lease liabilities

( 998 )  

Net cash provided by operating activities  

Operating lease liabilities

( 524 )  

Net cash provided by (used in) operating activities

( 8,325 )  

Cash flows from investing activities:

Purchases of short-term investments  

Proceeds from maturities of short-term investments  

68,000  

Purchases of property and equipment

Purchases of short-term investments

( 10,997 )  

Prepayment for the purchase of property and equipment  

Purchases of property and equipment

( 586 )  

Payment for business acquisition

Cash used in investing activities

Net cash provided by (used in) investing activities

56,417  

Cash flows from financing activities:

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

64,995  

Proceeds from exercise of stock options

3 unchanged sentences

Repurchases of common stock

Repurchases of contingent consideration related to acquisition

Net cash provided by (used in) financing activities

( 4,523 )  

Net cash used in financing activities

( 4,497 )  

Effect of exchange rate changes on cash and cash equivalents

Net change in cash and cash equivalents  

( 104 )  

Cash and cash equivalents, beginning of period

Net change in cash, cash equivalents, and restricted cash

43,491  

Cash, cash equivalents, and restricted cash at beginning of period

33,815  

Cash and cash equivalents, end of period  

97,605  

Cash, cash equivalents, and restricted cash at end of period

$ 77,306  

$ 100,385  

Reconciliation of cash, cash equivalents, and restricted cash to the balance sheets:

Cash and cash equivalents

$ 74,287  

$ 100,385  

Restricted cash  

Total cash, cash equivalents, and restricted cash

$ 77,306  

$ 100,385  

Continued on next page.

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(in thousands)

Nine Months Ended September 30,

Three Months Ended March 31,

Supplemental disclosure of cash flow information:

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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

Release of restricted cash reducing goodwill due to the acquisition purchase price adjustment

See accompanying Notes to Condensed Consolidated Financial Statements (unaudited)

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Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted.

The interim unaudited condensed consolidated financial statements reflect, in the opinion of management, all adjustments necessary (consisting only of normal recurring adjustments), to present a fair statement of results for the interim periods presented.

The interim unaudited condensed consolidated financial statements reflect, in the opinion of management, all adjustments necessary (consisting only of normal recurring adjustments) to present a fair statement of results for the interim periods presented.

The operating results for any interim period are not necessarily indicative of the results that may be expected for other interim periods or the full fiscal year.

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

The condensed consolidated balance sheet at December 31, 2019, 

has been derived from the audited consolidated financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America.

Reclassification of Prior Period Amounts

Certain prior period amounts have been reclassified to conform to the current year presentation of reporting 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

In the fourth quarter of 2019, in order to enhance the transparency of our revenue reporting, the Company updated its Condensed Consolidated Statements of Comprehensive Loss to change its historical presentation of revenue categories.

Previously, the Company presented revenue on two lines:

Solutions and Gainshare performance incentives. 

Included within Solutions, was revenue from software and related revenue, SaaS solutions, Design-for-Inspection (DFI™) licenses, and fixed-price project-based solution implementation services.

The previous Gainshare performance incentive category included only revenue from performance incentive programs.

The Company now presents revenue in the following categories:

Analytics and Integrated Yield Ramp. 

Integrated Yield Ramp revenue is comprised of all revenue from the Company’s Integrated Yield Ramp services engagements that include performance incentives based on customers’

yield achievement (i.e.

both fixed-fees and Gainshare royalty from such engagements).

Analytics comprises all other revenue, including from the Company’s licenses and services for Exensio®

Software, Exensio SaaS, DFI™

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

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

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

Three Months Ended September 30, 2019

Nine Months Ended September 30, 2019

Reclassification

$ 16,208  

$ ( 16,208 )  

$ 46,298  

$ ( 46,298 )  

Gainshare performance incentives

( 5,706 )  

16,725  

( 16,725 )  

12,691  

$ 12,691  

36,099  

$ 36,099  

Integrated Yield Ramp

26,924  

Total revenues

$ 21,914  

$ 63,023  

Since certain costs of revenues are attributed to both Analytics and Integrated Yield Ramp revenue categories, the Company believes it is more appropriate and meaningful to present the Condensed Consolidated Statements of Comprehensive Loss under a one -step presentation format that excludes any measure of gross margin.

In the fourth quarter of 2019,  the Company elected to change its Condensed Consolidated Statements of Comprehensive Loss presentation from a two -step presentation, where total costs of revenues was deducted from total revenues to report a gross profit line, to a one -step presentation, where total costs and expenses are deducted from total revenues. The change in presentation does not change previously presented amounts for costs of revenues, operating expenses and other expenses (income), or loss before income taxes.

The condensed consolidated balance sheet at December 31, 2020 , has been derived from the audited consolidated financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America.

Use of Estimates 

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GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.

Significant estimates in these financial statements include revenue recognition, assumptions made in analysis of allowance for doubtful accounts, impairment of goodwill and long-lived assets, realization of deferred tax assets, and accounting for lease obligations, stock-based compensation expense, and income taxes.

Significant estimates in these financial statements include revenue recognition, assumptions made in analysis of allowance for doubtful accounts, impairment of goodwill and long-lived assets, realization of deferred tax assets (DTAs), and accounting for lease obligations, stock-based compensation expense, and income taxes.

Actual results could differ from those estimates.

The global COVID- 19 pandemic has impacted the operations and purchasing decisions of companies worldwide.

It also has created and may continue to create significant uncertainty in the global economy.

The global COVID- 19  pandemic has impacted the operations and purchasing decisions of companies worldwide.

It also has created and 

continue to create significant uncertainty in the global economy.

The Company has undertaken measures to protect its employees, partners, customers, and vendors.

In addition, the Company’s personnel worldwide are subject to various travel restrictions, which limit the ability of the Company to provide services to customers and affiliates.

This impacts the Company's normal operations.

In addition, the Company’s personnel worldwide are subject to various travel restrictions, which limit the ability of the Company to provide services to customers and its affiliates.

The Company believes the lack of an ability to meet in person in most of 

2020 through the first quarter of 2021  

have made it harder for us to sell complex or new technologies to new customers during 

2020 and 2021.

 Once the Company can again begin to meet with customers in person, it may 

improve traction with new customers.

To date, the Company has been able to provide uninterrupted access to its products and services due to its globally distributed workforce, many of whom are working remotely, and its pre-existing infrastructure that supports secure access to the Company’s internal systems.

If, however, the COVID- 19 pandemic has a substantial impact on the productivity of the Company’s employees or its partners’

If, however, the COVID- 19  pandemic, including spikes in different regions from time to time, has a substantial impact on the productivity of the Company’s employees, or supplies, or its partners’

or customers’

decision to use the Company’s products and services, the results of the Company’s operations and overall financial performance may be adversely impacted.

The duration and extent of the impact from the COVID- 19 pandemic depends on future developments that cannot be accurately predicted at this time.

As of the date of issuance of the financial statements, the Company is not aware of any specific event or circumstance that would require updates to the Company’s estimates and judgments or revisions to the carrying value of its assets or liabilities.

These estimates may change, as new events occur and additional information is obtained, and are recognized in the condensed consolidated financial statements as soon as they become known.

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

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

Intangibles –

Goodwill and Other

In January 2017, the Financial Accounting Standards Board (or FASB) issued Accounting Standards Update (ASU) No.

2017 - 04, Intangibles –

Goodwill and Other (Topic 350 ).

This standard eliminates step 2 from the annual goodwill impairment test.

This update was effective for the Company beginning in the first quarter of 2020.

The Company adopted this standard on January 1, 2020, and it did not have a material impact on its condensed consolidated financial statements and footnote disclosures.

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

In August 2018, the FASB issued ASU No.

2018 - 15, Intangibles –

Goodwill and Other –

Internal-Use Software (Subtopic 350 - 40 ):

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

The new guidance clarifies the accounting for implementation costs incurred to develop or obtain internal-use software in cloud computing arrangements.

Further, the standard also requires entities to expense the capitalized implementation costs of a hosting arrangement over the term of the hosting arrangement.

This standard was effective for the Company beginning in the first quarter of 2020.

2018 - 15  should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption.

The Company adopted ASU 

2018 - 15  on January 1, 2020 on a prospective basis.

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

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

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

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

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

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

Accounting Standards Not Yet Effective

decision to use the Company’s products and services, the results of the Company’s operations and overall financial performance 

be adversely impacted.

The duration and extent of the impact from the COVID- 19  pandemic depends on future developments that cannot be accurately predicted at this time.

As of the date of issuance of the financial statements, the Company is 

not  aware of any specific event or circumstance that would require updates to the Company’s estimates and judgments or revisions to the carrying value of its assets or liabilities.

