10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☑	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the Quarterly Period ended June 30, 2018

or

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from _______________ to ______________

Commission File Number 000-31311

PDF SOLUTIONS, INC.

(Exact name of Registrant as Specified in its Charter)

Delaware	25-1701361
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)
333 West San Carlos Street, Suite 1000
San Jose, California	95110
(Address of Principal Executive Offices)	(Zip Code)

(408) 280-7900

(Registrant’s Telephone Number, Including Area Code)

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

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

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

Large accelerated filer ☐	Accelerated filer ☑
Non-accelerated  filer (Do not check if a smaller reporting company) ☐	Smaller reporting company ☐
Emerging growth company ☐
If an emerging growth company, indicated by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

There were 32,140,816 shares of the Registrant’s Common Stock outstanding as of August 1, 2018.

TABLE OF CONTENTS

	Page
PART I  FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets	3
Condensed Consolidated Statements of Operations and Comprehensive Income	4
Condensed Consolidated Statements of Cash Flows	5
Notes to Condensed Consolidated Financial Statements	6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
Item 3. Quantitative and Qualitative Disclosures About Market Risk	30
Item 4. Controls and Procedures	30
PART II  OTHER INFORMATION
Item 1. Legal Proceedings	31
Item 1A. Risk Factors	31
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	31
Item 3. Defaults Upon Senior Securities	32
Item 4. Mine Safety Disclosures	32
Item 5. Other Information	32
Item 6. Exhibits	32
SIGNATURES	32
INDEX TO EXHIBITS	32

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

PDF SOLUTIONS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS 

(unaudited)

(in thousands, except par value)

	June 30, 2018			December 31, 2017
ASSETS
Current assets:
Cash and cash equivalents	$	100,916		$	101,267
Accounts receivable, net of allowance of $333 and $374, respectively		53,919			57,564
Prepaid expenses and other current assets		8,660			5,069
Total current assets		163,495			163,900
Property and equipment, net		28,095			25,386
Goodwill		1,923			1,923
Intangible assets, net		5,569			6,074
Deferred tax assets		17,747			16,348
Other non-current assets		8,943			10,545
Total assets	$	225,772		$	224,176
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	2,495		$	2,536
Accrued compensation and related benefits		5,608			6,493
Accrued and other current liabilities		2,330			2,627
Deferred revenues – current portion		9,369			7,981
Total current liabilities		19,802			19,637
Long-term income taxes payable		4,652			3,902
Other non-current liabilities		994			2,269
Total liabilities		25,448			25,808
Commitments and contingencies (Note 9)
Stockholders’ equity:
Preferred stock, $0.00015 par value, 5,000 shares authorized, no shares issued and outstanding		-			-
Common stock, $0.00015 par value, 70,000 shares authorized: shares issued 40,298 and 39,799, respectively; shares outstanding 32,075 and 32,112, respectively		5			5
Additional paid-in-capital		304,948			297,950
Treasury stock at cost, 8,224 and 7,688 shares, respectively		(78,422	)		(71,793	)
Accumulated deficit		(25,256	)		(27,089	)
Accumulated other comprehensive loss		(951	)		(705	)
Total stockholders’ equity		200,324			198,368
Total liabilities and stockholders’ equity	$	225,772		$	224,176

See accompanying Notes to Condensed Consolidated Financial Statements (unaudited).    

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PDF SOLUTIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(unaudited)

(in thousands, except per share amounts)