These estimates 

change, as new events occur and additional information is obtained, and are recognized in the condensed consolidated financial statements as soon as they become known.

Actual results could differ from those estimates and any such differences 

be material to the financial statements.

Recent Accounting Standards

Accounting Standards Adopted

In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No.

2019 - 12, Income Taxes (Topic 740 ), Simplifying the Accounting for Income Taxes, related to simplifying the accounting for income taxes.

The guidance eliminates certain exceptions from ASC 740 related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences.

The guidance also clarifies and simplifies other aspects of the accounting for income taxes.

The guidance is effective for the Company beginning in the first quarter of 2021 on a prospective basis. The Company adopted this standard on January 1, 2021, and it did not have a material impact on the Company's condensed consolidated financial statements or the related disclosures.

In January 2020, the FASB issued ASU No.

2020 - 01 -Investments-Equity Securities (Topic 321 ), Investments-Equity Method and Joint Ventures (Topic 323 ), and Derivatives and Hedging (Topic 815 )-Clarifying the Interactions between Topic 321, Topic 323, and Topic 815.

This ASU clarifies the interaction between accounting standards related to equity securities (ASC 321 ), equity method investments (ASC 323 ), and certain derivatives (ASC 815 ).

The amendments in this ASU are effective for fiscal years beginning after December 15, 2020.

The Company adopted this standard on January 1, 2021, and it did not have a material impact on the Company's condensed consolidated financial statements or the related disclosures.

Accounting Standards Not Yet Adopted

In June 2016, the FASB issued ASU No.

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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 or the related disclosure.

In December 2019, the FASB issued ASU No.

2019 - 12, Income Taxes (Topic 740 ) related to simplifying the accounting for income taxes.

The guidance is effective for the Company beginning in the first quarter of 2021 on a prospective basis.

Early adoption is permitted. 

The Company is currently evaluating the impact of this ASU, and 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 January 2020, the FASB issued ASU No.

This ASU clarifies the interaction between accounting standards related to equity securities (ASC 321 ), equity method investments (ASC 323 ), and certain derivatives (ASC 815 ).

The amendments in this ASU are effective for fiscal years beginning after December 15, 2020.

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.

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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.

Management has reviewed other recently issued accounting pronouncements issued or proposed by the FASB, and does not believe any of these accounting pronouncements has had or will have a material impact on the condensed consolidated financial statements. 

REVENUE FROM CONTRACTS WITH CUSTOMERS

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Analytics revenue and Integrated Yield Ramp revenue.

The Company recognizes revenue in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”) Topic 606,  

The Company recognizes revenue in accordance with FASB Accounting Standard Codification (“ASC”) Topic 606,  

Revenue from Contracts with Customers , and its related amendments (collectively known as “ASC 606”

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Analytics revenue is derived from the following primary offerings:

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

licenses and services for standalone Software (which is primarily Exensio and Cimetrix products), SaaS (which is primarily Exensio products), and DFI™

systems that do not include performance incentives based on customers’

yield achievement.

Revenue from standalone Exensio Software is recognized depending on whether the license is perpetual or time-based.

Perpetual ( one -time charge) license software is recognized at the time of the inception of the arrangement when control transfers to the customers, if the software license is distinct from the services offered by us.

Revenue from standalone Software is recognized depending on whether the license is perpetual or time-based.

Perpetual ( one -time charge) license software is recognized at the time of the inception of the arrangement when control transfers to the customers, if the software license is considered as a separate performance obligation from the services offered by the Company.

Revenue from post-contract support is recognized over the contract term on a straight-line basis, because we are providing (i) support and (ii) unspecified software updates on a when-and-if available basis over the contract term.

Revenue from time-based-licensed software is allocated to each performance obligation and is recognized either at a point in time or over time as follows.

The license component is recognized at the time when control transfers to the customer, with the post-contract support component recognized ratably over the committed term of the contract.

The license component is recognized at the time when control transfers to customers, with the post-contract support component recognized ratably over the committed term of the contract.

For contracts with any combination of licenses, support, and other services, distinct performance obligations are accounted for separately.

For contracts with multiple performance obligations, we allocate the transaction price of the contract to each performance obligation on a relative basis using standalone selling price (or SSP) attributed to each performance obligation.

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

Revenue from SaaS arrangements, which allow for the use of a cloud-based software product or service over a contractually determined period of time without the customer having to take possession of software, is accounted for as a subscription 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. For contracts with any combination of SaaS and related services, distinct performance obligations are accounted for separately.

For contracts with multiple performance obligations, we allocate the transaction price of the contract to each performance obligation on a relative basis using SSP attributed to each performance obligation.

Revenue from DFI™

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

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

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

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Integrated Yield Ramp Revenue

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

Integrated Yield Ramp revenue is derived from the Company’s fixed-fee engagements that include performance incentives based on customers’ yield achievement (which consists primarily of Gainshare royalties) typically based on customer’s wafer shipments, pertaining to these fixed-price contracts, which royalties are variable.

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.

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

yield achievement. Revenue derived from Gainshare is contingent upon the Company’s customers reaching certain defined production yield levels.

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

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

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The following table represents a disaggregation of revenue by timing of revenue:

Three Months Ended September 30,

Nine Months Ended September 30,

Point-in-time

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.

Three Months Ended March 31,

Point-in-time  

International revenues accounted for approximately 65 % of our total revenues during the three months ended March 31, 2021  compared to 59 % of our total revenues during the three months ended March 31, 2020 .

See Note 11,  

Customer and Geographic Information . 

Significant Judgments

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The Company’s contracts with customers often include promises to transfer products, licenses software and provide services, including professional services, technical support services, and rights to unspecified updates to a customer.

Determining whether licenses and services are distinct performance obligations that should be accounted for separately, or not distinct and thus accounted for together, requires significant judgment.

Determining whether licenses and services are distinct performance obligations that should be accounted for separately, or

not distinct and thus accounted for together, requires significant judgment.

The Company rarely licenses software on a standalone basis, so the Company is required to estimate the range of SSPs for each performance obligation.

In instances where SSP is not directly observable because the Company does not license the software or sell the service separately, the Company determines the SSP using information that may include market conditions and other observable inputs.

The Company, in some cases, has more than one SSP for individual performance obligations.

In these instances, the Company may use information such as the size of the customer and geographic region of the customer in determining the SSP.

In instances where SSP is

not directly observable because the Company does

not license the software or sell the service separately, the Company determines the SSP using information that

may include market conditions and other observable inputs.

The Company is required to record Gainshare royalty revenue in the same period in which the usage occurs.

Because the Company generally does not receive the acknowledgment reports from its customers during a given quarter within the time frame necessary to adequately review the reports and include the actual amounts in quarterly results for such quarter, the Company accrues the related revenue based on estimates of customers underlying sales achievement.

Because the Company generally does

not receive the acknowledgment reports from its customers during a given quarter within the time frame necessary to adequately review the reports and include the actual amounts in quarterly results for such quarter, the Company accrues the related revenue based on estimates of customers underlying sales achievement.

The Company’s estimation process can be based on historical data, trends, seasonality, changes in the contract rate, knowledge of the changes in the industry and changes in the customer’s manufacturing environment learned through discussions with customers and sales personnel. As a result of accruing revenue for the quarter based on such estimates, adjustments will be required in the following quarter to true-up revenue to the actual amounts reported.

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

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

At March 31, 2021 and December 31, 2020 , contract assets of $ 0.4  million and $ 3.7 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.

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

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

three  months ended 

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

Revenue recognized for the 

nine months ended 

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

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

At March 31, 2021 and December 31, 2020 , the non-current portion of deferred revenues included in non-current liabilities was $ 1.6  million and $ 1.2 million, respectively. Revenue recognized during the three months ended March 31, 2021 and 2020 , that was included in the deferred revenues and billings in excess of recognized revenues balances at the beginning of each reporting period was $ 6.3  million and $ 4.6 million, respectively.

At March 31, 2021 , 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 $ 114.2  million. Given the applicable contract terms with customers, the majority of this amount is expected to be recognized as revenue over the next two years, with the remainder in the following three  years. This amount does not include insignificant contracts to which the customer is not committed, nor significant contracts for which we recognize revenue equal to the amount we have the right to invoice for services performed, or future sales-based or usage-based royalty payments in exchange for a license of intellectual property. 

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

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

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

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

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

The adjustment to revenue recognized in the three months ended 

March 31, 2021 and 2020 from performance obligations satisfied (or partially satisfied) in previous periods were increases of $ 0.3 million and $ 0.7 million, respectively.

These amounts primarily represent changes in estimated percentage-of-completion based contracts and changes in actual versus estimated Gainshare royalty.

Costs to obtain or fulfill a contract

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Total capitalized direct sales commission costs included in prepaid expenses and other current assets in the accompanying Condensed Consolidated Balance Sheets as of 

September 30, 2020 and December 31, 2019 

were $ 0.4  million.