	Three Months Ended June 30,						Six Months Ended June 30,
	2018			2017			2018			2017
Revenues:
Design-to-silicon-yield solutions	$	15,266		$	16,500		$	33,456		$	36,198
Gainshare performance incentives		5,853			7,789			12,400			12,380
Total revenues		21,119			24,289			45,856			48,578
Costs of Design-to-silicon-yield solutions
Direct costs of Design-to-silicon-yield solutions		10,774			11,283			22,112			22,618
Amortization of acquired technology		143			96			287			192
Total cost of Design-to-silicon-yield solutions		10,917			11,379			22,399			22,810
Gross profit		10,202			12,910			23,457			25,768
Operating expenses:
Research and development		7,100			7,276			14,345			14,557
Selling, general and administrative		5,919			6,195			12,294			12,095
Amortization of other acquired intangible assets		108			92			217			184
Total operating expenses		13,127			13,563			26,856			26,836
Loss from operations		(2,925	)		(653	)		(3,399	)		(1,068	)
Interest and other income (expense), net		390			27			59			(202	)
Loss before income taxes		(2,535	)		(626	)		(3,340	)		(1,270	)
Income tax benefits		(439	)		(815	)		(820	)		(1,976	)
Net income (loss)	$	(2,096	)	$	189		$	(2,520	)	$	706
Net income (loss) per share:
Basic	$	(0.07	)	$	0.01		$	(0.08	)	$	0.02
Diluted	$	(0.07	)	$	0.01		$	(0.08	)	$	0.02
Weighted average common shares:
Basic		31,962			32,111			32,065			32,051
Diluted		31,962			33,388			32,065			33,491
Net income (loss)	$	(2,096	)	$	189		$	(2,520	)	$	706
Other comprehensive income:
Foreign currency translation adjustments, net of tax		(771	)		435			(246	)		708
Comprehensive income (loss)	$	(2,867	)	$	624		$	(2,766	)	$	1,414

See accompanying Notes to Condensed Consolidated Financial Statements (unaudited).   

4

PDF SOLUTIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands)    

	Six Months Ended June 30,
	2018			2017
Operating activities:
Net income (loss)	$	(2,520	)	$	706
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		2,531			2,286
Stock-based compensation expense		5,557			5,788
Amortization of acquired intangible assets		505			376
Deferred taxes		(1,701	)		(193	)
Loss on disposal of property and equipment		3			5
Provision for (reversal of) allowance for doubtful accounts		(42)			124
Unrealized loss (gain) on foreign currency forward contract		47			33
Changes in operating assets and liabilities:
Accounts receivable, net of allowance		4,479			(5,996	)
Prepaid expenses and other current assets		(1,204	)		(3,435	)
Accounts payable		(992	)		851
Accrued compensation and related benefits		(818	)		(223	)
Accrued and other liabilities		(475	)		(745	)
Deferred revenues		2,745			726
Billings in excess of recognized revenues		7			301
Other non-current assets		1,597			377
Net cash provided by operating activities		9,719			981
Investing activities:
Purchases of property and equipment		(4,810	)		(4,964	)
Net cash used in investing activities		(4,810	)		(4,964	)
Financing activities:
Proceeds from exercise of stock options		416			1,808
Repurchases of common stock		(5,248	)		(4,770	)
Proceeds from employee stock purchase plan		1,007			910
Payments for taxes related to net share settlement of equity awards		(1,376	)		(1,879	)
Net cash (used in) provided by financing activities		(5,201	)		(3,931	)
Effect of exchange rate changes on cash and cash equivalents		(59	)		134
Net change in cash and cash equivalents		(351	)		(7,780	)
Cash and cash equivalents, beginning of period		101,267			116,787
Cash and cash equivalents, end of period	$	100,916		$	109,007
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Taxes	$	1,104		$	1,339
Property and equipment received and accrued in accounts payable and accrued and other liabilities	$	1,673		$	1,726

See accompanying Notes to Condensed Consolidated Financial Statements (unaudited).

5

PDF SOLUTIONS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation — 

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

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

The condensed consolidated balance sheet at December 31, 2017, has been derived from the audited consolidated financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America.

Use of Estimates — 

The preparation of financial statements in conformity with generally accepted accounting principles in the United States (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates in these financial statements include significant estimates and judgments made in recognizing revenue, accounting for goodwill and intangible assets, stock-based compensation expense and accounting for income taxes. Actual results could differ from those estimates. For a discussion of significant estimates and judgments made in recognizing revenue under the new revenue standard, see Note 2. Revenue Recognition.

Recent Accounting Pronouncements –

Recently Adopted Accounting Standards

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

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The purpose of this standard is to clarify the treatment of several cash flow categories. This update is effective for annual periods beginning after December 15, 2017, and interim periods within those fiscal years. The Company adopted this standard on January 1, 2018 and it did not have a material impact on its financial statements and footnote disclosures.

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

6

In January 2017, the FASB issued ASU No. 2017-01, Business Combinations: Clarifying the Definition of a Business, which narrows the existing definition of a business and provides a framework for evaluating whether a transaction should be accounted for as an acquisition (or disposal) of assets or a business. The guidance is effective for fiscal years beginning after December 15, 2017. The Company adopted this standard on January 1, 2018, and it did not have a material impact on its financial statements and footnote disclosures.

In May 2017, the FASB issued ASU No. 2017-09, Compensation-Stock Compensation (Topic 718) Scope of Modification Accounting. This standard clarifies which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. The standard is effective for interim and annual reporting periods beginning after December 15, 2017. The Company adopted this standard on January 1, 2018, and it did not have a material impact on our financial statements and footnote disclosures.

Accounting Standards Not Yet Effective

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The update requires that most leases, including operating leases, be recorded on the balance sheet as an asset and a liability, initially measured at the present value of the lease payments. Subsequently, the lease asset will be amortized generally on a straight-line basis over the lease term, and the lease liability will bear interest expense and be reduced for lease payments. The amendments in this update are effective for public companies’ financial statements issued for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is still in the process of evaluating the impact of adopting this new accounting standard on its consolidated financial statements and footnote disclosures.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350). This standard eliminates step 2 from the annual goodwill impairment test. This update is effective for annual periods beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted, and is to be applied on a prospective basis. The Company does not anticipate that the adoption of this standard will have a significant impact on its consolidated financial statements or the related disclosures.

In February 2018, the FASB issued ASU No. 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effect from Accumulated Other Comprehensive Income. This update allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Job Act ("TCJA") enacted in December 2017. This update will be effective for the Company for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Early adoption is permitted. The Company does not anticipate that the adoption of this standard will have a significant impact on its consolidated financial statements or the related disclosures.

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

2. REVENUE RECOGNITION 

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

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

7

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

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

● For fiscal 2018, revenue generated under Topic 606 is expected to be slightly lower than revenue would have been under Topic 605. This is the result of a combination of factors, including the reduction of deferred revenue that under Topic 605 would continue to be recognized as revenue in 2018 and beyond, as well as changes in the timing of revenue recognition as discussed below. The actual effect on revenue recognized for the first and second quarter of fiscal 2018 was not significant.

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

In addition, under the Company’s previous accounting practices, revenue was recognized from Gainshare performance incentive agreements in the period of receipt of related Gainshare acknowledgement reports, generally one quarter in arrears from the period in which the underlying sales (usage) occurred. Under Topic 606, the Company is now required to record Gainshare revenue in the same period in which the usage occurs. Because the Company generally does not receive the acknowledgment reports during a given quarter within the time frame necessary to adequately review the reports and include the actual amounts in quarterly results for such quarter, the Company accrues the related revenue based on estimates of customer's underlying sales achievement. As a result of accruing revenue for the quarter based on such estimates, adjustments will be required in the following quarter to true-up revenue to the actual amounts reported.

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

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

	As reported under Topic 606			Adjustments			Balances under Topic 605
	(In thousands)
Accounts receivable, net of allowance	$	53,919		$	621		$	54,540
Prepaid expenses and other current assets		8,660			(3,546	)		5,114
Deferred tax assets		17,747			316			18,063
Other non-current assets		8,943			(78	)		8,865
Deferred revenues – current portion		9,369			1,858			11,227
Long-term income taxes payable		4,652			(1,032	)		3,620
Other non-current liabilities		994			785			1,779
Accumulated deficit		(25,256	)		(4,298	)		(29,554	)

The impact of adopting Topic 606 to revenues, cost of revenues and net income for the three and six months ended June 30, 2018 was not significant. There was no significant impact to the basic and diluted net income (loss) per share.