March 31, 2021 and December 31, 2020  was $ 0.8  million.

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

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

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

March 31, 2021 and December 31, 2020 were $ 1.1  million and $ 0.9 million, respectively.

Amortization of these assets during the 

three months ended March 31, 2021 and 2020 were $ 0.2  million and $ 0.1 million, respectively.

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

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The Company also incurs certain direct costs to provide services in relation to the specific anticipated contracts.

The Company recognizes such costs as a component of costs of revenues, the timing of which is dependent upon identification of a contract arrangement.

The Company also defers costs from arrangements that required it to defer the revenues, typically due to the pattern of transfer of the performance obligations in the contract.

These costs are recognized in proportion to the related revenue.

The Company recognizes such costs as a component of cost of revenues, the timing of which is dependent upon identification of a contract arrangement.

At the end of the reporting period, the Company evaluates its deferred costs for their probable recoverability.

The Company recognizes impairment of deferred costs when it is determined that the costs no longer have future benefits and are no longer recoverable.

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

Deferred costs balance 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.

Practical Expedients

The deferred costs balance included in prepaid expenses and other current assets and in other non-current assets in the accompanying Condensed Consolidated Balance Sheets  

was immaterial as of as of March 31, 2021 and 

December 31, 2020 .The Company recognizes impairment of deferred costs when it has determined that the costs 

no  longer have future benefits and are 

no  longer recoverable.

There was 

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

The Company does not adjust transaction price for the effects of a significant financing component when the period between the transfers of the promised good or service to the customer and payment for that good or service by the customer is expected to be one year or less.

The Company assessed each of its revenue generating arrangements in order to determine whether a significant financing component exists, and determined its contracts did not include a significant financing component for the three and nine months ended September 30, 2020 

three months ended March 31, 2021 and 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.

A Securities Purchase Agreement for the purchase by Advantest of an aggregate of 3,306,924 shares of the Company’s common stock for aggregate gross proceeds of $ 65.2 million and a related Stockholder Agreement.

An Amendment #1 to that certain Software License and Related Services Agreement, dated as of March 25, 2020, 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.

Analytics revenue recognized from Advantest under this agreement during the 

three months ended March 31, 2021 was $ 2.6  million. Accounts receivable from Advantest, comprised of billed and unbilled accounts receivable, related to this agreement amounted to $ 0.1  million, and deferred revenue amounted to $ 2.2 million as of March 31, 2021 .

An Amended and Restated Master 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 through one or more development phases subject to certain conditions as set forth therein.

Costs and expenses incurred related to this agreement have 

not been significant for the three months ended March 31, 2021.

A Master Commercial Terms and Support Services Agreement for the commercialization and support of integrated products of the Company and Advantest that are the outcome of the above development agreement.

No costs and expenses were incurred related to the Commercial Agreement with Advantest during the three months ended March 31, 2021.

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

The Company carries out transactions with Advantest on arm’s length commercial customary terms.

For more information about these agreements with Advantest, see Note 3, Strategic Partnership Agreement with Advantest and Related Party Transactions , of Part II, Item 8.

“Financial Statements and Supplementary Data”

of the Company’s Annual Report on Form 10 -K for the year ended 

December 31, 2020 .

BUSINESS COMBINATION

December 1, 2020 ( the “Acquisition Date”), the Company acquired all the stock of Cimetrix Incorporated (“Cimetrix”). Total payment made for this acquisition in 2020 amounted to $ 28.6  million, net of cash acquired, and was funded from the available cash of the Company.

In 2020, the Company held back $ 3.5  million of the purchase price (the “Holdback Amount”) to satisfy adjustments and claims for indemnity arising out of breaches of certain representations, warranties and covenants, and certain other enumerated items in the merger agreement. During the three months ended March 31, 2021, 

the Company recorded a measurement period adjustment as described below which reduced the Holdback Amount to $ 3.0 million.

This reduction was released from the restricted cash on the Company’s Consolidated Condensed Balance Sheet. The Holdback Amount, as adjusted, is expected to be paid to the participating equity holders on approximately the 

twelve -month anniversary of the Acquisition Date.

The Holdback Amount is recorded under “Accrued and other current liabilities”

account in the Condensed Consolidated Balance Sheets.

The Company is required to maintain cash specifically designated to pay for the Holdback Amount, which the Company has classified as restricted cash.

Restricted cash amounted to $ 3.0 million and $ 3.5 million as of March 31, 2021  and 

December 31, 2020 , respectively, and is included in the “Prepaid expenses and other current assets”

account in the Company’s Consolidated Condensed Balance Sheet. 

The Company is still finalizing the allocation of the purchase price to the individual assets acquired.

Accordingly, the estimates set forth below are preliminary and are subject to change during the measurement period, which is 

not  to exceed 

one  year from the acquisition date.

During the measurement period, the Company records adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill.

Upon the conclusion of the measurement period, any subsequent adjustments are recorded to earnings.

During the three months ended March 31, 2021 , the Company recorded a measurement period adjustment to the estimated fair values initially recorded in 2020, which resulted in a reduction in Holdback Amount of $ 0.5 million with a corresponding change to goodwill.

The measurement period adjustment did not have an impact on the Company's Condensed Consolidated Statements of Comprehensive Loss during the three months ended 

March 31, 2021 .

As of March 31, 2021, the allocation of the purchase price for this acquisition is as follows (in thousands, except amortization period):

Amortization Period (Years)

Fair value of tangible assets (including cash of $5,900)

$ 8,403  

Fair value of intangible assets:

Developed technology

12,541  

In-process R&D

Customer relationships

Noncompetition agreements

Tradenames and trademarks

13,012  

Total assets acquired

$ 41,214  

Accounts payable and accrued expenses

$ 1,437  

Deferred revenue

Operating lease liabilities

Deferred tax liabilities

Total liabilities assumed

$ 3,703  

Total purchase price allocation

$ 37,511  

Pursuant to the merger agreement, the Company will also pay approximately $ 1.4  million to certain employees, subject to their continued employment with Cimetrix or the Company, at various scheduled payout dates through the 

second  quarter of 

 This amount will be recognized as compensation expense over the period as services are rendered.

As of March 31, 2021, estimated remaining total cash payout is approximately $ 1.0 million. The accrued compensation balance included under “Accrued compensation and related benefits”

account in the Condensed Consolidated Balance Sheet was $ 0.2  million and $ 0.3  million as of March 31, 2021  and December 31, 2020 , respectively.

Transaction expenses related to the acquisition of Cimetrix amounted to $ 1.6  million in 2020 .

 These costs consist of professional fees and administrative costs and were expensed as incurred in the Company’s Consolidated Statement of Comprehensive Loss.

Transaction costs incurred during the three months ended March 31, 2021  were immaterial.

The financial results of the acquisition of Cimetrix were considered immaterial for purposes of unaudited pro forma financial disclosures.

BALANCE SHEET COMPONENTS

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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.

Unbilled accounts receivable, included in accounts receivable, totaled $ 10.5 million and $ 7.2 million as of March 31, 2021 , and December 31, 2020 , 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 $ 1.8  million and $ 2.0  million as of March 31, 2021 , and December 31, 2020 , respectively.

Property and equipment

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

September 30,

Computer equipment

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

September 30, 2020

The construction-in-progress balance related to construction of DFI™ assets totaled $ 19.3  million and $ 18.9 million as of 

March 31, 2021 and December 31, 2020 , respectively. Depreciation and amortization expense during the three months ended March 31, 2021 and 2020  was $ 1.7  million for each period.

Goodwill and Intangible Assets, Net

The change in the carrying amount of goodwill during the three months ended March 31, 2021  was as follows (in thousands):

Balance at beginning of period

$ 15,774  

Measurement period acquisition adjustment (1)  

Balance at end of period

$ 15,305  

_________________________

Goodwill adjustment was recorded within the measurement period with a corresponding reduction in the Holdback Amount. See Note 4,  

Business Combination .

There were no impairments to goodwill during the three months ended March 31, 2021 . 

Intangible assets, net, consisted of the following (in thousands):

March 31, 2021

December 31, 2020

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15,013  

Tradename and trademarks  

( 732 )  

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( 1,600 )  

Noncompetition agreements  

( 94 )  

( 24 )  

In-process R&D

$ 47,288  

$ ( 23,564 )  

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.

$ 23,724  

$ 47,288  

$ ( 22,715 )  

$ 24,573  

_________________________________

* Non-amortizing intangible asset

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

Year Ending December 31,

2020 (remaining three months)

2021 (remaining nine months)

$ 2,372  

2026 and thereafter

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Intangible assets are amortized over their useful lives unless these lives are determined to be indefinite.