8

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

	As reported under Topic 606			Adjustments			Balances under Topic 605
	(In thousands)
Net income	$	(2,520	)	$	55		$	(2,465	)
Changes in operating assets and liabilities:
Accounts receivable, net of allowance		4,479			(1,413	)		3,066
Prepaid expenses and other current assets		(1,204	)		1,154			(50	)
Other non-current assets		1,597			79			1,676
Deferred revenue		2,745			125			2,870

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

Revenue is recognized when control of products or services is transferred to customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those promised products or services.

The Company determines revenue recognition through the following five steps:

● Identification of the contract, or contracts, with a customer

● Identification of the performance obligations in the contract

● Determination of the transaction price

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

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

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

The Company enters into contracts that can include various combinations of licenses, products and services, some of which are distinct and are accounted for as separate performance obligations. For contracts with multiple performance obligations, the Company allocates the transaction price of the contract to each performance obligation, generally on a relative basis using its standalone selling price.

Nature of Products and Services

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

The Company generates a significant portion of its Design-to-silicon-yield solutions revenue from fixed-price solution implementation service contracts delivered over a specific period of time. Revenue under project–based contracts for solution implementation services is recognized as services are performed using a percentage of completion method based on costs or labor-hours inputs, whichever is the most appropriate measure of the progress towards completion of the contract. Due to the nature of the work performed in these arrangements, the estimation of costs or hours at completion is complex, subject to many variables and requires significant judgment. Key factors reviewed by the Company to estimate costs to complete each contract are future labor and product costs and expected productivity efficiencies. If circumstances arise that change the original estimates of revenues, costs,

or extent of progress toward completion, revisions to the estimates are made. These revisions may result in increases or decreases in estimated revenues or costs. Losses on fixed-price solution implementation contracts are recognized in the period when they become probable. Revisions in profit estimates are reflected in the period in which the conditions that require the revisions become known and can be estimated (cumulative catch-up method).

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

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

9

The Company licenses some of its software products separately from solution implementations, primarily its Exensio big data platform and related products.  The majority of these products are delivered as on premise software licenses, while others can be delivered entirely or partially through Software-as-a-Service (SaaS) or cloud delivery models. Revenue from perpetual (one-time charge) license software is recognized at the time of the inception of the arrangement when control transfers to the client, if the software license is distinct from the services offered by the Company. Revenue from post-contract support subscription is recognized over the contract term on a straight-line basis, because the Company is providing a service of standing ready to provide support, when-and-if needed, and is providing unspecified software upgrades on a when-and-if available basis over the contract term. Revenue from time-based license software is allocated to each performance obligation and is recognized either at a point in time or over time. The license component is recognized at the time of the delivery of the software license, with the post-contract support subscription component being recognized ratably over for the committed term of the contract. Revenue from software hosting or SaaS arrangements that allow for the use of a hosted software product or service over a contractually determined period of time without taking possession of software are accounted for as subscriptions and recognized as revenue ratably, on a straight-line basis, over the coverage period beginning on the date the service is made available to customers.

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

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

	As reported under Topic 606			Adjustments			Balances under Topic 605
				(In thousands)
Design-to-silicon-yield solutions	$	15,266		$	12		$	15,278
Total revenue		21,119			12			21,131
Gross margin		10,202			12			10,214
Selling, general and administrative		5,919			(73	)		5,846
Total operating expenses		13,127			(73	)		13,054
Income (loss) from operations		(2,925	)		85			(2,840	)
Income (loss) before taxes		(2,535	)		85			(2,450	)
Net income (loss)		(2,096	)		85			(2,011	)

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

	As reported under Topic 606			Adjustments			Balances under Topic 605
				(In thousands)
Design-to-silicon-yield solutions	$	33,456		$	(18	)	$	33,438
Total revenue		45,856			(18	)		45,838
Gross margin		23,457			(18	)		23,439
Selling, general and administrative		12,294			(73	)		12,221
Total operating expenses		26,856			(73	)		26,783
Income (loss) from operations		(3,399	)		55			(3,344	)
Income (loss) before taxes		(3,340	)		55			(3,285	)
Net income (loss)		(2,520	)		55			(2,465	)

10

Disaggregation of revenue

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

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

	Three Months Ended		Six Months Ended
	June 30, 2018		June 30, 2018
Product and licenses	$	6,828	$	14,315
Support and Services		14,200		31,190
Other		90		351
Total	$	21,119	$	45,856

          Product and licenses include a portion of time-based software which is recognized in the period, perpetual software and Gainshare performance incentives. The remaining portions of revenue from these contracts correspond to services or other types of performance obligations reported as either services revenue or other revenue.

Under Topic 606, the Company’s performance obligations are satisfied either over-time or at a point-in-time. Revenue from performance obligations, satisfied over time and at a point-in-time, accounted for approximately 68% and 32% for the three and six months ended June 30, 2018, respectively. International revenues accounted for approximately 57% and 58% of our total revenues for the three and six months ended June 30, 2018, respectively, compared to 62% and 57% for the three and six months ended June 30, 2017, respectively. See Note 7. Customer and Geographic Information.

Significant Judgments

More judgments and estimates are required under Topic 606 than were required under Topic 605. Due to the complexity of certain contracts, the actual revenue recognition treatment required under Topic 606 for the Company’s arrangements may be dependent on contract-specific terms and may vary in some instances.

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

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

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

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

   Contract Balances  

The Company performs its obligation under a contract with a customer by transferring products or services in exchange for consideration from the customer. The timing of the Company’s performance often differs from the timing of the customer’s payment, which results in the recognition of a receivable, a contract asset or a contract liability. The Company classifies the right to consideration in exchange for products or services transferred to a client as either a receivable or a contract asset. A receivable is a right to consideration that is unconditional as compared to a contract asset which is a right to consideration that is conditional upon factors other than the passage of time. The majority of the Company’s contract assets represent unbilled amounts related to fixed-price solution implementation service contracts when the costs or labor-hours input method of revenue recognition is utilized and revenue recognized exceeds the amount billed to the client, and the right to consideration is subject to milestone completion or client acceptance. The contract assets are generally classified as current and are recorded on a net basis with deferred revenue (i.e., contract liabilities) at the contract level. The contract assets is included in prepaid expenses and other in the condensed consolidated balance sheets. At June 30, 2018 and January 1, 2018, contract assets of $3.2 million and $1.9 million, respectively, are included in prepaid expenses and other current assets in the condensed consolidated balance sheets. The change in the contract assets balance during the period relates to the recording of revenues for which the right to consideration is subject to milestone completion or client acceptance and movement of previously recorded contract assets to receivables as the right to consideration becomes unconditional. Deferred revenues consist substantially of amounts invoiced in advance of revenue recognition and is recognized as the revenue recognition criteria are met. Deferred revenues that will be recognized during the succeeding twelve month period is recorded as current deferred revenues and the remaining portion is recorded as non- current deferred revenues. This balance was recorded in the other non-current liabilities in the accompanying condensed consolidated balance sheets. Non-current portion of deferred revenue was $0.5 million and $0.9 million, respectively, as of June 30, 2018 and January 1, 2018.

           During the three and six months ended June 30, 2018, the Company recognized $5.0 million and $7.6 million, respectively, of revenue that was included in the deferred revenue balance, as adjusted for Topic 606, at the beginning of 2018.