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

During the three and nine months ended September 30, 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 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.

Long-term operating leases are included in operating lease right-of-used (ROU) assets and operating lease liabilities in the Company’s Condensed Consolidated Balance Sheets.

ROU assets represent the Company’s right to use an underlying asset for the lease term and operating lease liabilities represent the Company’s obligation to make lease payments arising from the lease.

Operating lease ROU assets and liabilities are recognized based on the present value of remaining lease payments over the lease term.

In determining the present value of lease payments, implicit rate must be used when readily determinable.

As the Company’s leases do not provide implicit rates, at the date of the Company’s adoption of the new lease standard, the discount rate is calculated using the Company’s incremental borrowing rate determined based on the information available.

The operating lease ROU asset also includes any lease payments made and excludes lease incentives or tenant improvement allowance.

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

Operating lease expense 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. 

The weighted average amortization period for acquired identifiable intangible assets was 6.1  years as of March 31, 2021 . Intangible asset amortization expense during the 

three months ended March 31, 2021 and 2020 was $ 0.8  million and $ 0.3  million, respectively, and included under "Cost of revenues" and "Amortization of other intangible assets" account in the Condensed Consolidated Statements of Comprehensive Loss. 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 months ended March 31, 2021 , there were no indicators of impairment related to the Company’s intangible assets.

The Company leases administrative and sales offices and certain equipment under non-cancellable 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 dates through 2028.

The Company had no leases that were classified as a financing lease as of March 31, 2021 and December 31, 2020 .

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

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

Operating lease expense

$ 1,362  

$ 1,402  

Short-term lease and variable lease expense (1)

Total lease expense

$ 1,763  

$ 1,735  

Supplemental balance sheets information related to leases was as follows:

September 30,

__________________________

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.

Variable lease expense for the periods presented primarily included common area maintenance charges. 

Supplemental balance sheet information related to operating leases was as follows:

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 September 30, 2020, are as follows (in thousands):

Maturities of operating lease liabilities as of March 31, 2021  were as follows (in thousands):

Year Ending December 31,

2020 (remaining three months)

2021 (remaining nine months)

$ 1,453  

2026 and thereafter

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$ 9,403  

Present value of future minimum lease payments operating lease liabilities(c)

Present value of future minimum lease payments under operating lease liabilities (3)

$ 7,893  

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.

As of March 31, 2021 , the total operating lease liability includes approximately $ 1.1  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 $ 1.8 million as of September 30, 2020.

Includes the current portion of operating lease liabilities of $ 1.7  million as of March 31, 2021 .

STOCKHOLDERS’

Issuance of Common Stok

Issuance of Common Stock

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 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, 

approximately 786,000 shares had been repurchased at an average price of $ 12.43 per share, for a total price of $ 9.8 million under the 2018 Program.

Through May 28, 2020, 

approximately 786,000 shares had been repurchased at an average price of $ 12.43 per share, for a total price of $ 9.8 million under the 2018 Program. 

During the three months ended March 31, 2021 , 251,212 shares were repurchased under the 2020 Program at an average price of $ 18.01 per share for an aggregate total price of $ 4.5 million.

EMPLOYEE BENEFIT PLANS

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

On March 31, 2021 , the Company had the following stock-based compensation plans:

Employee Stock Purchase Plan

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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 ) 

675,000  shares, ( 2 ) 

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

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

May 17, 2020.

The Company’s proposal to extend the Purchase Plan through June 22, 2030 was not ratified by the Company’s stockholders and hence, the Purchase Plan expired on May 17, 2020.

The Company’s proposal at its annual meeting of stockholders in 2020 to extend the 2010 Purchase Plan through June 22, 2030 was not approved by the Company’s stockholders and consequently, the Purchase Plan expired on May 17, 2020.

After the Purchase Plan expired, no new offering periods will commence under the Purchase Plan;

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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:

Nine Months Ended September 30,

Three Months Ended March 31,

Expected life (in years)

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$ 4.83  

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.

During the three months ended March 31, 2021 and 2020 , a total of approximately 99,674 and 89,000  shares, respectively issued under the Purchase Plan, were issued at a weighted-average purchase price of $ 9.24 per share and $ 9.02 per share, respectively.

As of March 31, 2021 , there was $ 0.1  million of unrecognized compensation cost related to the Purchase Plan.

That cost is expected to be recognized over a weighted average period of 0.7  year. 

Stock Incentive Plans

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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.

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

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

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

Three Months Ended September 30,

Nine Months Ended September 30,

As of March 31, 2021 , 12.1  million shares of common stock were reserved to cover stock-based awards under the 2011 Plan, of which 4.2  million shares were available for future grant.

As of March 31, 2021 , 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. 

There were no stock options granted during the three months ended March 31, 2021 .

The fair value of stock options granted during the three months ended March 31, 2020, was estimated as of the grant-date using the following assumptions:

Three Months Ended

March 31, 2020

Expected life (in years)

43.92 %  

39.93 %  

40.90 %  

Risk-free interest rate

0.23 %  

1.40 %  

0.60 %  

Expected dividend

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$ 5.21  

$ 4.70  

$ 5.75  

$ 4.61  

Stock-Based Compensation

Stock-based compensation is estimated at the grant date based on the award’s fair value and is recognized on a straight-line basis over the vesting periods, generally four years .

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 September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

Costs of revenues

$ 2,582  

$ 2,404  

Research and development

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$ 3,368  

$ 9,476  

$ 8,642  

The stock-based compensation expense in the table above includes immaterial expense or credit adjustments related to cash-settled SARs granted to certain employees.

____________________

The stock-based compensation expense during the three months ended March 31, 2020 includes immaterial expense or credit adjustments related to cash-settled SARs granted to certain employees.

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

SARs were fully exercised as of September 30, 2020.

There was 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:

All remaining outstanding SARs were fully exercised in the third quarter of 2020.

Stock-based compensation expense that was recorded as capitalized software development costs under property and equipment, net, was nil  and $ 0.1  million during the three months ended March 31, 2021 and 2020 , respectively. 

Additional information with respect to options under the Stock Plans during the 

three months ended March 31, 2021 , is as follows:

(in thousands)

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$ 10.95  

Granted (weighted average fair value of $5.75 per share)

( 81 )  

( 177 )  

$ 10.33  

( 43 )  

$ 10.69  

( 10 )  

$ 10.06  

Outstanding, September 30, 2020

Outstanding, March 31, 2021

$ 11.81  

$ 2,309  

Vested and expected to vest, September 30, 2020

Vested and expected to vest, March 31, 2021

$ 11.76  

$ 2,293  

Exercisable, September 30, 2020

Exercisable, March 31, 2021

$ 11.14  

$ 2,104  

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

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

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

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

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

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

The aggregate intrinsic value in the table above represents the total intrinsic value based on the Company’s closing stock price of $ 17.78 per share as of March 31, 2021 .

The total intrinsic value of options exercised during the three months ended March 31, 2021 , was $ 1.0 million.

As of March 31, 2021 , there was $ 0.3  million of total unrecognized compensation expense related to unvested stock options, which is expected to be recognized over a weighted average period of 2.4  years.

The total fair value of shares vested during the three months ended March 31, 2021 , was $ 39 thousand.

Non-vested restricted stock unit activity during the three months ended March 31, 2021  was as follows:

Average Grant

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(in thousands)

Nonvested, January 1, 2020

Non-vested, January 1, 2021

$ 16.33  

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$ 15.88  

Nonvested, September 30, 2020

Non-vested, March 31, 2021

$ 16.51  

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.

RESTRUCTURING CHARGES

On September 27, 2018, the Board of Directors of the Company approved a reduction in its workforce to reduce expenses and align its operations with evolving business needs.

Notifications to the affected employees began on 

October 24, 2018.

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

As of September 30, 2020, 

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

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

Three Months Ended September 30,

Nine Months Ended September 30,

Beginning balance

Restructuring charges

Cash payments

Ending balance

INCOME TAXES   

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.

As of March 31, 2021 , there was $ 21.2  million of total unrecognized compensation cost related to non-vested restricted stock units.

That cost is expected to be recognized over a weighted average period of 2.4  years. Restricted stock units do not have rights to dividends prior to vesting.

Income tax benefit decreased $ 4.4  million for the three months ended March 31, 2021 , to a $ 1.0  million income tax expense as compared to an income tax benefit of $ 3.5  million for the three months ended March 31, 2020 .

The Company’s effective tax rate benefit was ( 14 %) and 86 % for the three months ended March 31, 2021 and 2020 , respectively.

The Company’s effective tax rate benefit decreased in the three months ended March 31, 2021 , as compared to the same period in 2020 , primarily due to a full valuation allowance against U.S.

net deferred tax assets as well as a one -time benefits in the first quarter of 2020 pursuant to the provisions of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) passed on March 27, 2020.  

The Company’s total amount of unrecognized tax benefits, excluding interest and penalties, as of March 31, 2021 , was $ 14.5  million, of which $ 2.2  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, 2020 , was $ 14.3 million, of which $ 2.2 million, if recognized, would affect the Company’s effective tax rate.

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 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.

As of March 31, 2021 , the Company has recorded unrecognized tax benefits of $ 3.0  million, including interest and penalties of $ 0.8  million, as long-term taxes payable in its Condensed Consolidated Balance Sheet.

The remaining $ 12.3  million has been recorded net of our DTAs which is subject to a full valuation allowance. 

The valuation allowance was approximately $ 41.9 million as of March 31, 2021 , and December 31, 2020 , which was related to U.S.

net federal and state DTAs.

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

Because the Company used some of the tax attributes carried forward from previous years to tax years that are still open for audit, the federal and California statute of limitations remains open for all tax years since 2000 and 2002, respectively.

The Company is not currently subject to an income tax examination or under audit in any jurisdiction.

federal and California income tax purposes, the statute of limitations currently remains open for the tax years ending 2017 to present and 2016 to present, respectively.

In addition, due to NOL carryback claims, the tax years 2013 through 2015 may be subject to federal examination and all of the net operating loss and research and development credit carryforwards that may be utilized in future years may be subject to federal and state examination.

The Company is not subject to income tax examinations in any other of its major foreign subsidiaries’

jurisdictions.

On March 11, 2021, the American Rescue Plan Act of 2021 (“American Rescue Plan”) was signed into law to provide additional relief in connection with the ongoing COVID- 19 pandemic.

The American Rescue Plan includes, among other things, provisions relating to Paycheck Protection Program (PPP) loan expansion, defined pension contributions, excessive employee remuneration, and the repeal of the election to allocate interest expense on a worldwide basis.

Under ASC 740, the effects of new legislation are recognized upon enactment.

Accordingly, the American Rescue Plan is effective beginning in the quarter that includes March 11, 2021.

Such provisions did not have a material impact on the Company’s condensed consolidated financial statements.

NET LOSS PER SHARE

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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 September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

$ ( 7,597 )  

Basic weighted-average shares outstanding

36,974  

32,703  

Effect of dilutive options and restricted stock units

Diluted weighted-average shares outstanding

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 September 30,

Nine Months Ended September 30,

36,974  

32,703  

Net loss per share, basic and diluted  

$ ( 0.21 )  

For the 

three months ended March 31, 2021 and 2020 , 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 were 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 March 31,

Outstanding options

Nonvested restricted stock units

Non-vested restricted stock units

Employee Stock Purchase Plan

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

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

__________________________

1 unchanged sentence

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

September 30,

__________________________

2 unchanged sentences

work sites are as follows (amounts in thousands):

Three Months Ended September 30,

United States

$ 7,710  

$ 7,341  

Rest of the world

Total revenue

$ 23,112  

$ 21,914  

Nine Months Ended September 30,

Three Months Ended March 31,

United States

1 unchanged sentence

$ 8,617  

10,200  

11,369  

Taiwan  

Rest of the world

21,198  

20,410  

Rest of the world  

Total revenue

2 unchanged sentences

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

September 30,

United States

1 unchanged sentence

$ 43,663  

Rest of the world

Total long-lived assets, net

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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 September 30, 2020, and the basis for that measurement (in thousands):

The following table represents the Company’s assets measured at fair value on a recurring basis as of March 31, 2021  and December 31, 2020 , and the basis for those measurements (in thousands):

Fair Value Measurements Using  

March 31,  

Assets  

Inputs  

Cash equivalents  

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$ 121,016  

__________________________

( 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):

Fair Value Measurements Using  

December 31,  

Assets  

Inputs  

Cash equivalents  

2 unchanged sentences

$ 18,012  

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

Treasury bills  

114,981  

$ 132,993  

As of March 31, 2021 and December 31, 2020, the amortized cost of the Company’s cash equivalents and short-term investments approximated their 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 in the periods presented.

There were no material realized or unrealized gains or losses, either individually or in the aggregate.

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.

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The counterparty to these foreign currency forward contracts is a financial institution that the Company believes is creditworthy, and therefore, the Company believes the credit risk of counterparty nonperformance is not significant.

These foreign currency forward contracts are not designated for hedge accounting treatment.

Therefore, the change in fair value of these contracts is recorded into earnings as a component of other 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 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.

These foreign currency forward contracts are not designated for hedge accounting treatment. 

For the three months ended March 31, 2021 , there was no realized gain or loss from foreign currency forward contracts.

For the three months ended March 31, 2020 , the Company recognized a realized loss of $ 0.3  million from foreign currency forward contracts. 

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

As of March 31, 2021 and December 31, 2020 , 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. 

See Note 4, Business Combination , for the discussion about the Company’s commitments under the strategic partnership with Advantest. 

Operating Leases  

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

As of March 31, 2021 , total outstanding purchase obligations were $ 10.6  million, the majority of which due within the next 24 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 September 30, 2020, the Company was not party to any material legal proceedings, thus no loss was probable and 

As of March 31, 2021 , 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.

The arbitration is on-going. 

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 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.

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 continuing 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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refer to PDF Solutions, Inc.  

 We offer products and services designed to empower engineers and data scientists across the semiconductor ecosystem to improve the yield, quality, and profitability of their products.

We provide comprehensive data solutions designed to empower organizations across the semiconductor ecosystem to improve the yield and quality of their products and operational efficiency for increased profitability.

We derive revenues from two sources:

Analytics and Integrated Yield Ramp.

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

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

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

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

In some cases, especially on our historical integrated yield ramp (or IYR) engagements, we also receive a value-based royalty that we call Gainshare.

Our products, services, and solutions have been sold to integrated device manufacturers (or IDMs), fabless semiconductor companies, foundries, out-sourced semiconductor assembly and test (or OSATs), and system houses.

Our products, services, and solutions have been sold to integrated device manufacturers (or IDMs), fabless semiconductor companies, foundries, equipment manufacturers, electronics manufacturing suppliers (or EMS), original device manufacturers (or ODMs), out-sourced semiconductor assembly and test (or OSATs), and system houses.

Industry Trend

The global COVID-19 pandemic has impacted the operations and purchasing decisions of companies worldwide.

While the full potential economic impact brought by the COVID-19 pandemic may be difficult to assess or predict, the pandemic has resulted in significant disruption of global financial markets and on June 8, 2020, the National Bureau of Economic Research announced that the U.S.

was in a recession.

The COVID-19 pandemic has significantly affected how we and our customers are operating our business.

The COVID-19 pandemic has significantly affected how we and our customers are operating our businesses.

For example, most U.S.

states and countries worldwide have imposed and may continue to impose from time-to-time for the foreseeable future, restrictions on the physical movement of our employees, partners, and customers to limit the spread of COVID-19, including travel restrictions and shelter-in-place orders.

As a result, our Shanghai office was temporarily shut down and the restrictions limited the ability of our local employees to travel to customer sites or visit our other offices from January to April 2020.

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

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

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

safety. In addition, our personnel worldwide are subject to various country to country travel restrictions, which limit our ability to provide services to customers at their facilities.

To date, we have been able to provide uninterrupted access to our products and services due to our globally distributed workforce, many of whom are already working remotely, and our pre-existing infrastructure, which supports secure access to our internal systems.

If, however, the COVID-19 pandemic has a substantial impact on our employees’

productivity or our partners or customers decision to use our products and services, our ability to deliver on current commitments, to secure future bookings, or achieve expected financial performance may be harmed.

The duration and extent of the impact from the COVID-19 pandemic depends on future developments that cannot be accurately predicted at this time, such as the severity and transmission rate of the virus, the extent and effectiveness of containment actions and the impact of these and other factors on our employees, customers, partners and vendors.

Certain general business trends may affect our Analytics revenue.

states and countries worldwide imposed in 2020, and may continue to impose from time-to-time for the foreseeable future, restrictions on the physical movement of people to limit the spread of COVID-19, including travel restrictions and stay-at-home orders.

As a result, from January to April 2020, our Shanghai office was temporarily shut down and our local employees were restricted from traveling to customer sites or visiting our other offices.

Several other impacted locations were temporarily closed partially or fully in 2020, with minimal staffing only for essential activities including, for example, supporting essential businesses with our U.S.

clean room facility.

By the third quarter of 2020, our offices in Canada, France, Korea, and Japan had generally reopened with some restrictions returning temporarily at the end of 2020.

We are closely monitoring the COVID-19 situation and are currently planning to reopen our corporate headquarters in the United States and other offices with a focus on our employees’

safety. In addition, our personnel worldwide continue to be subject to various country-to-country travel restrictions, which limits the ability of some employees to travel to other offices or customer sites.