 At June 30, 2018, 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 $45.3 million. Given the applicable contract terms, the majority of this amount is expected to be recognized as revenue over the next 2 years, with the remainder in the following 5 years.  This amount does not include contracts to which the customer is not committed, nor contracts with original expected lengths of one year or less, nor contracts for which we recognize revenue equal to the amount we have the right to invoice for services performed, or future sales-based or usage-based royalty payments in exchange for a license of intellectual property. This amount is subject to change due to future revaluations of variable consideration, terminations, other contract modifications, or currency adjustments.  The estimated timing of the recognition of remaining unsatisfied performance obligations is subject to change and are affected by changes to the scope, change in timing of delivery of products and services, or contract modifications.

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

The amount of revenue recognized in the three and six months ended June 30, 2018 from performance obligations satisfied (or partially satisfied) in previous periods was ($0.2) million and $0.3 million, respectively. This amount primarily represents changes of estimated  percentage-of –completion based contracts and changes in estimated Gainshare performance incentives for those customers that reported actual Gainshare revenue with some time lag.

12

Costs to obtain or fulfill a contract

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

3. BALANCE SHEET COMPONENTS 

Accounts receivable 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 $23.2 million and $22.2 million as of June 30, 2018, and December 31, 2017, 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 $7.3 million and $8.6 million as of June 30, 2018 and December 31, 2017, respectively. 

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

	June 30, 2018			December 31, 2017
Property and equipment, net:
Computer equipment	$	10,568		$	10,729
Software		4,120			3,348
Furniture, fixtures and equipment		4,119			3,676
Leasehold improvements		2,002			1,980
Test equipment		14,659			13,796
Construction-in-progress		14,992			12,527
		50,460			46,056
Less: accumulated depreciation		(22,365	)		(20,670	)
Total	$	28,095		$	25,386

Test equipment includes DFI assets at customer sites that are contributing to DFI solution revenues. The construction-in-progress balance as of June 30, 2018 and December 31, 2017 was primarily related to construction of DFI assets. Depreciation and amortization expense was $1.3 million and $1.2 million for the three months ended June 30, 2018 and 2017, respectively. Depreciation and amortization expense was $2.5 million and $2.3 million for the six months ended June 30, 2018 and 2017, respectively.  

As of both June 30, 2018, and December 31, 2017, the carrying amount of goodwill was $1.9 million.

Intangible assets balance was $5.6 million and $6.1 million as of June 30, 2018, and December 31, 2017, respectively. Intangible assets as of June 30, 2018 and December 31, 2017 consist of the following (in thousands):

				June 30, 2018							December 31, 2017
	Amortization Period (Years)			Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Acquired identifiable intangibles:
Customer relationships	1	-	9	$	6,740	$	(4,329	)	$	2,411	$	6,740	$	(4,145	)	$	2,595
Developed technology	4	-	6		15,820		(13,117	)		2,703		15,820		(12,829	)		2,991
Tradename	2	-	4		790		(635	)		155		790		(622	)		168
Backlog		1			100		(100	)		-		100		(100	)		-
Patent	7	-	10		1,800		(1,500	)		300		1,800		(1,480	)		320
Other acquired intangibles		4			255		(255	)		-		255		(255	)		-
Total				$	25,505	$	(19,936	)	$	5,569	$	25,505	$	(19,431	)	$	6,074

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The weighted average amortization period for acquired identifiable intangible assets was 6.31 years as of June 30, 2018. For the three and six months ended June 30, 2018, total intangible asset amortization expense was $0.3 million and $0.5 million, respectively. For the three and six months ended June 30, 2017, total intangible asset amortization expense was $0.2 million and $0.4 million respectively. The Company expects annual amortization of acquired identifiable intangible assets to be as follows (in thousands):

Year ending December 31,	Amount
2018 (remaining six months)	$	505
2019		1,009
2020		1,009
2021		833
2022		626
2023 and thereafter		1,587
Total future amortization expense	$	5,569

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

4. STOCKHOLDERS’ EQUITY

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

	Three Months Ended June 30,				Six Months Ended June 30,
	2018		2017		2018		2017
Cost of Design-to-silicon yield-solutions	$	968	$	1,069	$	1,981	$	2,261
Research and development		845		848		1,724		1,682
Selling, general and administrative		889		987		1,852		1,845
Stock-based compensation expenses	$	2,702	$	2,904	$	5,557	$	5,788