We believe the lack of an ability to meet in person during most of 2020 and the first quarter of 2021 may have made it harder for us to sell complex or new technologies to such customers during these periods.

If we can again begin to meet with customers in person, we may improve traction with these customers.

To date, we have been able to provide uninterrupted access to our products and services due to our globally distributed workforce, many of whom were working remotely prior to the pandemic, and our pre-existing infrastructure, which supports secure access to our internal systems.

The total duration and full extent of the impact from the COVID-19 pandemic depends on future developments that cannot be accurately predicted at this time, such as the ultimate severity and transmission rate of the virus and variants, the extent and effectiveness of containment actions and vaccinations, and the impact of these and other factors on our employees, customers, partners, and suppliers.

Certain other trends may affect our Analytics revenue specifically.

In particular, the confluence of Industry 4.0 (i.e.

the fourth industrial revolution, or the automation and data exchange in manufacturing technologies and processes) and cloud computing (i.e.

the on-demand availability of computing resources and data storage without direct active management by the user) is driving increased innovation in semiconductor and electronics manufacturing and analytics, as well as in the organization of IT networks and computing at those same companies.

First, the ubiquity of connectivity and sensor technology enables any manufacturing company to augment its factories and visualize its entire production line.

First, the ubiquity of wireless connectivity and sensor technology enables any manufacturing company to augment its factories and visualize its entire production line.

In parallel, the cost per terabyte of data storage has continually decreased year to year.

The combination of these two trends means that more data is collected and stored than ever before.

Semiconductor companies are striving to analyze these very large data sets in real-time to make rapid decisions that measurably improve manufacturing efficiency and quality.

Further, semiconductor companies are striving to analyze these very large data sets in real-time to make rapid decisions that measurably improve manufacturing efficiency and quality.

In parallel, the traditional practice of on-site data storage, even for highly sensitive data, is changing.

The ability to cost-effectively and securely store, analyze, and retrieve massive quantities of data from the cloud versus on-premise enables data to be utilized across a much broader population of users, frequently resulting in greater demands on analytics programs.

The combination of these two trends means that cloud-based, analytic programs that effectively manage identity management, physical security and data protection are increasingly in demand for insights and efficiencies across the organizations of these companies.

We believe that all these trends will continue for the next few years, and the challenges involved in adopting Industry 4.0 and secure cloud computing will create opportunities for companies that have a combination of advanced analytics capabilities, proven and established data infrastructures, and professional services to optimize their environment to customers’

specialized needs.   

Other business trends may continue to affect our Integrated Yield Ramp revenue.

The logic foundry market at the leading-edge nodes, such as 10nm and 7nm has undergone significant change over the past few years.

The leading foundry continues to increase market share as other foundries have either suspended 7nm development, forecasted a later start of mass production, or started later than originally forecast in some cases.

The combination of these latter two trends means that cloud-based, analytic programs that effectively manage identity management, physical security, and data protection are increasingly in demand for insights and efficiencies across the organizations of these companies.

We believe that all these trends will continue for the next few years, and the challenges involved in adopting Industry 4.0 and secure cloud computing will create opportunities for our combination of advanced analytics capabilities, proven and established supporting infrastructure, and professional services to configure our products to meet customers’

specialized needs.

Other business trends may continue to affect our Integrated Yield Ramp revenue specifically.

The logic foundry market at the leading edge nodes, such as 10nm and 7nm, underwent significant change over the past few years.

The leading foundry continues to dominate market share as other foundries either started later than originally forecast in some cases.

This trend will likely continue to negatively impact our Integrated Yield Ramp business on these nodes.

We expect most logic foundries to invest in derivatives of older process nodes, such as 28nm and 14nm, to extract additional value as many of their customers will not move to advanced nodes due to either technological barriers or restrictive economics.

Foundries that participate at leading edge nodes are expected to continue to invest in new technologies such as memory, packaging, and multi-patterned and extreme ultraviolet lithography, as well as new innovations in process control and variability management.

Foundries that participate at leading edge nodes are expected to continue to invest in new technologies such as memory, packaging, and multi-patterned and EUV lithography, as well as new innovations in process control and variability management.

We expect China’s investment in semiconductors to continue.

In order for these trends to provide opportunities for us to increase our business in process control and electrical characterization, Chinese semiconductors manufacturers will need to increase their production volumes on advanced technology nodes and continue to engage foreign suppliers.

In order for these trends to provide opportunities for us to increase our business leveraging electrical characterization, Chinese semiconductors manufacturers will need to increase their production volumes on advanced technology nodes and continue to engage foreign suppliers, subject to compliance with changing U.S.

export restrictions.

As a result of these market developments, we have chosen to focus our resources and investments in products, services, and solutions for analytics.

There are other general business trends that may affect our business opportunities.

There are other business trends that may affect our business opportunities generally.

For instance, the demand for consumer electronics, communications devices, and high-performance computing continues to drive technological innovation in the semiconductor industry as the need for products with greater performance, lower power consumption, reduced costs, and smaller size continues to grow with each new product generation.

In addition, advances in computing systems and mobile devices have fueled demand for higher capacity memory chips.

In addition, advances in computing systems and mobile devices continue to fuel demand for higher capacity memory chips.

To meet these demands, IC manufacturers and designers are constantly challenged to improve the overall performance of their ICs by designing and manufacturing ICs with more embedded applications to create greater functionality while lowering power and cost per transistor.

As this trend continues, companies will continually be challenged to improve process capabilities to optimally produce ICs with minimal random and systematic yield loss, which is driven by the lack of compatibility between the design and its respective manufacturing process.

We believe that these difficulties will continue to create a need for all types of products and services that address yield loss across the IC product life cycle.

We believe that these difficulties will continue to create a need for our products and services that address yield loss across the IC product life cycle.

Early decisions by the Biden U.S.

Presidential Administration confirm continuity of a bipartisan consensus in the U.S.

government favoring increased confrontation of China in trade practices and economic matters, national security, and human rights. 

The Biden Administration views technology as a domain of strategic competition in which the U.S.

and allies must stay ahead of China. 

The Administration has reaffirmed the U.S.

government consensus identifying semiconductor, artificial intelligence, and 5G technologies, and protection of U.S.

supply chains, as priority efforts. 

It appears that the Administration may now augment ongoing U.S.

efforts by enlisting the cooperation of allied countries in both advanced development and protection against P.R.C.

and allied advances. 

The prior U.S.

presidential administration expanded and intensified export controls and sanctions, including addition of many P.R.C.

companies to the U.S.

Export Administration Regulations (EAR) Entity List.

These listings restrict supply to designees of items that are subject to the EAR. 

After an internal evaluation, we determined that a large percentage of our software products are not of U.S.

origin and are, thus, not subject to the EAR. 

Our standard operations include development, distribution processes, software download sites, and professional service centers and processes located in various geographies around the world to better serve our customers.

Some customers have nonetheless expressed concerns to us that continued action by the U.S.

government could potentially interrupt their ability to make use of our products or services. 

The continuing tension between the U.S.

governments in trade and security matters or the perception of that tension could lead to disruptions or reductions in international trade, deter or prevent purchasing activity of customers, and negatively impact us in our China sales and financial results.

Our Strategic Partnership with Advantest

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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. 

We entered into this partnership to expand test and measurement solutions throughout the semiconductor value chain.

We believe that the combination of our Exensio platform with Advantest’s advanced testing equipment will provide Advantest tool users with the ability to connect, test, measure, and analyze manufacturing data generated by the tools at any point in the semiconductor value chain, helping customers increase yield and reduce testing costs.

Further, we believe collaboration with Advantest’s technology, direct connection to its customer relationships, and the breadth of its global footprint will enable us to both accelerate our technology roadmap and customer adoption of our AI-driven data analytics solutions across the supply chain.

Cimetrix Acquisition

On December 1, 2020, we completed the acquisition of Cimetrix Incorporated.

The combination of Cimetrix connectivity products with our Exensio platform, which leverages machine learning, is intended to enable IC, assembly, and equipment manufacturer customers to extract more intelligence from their tools, not just data, to build more reliable chips and systems at lower manufacturing costs. 

For further information about this acquisition, see Note 4, Business Combination , to our Condensed Consolidated Financial Statements of this Quarterly Report on Form 10-Q.

Financial Highlights   

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 $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.

Financial highlights for the three months ended March 31, 2021, are as follows: 

Total revenues were $24.2 million, an increase of $3.0 million, or 14.4%, compared to the three months ended March 31, 2020.

Analytics revenue was $19.4 million, which was an increase of $6.1 million, compared to the three months ended March 31, 2020.

The increase in Analytics revenue was primarily driven by increased revenue from our analytics and connectivity products. Integrated Yield Ramp revenue decreased $3.1 million compared to year-ago period primarily due to lower hours worked on fixed fees engagements and decreased Gainshare royalty from the 14nm and 28nm technology nodes. 

Costs of revenues increased $2.2 million, compared to the three months ended March 31, 2020, primarily due to increases in personnel-related costs due to higher headcount resulting from the acquisition of Cimetrix, cloud-delivery related costs, amortization of other acquired intangible assets, and software maintenance expense, partially offset by decreases in direct costs due mainly to hardware expense, shipping costs and the timing of deferral of contract costs, and decreased travel expenses resulting from reduced business travel as a result of the global COVID-19 pandemic.

Net loss was $7.6 million, compared to $0.5 million for the three months ended March 31, 2020.

The increase in net loss was primarily attributable to increases in costs of revenues, operating expenses related primarily to our research and development, sales and marketing activities, general and administrative expenses related to subcontractor costs, legal fees, and accounting and related fees, and income tax expense, partially offset by increases in total revenues and interest and other expense (income), net.

Cash, cash equivalents and short-term investments decreased $13.0 million to $132.3 million at March 31, 2021, from $145.3 million at December 31, 2020, primarily due to cash used in our operating activities, the purchase of property and equipment, and the repurchases of common stock. 

Critical Accounting Policies and Estimates

See Note 1 of “Notes to Condensed Consolidated Financial Statements (Unaudited)”

of this Quarterly Report on Form 10-Q for a description of recent accounting pronouncements and accounting changes, including the expected dates of adoption and estimated effects, if any, on our condensed consolidated financial statements, and to Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 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.

See Note 1, 

Summary of Significant Accounting Policy , to our Condensed Consolidated Financial Statements of this Quarterly Report on Form 10-Q, for a description of recent accounting pronouncements and accounting changes, including the expected dates of adoption and estimated effects, if any, on our condensed consolidated financial statements, and to Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2020.

There were no material changes during the three months ended March 31, 2021 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, 2020.

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

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Analytics revenue is derived from the following primary offerings:

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

licenses and services for standalone Software (which consists primarily of Exensio and Cimetrix products), SaaS (which consists primarily of Exensio products), and DFI™

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

yield achievement.

Revenue from standalone Exensio Software is recognized depending on whether the license is perpetual or time-based.

yield achievement. 

Revenue from standalone Software is recognized depending on whether the license is perpetual or time-based.

Perpetual (one-time charge) license software is recognized at the time of the inception of the arrangement when control transfers to the customers, if the software license is distinct from the services offered by us.

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Revenue from 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™

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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”

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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 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.

If we conclude at a future financial reporting period that there has been a change in our ability to realize our California R&D credit and net operating loss carry forward deferred tax assets, and it is at such time “more-likely-than-not”

that we will realize the tax credits before applicable expiration dates, our tax provision will decrease in the period in which we make such determination.

We evaluate our deferred tax assets for realizability considering both positive and negative evidence, including our historical financial performance, projections of future taxable income, future reversals of existing taxable temporary differences, tax planning strategies and any carryback availability.

Based on all available evidence, both positive and negative, we determined a full valuation allowance was appropriate for our federal and state net deferred tax assets (or DTAs) in the fourth quarter of 2020, primarily driven by an increased cumulative loss incurred over the 12-quarter period ended December 31, 2020, near term forecasted book losses, and the likelihood that we will not utilize tax attributes before they begin to expire at the end of 2022.

The valuation allowance was approximately $41.9 million as of as of March 31, 2021 and December 31, 2020.

We will continue to evaluate the need for a valuation allowance and may change our conclusion in a future period based on changes in facts (e.g., 12-quarter cumulative profit, significant new revenue, etc.).

If we conclude that we are more likely than not to utilize some or all of our U.S.

DTAs, we will release some or all of our valuation allowance and our tax provision will decrease in the period in which we make such a determination.

We evaluate our DTAs for realizability considering both positive and negative evidence, including our historical financial performance, projections of future taxable income, future reversals of existing taxable temporary differences, tax planning strategies and any carryback availability.

In evaluating the need for a valuation allowance, we estimate future taxable income based on management approved business plans.

This process involves significant management judgment about assumptions that are subject to change from period to period based on changes in tax laws or variances between future projected operating performance and actual results.

Changes in the net deferred tax assets, less offsetting valuation allowance, in a period are recorded through the income tax provision and could have a material impact on the Condensed Consolidated Statements of Comprehensive Loss.

Changes in the net DTAs, less offsetting valuation allowance, in a period are recorded through the income tax provision and could have a material impact on the Condensed Consolidated Statements of Comprehensive Loss.

Our income tax calculations are based on application of applicable U.S.

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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 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.

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 March 31, 2021, no deferred taxes have been provided on undistributed earnings from our international subsidiaries.

We intend to reinvest the earnings of our non-U.S.

subsidiaries in those operations indefinitely.

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

As such, we have not provided for any foreign withholding taxes on the earnings of foreign subsidiaries as of March 31, 2021.

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

in the year earned under the Global Intangible Low-Taxed Income rules implemented under 2017 Tax Cuts and Jobs Act.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted.

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

in the year earned under the Global Intangible Low-Taxed Income rules implemented under 2017 Tax Cuts and Jobs Act. 

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 nine months ended September 30, 2020.

There was no goodwill impairment for the three months ended March 31, 2021.

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 nine months ended September 30, 2020.

There was no impairment of long-lived assets for the three months ended March 31, 2021.

Recent Accounting Pronouncements and Accounting Changes

See Note 1 of “Notes to Condensed Consolidated Financial Statements (Unaudited)”

See Note 1, 

Results of Operations

Income Statement Presentation

In the fourth quarter of 2019, in order to enhance the transparency of our revenue reporting, we updated our Condensed Consolidated Statements of Comprehensive Loss to change our historical presentation of revenue categories.

Previously, we presented revenue on two lines:

Solutions and Gainshare performance incentives. 

Included within Solutions, was revenue from software and related revenue, SaaS solutions, DFI™

licenses, and fixed-price project-based solution implementation services.

The previous Gainshare performance incentive category included only revenue from performance incentive programs.

We now present revenue in the following categories:

Analytics and Integrated Yield Ramp. 

Integrated Yield Ramp revenue is comprised of all revenue from our Integrated Yield Ramp services engagements that include performance incentives based on customers’

yield achievement, i.e.

both fixed-fees and Gainshare royalty from such engagements.

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

and CV®

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

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

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

Three Months Ended September 30, 2019

Nine Months Ended September 30, 2019

Reclassification

Gainshare performance incentives

Integrated Yield Ramp

Total revenues

Since certain costs of revenues are attributed to both Analytics and Integrated Yield Ramp revenue categories, we believe it is more appropriate and meaningful to present the Condensed Consolidated Statements of Comprehensive Loss under a one-step presentation format that excludes any measure of gross margin.

In the fourth quarter of 2019, we elected to change our Condensed Consolidated Statements of Comprehensive Loss presentation from a two-step presentation, where total costs of revenues was deducted from total revenues to report a gross profit line, to a one-step presentation, where total costs and expenses are deducted from total revenues. The change in presentation does not change previously presented amounts for costs of revenues, operating expenses and other expenses (income), or loss before income taxes.

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

Discussion of Financial Data for the three months ended March 31, 2021 and 2020

Revenues, Costs of Revenues, and Gross Margin

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

(Dollars in thousands)

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Analytics 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®

Analytics revenue increased $6.1 million for the three months ended March 31, 2021, compared to the three months ended March 31, 2020.

The increase in Analytics revenue was primarily driven by a $8.2 million incre ase in revenue from our analytics and connectivity products, offset by a $2.1 million decrease in revenue from Characterization products and services due to lower hours worked across multiple contracts and customers.  

Integrated Yield Ramp 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.

Integrated Yield Ramp revenue decreased $3.1 million for the three months ended March 31, 2021, compared to the three months ended March 31, 2020, due primarily to lower hours worked on fixed fees engagements and decreases in Gainshare royalty from the 14nm and 28nm technology nodes. 

Our Integrated Yield Ramp revenue may continue to fluctuate from period to period primarily due to the contribution of Gainshare royalty, which is dependent on many factors that 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.

Our revenues may fluctuate in the future and are dependent on a number of factors, including the semiconductor industry’s continued acceptance of our products, services and solutions, the timing of purchases by existing and new customers, cancellations by existing customers, and our ability to attract new customers and penetrate new markets, and further penetration of our current customer base.

Our Analytics and Integrated Yield Ramp revenues may fluctuate in the future and are dependent on a number of factors, including the semiconductor industry’s continued acceptance of our products, services and solutions, the timing of purchases by existing and new customers, cancellations by existing customers, and our ability to attract new customers and penetrate new markets, and further penetration of our current customer base.