On June 30, 2018, the Company had the following stock-based compensation plans:

Stock Plans — At the annual meeting of stockholders on November 16, 2011, the Company’s stockholders approved the 2011 Stock Incentive Plan, which was most recently amended and restated at the 2017 annual meeting of stockholders on May 31, 2017, when the Company’s stockholders approved the Fourth Amended and Restated 2011 Stock Incentive Plan (as amended, the “2011 Plan”). Under the 2011 Plan, the Company may award stock options, stock appreciation rights, stock grants or stock units covering shares of the Company's common stock to employees, directors, non-employee directors and contractors. The aggregate number of shares reserved for awards under this plan is 7,800,000 shares, plus up to 3,500,000 shares previously issued under the 2001 Plan that are forfeited or repurchased by the Company or shares subject to awards previously issued under the 2001 Stock Plan (the "2001 Plan") that expire or that terminate without having been exercised or settled in full on or after November 16, 2011. In case of awards other than options or stock appreciation rights, the aggregate number of shares reserved under the plan will be decreased at a rate of 1.33 shares issued pursuant to such awards. The exercise price for stock options must generally be at prices no less than the fair market value at the date of grant. Stock options generally expire ten years from the date of grant and become vested and exercisable over a four-year period.

In 2001, the Company adopted a 2001 Plan. In 2003, in connection with its acquisition of IDS Systems Inc., the Company assumed IDS’ 2001 Stock Option / Stock Issuance Plan (the “IDS Plan”). Both of the 2001 and the IDS Plans expired in 2011. Stock options granted under the 2001 and IDS Plans generally expire ten years from the date of grant and become vested and exercisable over a four -year period. Although no new awards may be granted under the 2001 or IDS Plans, awards made under the 2001 and IDS Plans that are currently outstanding remain subject to the terms of each such plan.   

14

As of June 30, 2018, 9.6 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 which were forfeited, expired or repurchased by the Company after adoption of the 2011 Plan through June 30, 2018. As of June 30, 2018, there were no outstanding awards that had been granted outside of the 2011, 2001 or the IDS Plans (collectively, the "Stock Plans"). 

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

	Three Months Ended June 30,					Six Months Ended June 30,
	2018		2017			2018			2017
Expected life (in years)		-		4.41			4.43			4.41
Volatility		-		41.63	%		42.22	%		41.53	%
Risk-free interest rate		-		1.67	%		2.52	%		1.69	%
Expected dividend		-		-			-			-
Weighted average fair value per share of options granted during the period	$	-	$	5.98		$	4.28		$	6.16

No stock options were granted during the three months ended June 30, 2018.

Stock option activity under the Company’s Stock Plans during the six months ended June 30, 2018, was as follows:

	Number of Options (in thousands)			Weighted Average Exercise Price per Share		Weighted Average Remaining Contractual Term (years)		Aggregate Intrinsic Value (in thousands)
Outstanding, January 1, 2018		1,045		$	9.65
Granted (weighted average fair value of $4.28 per share)		10		$	11.26
Exercised		(59	)	$	7.069
Canceled		(6	)	$	14.02
Expired		(4	)	$	16.22
Outstanding, June 30, 2018		986		$	9.80		4.51	$	3,404
Vested and expected to vest, June 30, 2018		977		$	9.71		4.44	$	3,403
Exercisable, June 30, 2018		808		$	8.50		3.56	$	3,380

The aggregate intrinsic value in the table above represents the total intrinsic value based on the Company’s closing stock price of $11.98 per share as of June 30, 2018. The total intrinsic value of options exercised during the six months ended June 30, 2018, was $0.3 million.

As of June 30, 2018, there was $0.9 million of total unrecognized compensation cost related to unvested stock options. That cost is expected to be recognized over a weighted average period of 3.0 years. The total fair value of shares vested during the six months ended June 30, 2018, was $0.2 million.

Restricted stock unit activity during the six months ended June 30, 2018, was as follows:

	Shares (in thousands)			Weighted Average Grant Date Fair Value Per Share
Outstanding, January 1, 2018		1,617		$	15.66
Granted		10		$	11.26
Vested		(332	)	$	16.19
Forfeited		(84	)	$	15.53
Outstanding, June 30, 2018		1,211		$	15.49

15

As of June 30, 2018, there was $15.3 million of total unrecognized compensation cost related to outstanding restricted stock units. That cost is expected to be recognized over a weighted average period of 2.3 years. Restricted stock units do not have rights to dividends prior to vesting.

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

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

	Six Months Ended June 30,
	2018			2017
Expected life (in years)		1.25			1.25
Volatility		37.23	%		33.32	%
Risk-free interest rate		1.93	%		0.93	%
Expected dividend		—			—
Weighted average fair value per share of options granted during the period	$	4.32		$	6.78

During the three months ended June 30, 2018 and 2017, no shares were issued under the Purchase Plan. During the six months ended June 30, 2018 and 2017, a total of 108,000 and 100,000 shares, respectively, were issued at a weighted-average purchase price of $9.29 and $9.13 per share, respectively. As of June 30, 2018, there was $1.3 million of unrecognized compensation cost related to the Purchase Plan. That cost is expected to be recognized over a weighted average period of 1.58 years. As of June 30, 2018, 4.2 million shares were available for future issuance under the Purchase Plan.   

Stock Repurchase Program - On May 29, 2018, the Board of Directors terminated the previous 2016 program, and adopted a new 2018 program to repurchase up to $25.0 million of the Company’s common stock both on the open market and in privately negotiated transactions, from time to time, over the next two years. During the three and six months ended June 30, 2018, the Company repurchased 98,800 and 437,007 shares, respectively, under the 2016 program. As of June 30, 2018, 1,279,189 shares had been repurchased at an average price of $14.59 per share under the 2016 program, for a total purchase of $18.7 million. Under the 2018 program, as of June 30,.2018, $25.0 million of the Company’s common stock remained available for future repurchases. 

5. INCOME TAXES  

Income tax benefit decreased $1.2 million for the six months ended June 30, 2018 to a $0.8 million compared to $2.0 million for the six months ended June 30, 2017. The Company’s effective tax rate benefit was 23% and 156% for the six months ended June 30, 2018 and 2017, respectively. The Company’s effective tax rate benefit decreased in the six months ended June 30, 2018, as compared to the same period in 2017, primarily due to lower excess tax benefits related to employee stock compensation and the impact of the recently enacted TCJA, such as a decrease in the maximum federal tax rate from 35% to 21%.

The Company’s total amount of unrecognized tax benefits, excluding interest and penalties, as of June 30, 2018, was $13.0 million, of which $7.7 million, if recognized, would affect the Company’s effective tax rate. The Company’s total amount of unrecognized tax benefits, excluding interest and penalties, as of December 31, 2017, was $12.9 million, of which $7.7 million, if recognized, would affect the Company's effective tax rate. As of June 30, 2018, the Company has recorded unrecognized tax benefits of $2.9 million, including interest and penalties, as long-term taxes payable in its condensed consolidated balance sheet. The remaining $10.8 million has been recorded net of our deferred tax assets, of which $5.3 million is subject to a full valuation allowance. 

The valuation allowance was approximately $9.5 million and $9.1 million as of June 30, 2018, and December 31, 2017, respectively, which was related to California R&D tax credits and California net operating losses related to the Company's acquisition of Syntricity that it currently does not believe are more likely than not to be ultimately realized.

16

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

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

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

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

6. NET INCOME PER SHARE

Basic net income per share is computed by dividing net income by weighted average number of common shares outstanding for the period (excluding outstanding stock options and shares subject to repurchase). Diluted net income 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 income per share (in thousands except per share amount): 

	Three Months Ended June 30,					