Fluctuations in future results may also occur if any of our significant customers renegotiate pre-existing contractual commitments, including due to adverse changes in their own business.

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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 $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.

The increase in costs of revenues of $2.2 million for the three months ended March 31, 2021, compared to the three months ended March 31, 2020, was primarily due to (i) a $1.9 million increase in personnel-related costs due to higher headcount as a result of the Cimetrix acquisition, higher benefit costs, and merit increases, (ii) a $0.5 million increase in cloud-delivery and software royalty and licenses expense, and (iii) a $0.4 million increase in amortization of other acquired intangibles assets, partially offset by (i) a $0.4 million decrease in other direct costs due mainly to hardware expense, shipping costs and the timing of deferral of contract costs, and (ii) a $0.2 million decrease in travel expenses resulting from reduced business travel due to the global COVID-19 pandemic.

Gross margin for the three months ended March 31, 2021 was 56% compared to 60% for the year-ago period. The lower gross margin during the three months ended March 31, 2021, was primarily due to lower Integrated Yield Ramp revenue from Gainshare royalty and an increase in cost of revenues.

Operating Expenses:

Research and Development

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

(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 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.

Research and development expenses increased for the three months ended March 31, 2021, compared to the year-ago period, primarily due to (i) a $1.8 million increase in personnel-related costs due to higher headcount as a result of the Cimetrix acquisition, higher benefit costs, merit increases and higher stock-based compensation, (ii) a $0.6 million increase in subcontractor expenses primarily related to our DFI™, Exensio solutions and Data Connectivity and Equipment Control Software, and (iii) a $0.1 million increase in cloud-services related costs, partially offset by (i) a $0.2 million decrease in software maintenance expense and (ii) a $0.1 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 September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

(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 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.

Selling, general and administrative expenses increased for the three months ended March 31, 2021, compared to the year-ago period, primarily due to (i) a $0.9 million increase in personnel-related costs due to higher headcount as a result of the Cimetrix acquisition, higher benefit costs, merit increases and higher stock-based compensation, (ii) a $0.4 million increase in facilities and IT related costs including rent and depreciation expense, (iii) a $0.3 million increase in subcontractor expenses, (iv) a $0.2 million increase in legal fees, primarily related to fees for legal services for the arbitration proceeding over a disputed customer contract, and (v) a $0.2 million increase in accounting and related fees, partially offset by (i) a $0.3 million decrease in general legal expenses, and (ii) a $0.1 million decrease in travel 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 September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

(Dollars in thousands)

Amortization of other acquired intangible assets

Amortization of other acquired intangible assets consists of amortization of intangibles acquired as a result of certain business combination. 

Amortization of other acquired intangible assets consists of amortization of intangibles acquired as a result of certain business combinations.

The increase in amortization of other acquired intangible assets for the three months ended March 31, 2021, compared to the year-ago period, was primarily related to amortization of other acquired intangible assets related to the Cimetrix acquisition.

Interest and Other Expense (Income), Net

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

(Dollars in thousands)

1 unchanged sentence

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 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,

Interest and other expense (income), net increased for the three months ended March 31, 2021, compared to the year-ago period, primarily due to a higher net favorable fluctuations in foreign exchange rates, a decrease in loss related to foreign currency forward contracts, partially offset by a decrease in interest income due to lower interest rates. 

Income Tax Expense (Benefit)

Three Months Ended March 31,

(Dollars in thousands)

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.

Income tax expense (benefit)

Income tax expense increased for the three months ended March 31, 2021, compared to the year-ago period, primarily due to a full valuation allowance against U.S.

net deferred tax assets recorded in the fourth quarter of 2020 and one-time benefits recorded in the first quarter of 2020, pursuant to the provisions of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) passed on March 27, 2020. 

Liquidity and Capital Resources

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.

As of March 31, 2021, our working capital, defined as total current assets less total current liabilities, was $143.3 million, compared to $151.2 million as of December 31, 2020.

Total cash and cash equivalents, and short-term investments were $132.3 million as of March 31, 2021, compared to cash and cash equivalents of $145.3 million as of December 31, 2020. As of March 31, 2021, and December 31, 2020, cash and cash equivalents held by our foreign subsidiaries were $6.4 million and $4.0 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.

There has been no significant impact in respect to Liquidity and Capital Resources from the global COVID-19 pandemic.

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

Private Placement

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

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

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

Cimetrix Acquisition

On December 1, 2020, the Company completed the acquisition of Cimetrix Incorporated with a total payment made in 2020 of $28.6 million, net of cash acquired.

In 2020, the Company held back $3.5 million of the purchase price (the “Holdback Amount”) to satisfy adjustments to the closing balance sheet and claims for indemnity arising out of breaches of certain representations, warranties and covenants, and certain other enumerated items in the merger agreement. During the three months ended March 31, 2021, the Company recorded a measurement period adjustment which reduced the Holdback Amount to $3.0 million. The Holdback Amount, as adjusted, is expected to be paid to the participating equity holders in December 2021. 

See Note 4, 

Business Combination  to our Condensed Consolidated Financial Statements of this Quarterly Report on Form 10-Q for further discussion.

Repurchase of Company's Common Stock

During the three months ended March 31, 2021, 251,212 shares were repurchased at an average price of $18.01 per share, for a total price of $4.5 million under the 2020 Program.

Cash Flow Data

Nine Months Ended September 30,

The following table summarizes our cash flows for the periods presented (in thousands):

Three Months Ended March 31,

(In thousands)

5 unchanged sentences

Net increase in cash and cash equivalents

Net Cash Flows Provided by Operating Activities

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.

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 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. 

Net Cash Flows Provided by (Used in) Operating Activities

Cash flow used in operating activities during the three months ended March 31, 2021 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 $13.7 million decrease in cash flows from operating activities for the three months ended March 31, 2021, compared to the year-ago period, was driven primarily by a $6.8 million decrease in net change from operating assets and liabilities, and a $7.1 million increase in net loss, partially offset by a $0.7 million increase in non-cash adjustments to net loss, which was primarily due to an increase in amortization of acquired intangible assets of $0.5 million.

The major contributors to the net change in operating assets and liabilities for the three months ended March 31, 2021 were as follows:

Prepaid expense and other current assets decreased by $2.8 million, primarily due to timing of billing of contract assets related to our fixed-price service contracts.

Accounts payable decreased by $4.1 million, primarily due to the timing of payments of invoices.

Accrued compensation and related benefits decreased by $2.1 million, primarily due to the timing of payments of accrued bonuses and accrued payroll taxes;

Billings in excess of recognized revenues and deferred revenues decreased by a total of $3.0 million, primarily due to timing of billing and revenue recognition.

Net Cash Flows Provided by (Used in) Investing Activities

Cash provided by investing activities increased by $58.5 million for the three months ended March 31, 2021 compared to the year-ago period.

For the three months ended March 31, 2021, cash provided by investing activities primarily related to proceeds from maturities of short-term investments of $68.0 million, offset by purchases of short-term investments of $11.0 million and property and equipment of $0.6 million. For the three months ended March 31, 2020, cash flows used in investing activities related to a $2.1 million property and equipment purchased primarily related to the construction of our DFI™ solution and expansion of our research and development laboratory and clean room.

Net Cash Flows Used in Financing Activities

Net cash used in financing activities increased by $4.0 million for the three months ended March 31, 2021 compared to the year-ago period. For the three months ended March 31, 2021, net cash used in financing activities primarily consisted of $4.5 million for the repurchase of 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 $1.5 million of proceeds from our 2001 Employee Stock Purchase Plan (as amended and now expired, the “Purchase Plan”) and exercise of stock options. For the three months ended March 31, 2020, net cash used in financing activities primarily consisted of $1.5 million in cash payments for taxes related to net share settlement of equity awards, partially offset by $1.0 million of proceeds from our 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.

Refer to Note 3, Strategic Partnership Agreement with Advantest and Related Party Transactions , to our Condensed Consolidated Financial Statements of this Quarterly Report on Form 10-Q, for a discussion on related party transactions between the Company and Advantest.

Off-Balance Sheet Agreements  

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

Contractual Obligations

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

Payments Due by Period

Contractual Obligations

Operating lease obligations(1)

Purchase obligations(2)

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

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 $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

6 unchanged sentences

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.

  As of March 31, 2021, we had cash, cash equivalents and short-term investments of $132.3 million.

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

1 unchanged sentence

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.

A hypothetical increase in market interest rates of 100 basis points from the market rates in effect at March 31, 2021, 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 March 31, 2021 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.

7 unchanged sentences

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.

As of March 31, 2021, we had no outstanding forward contracts.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements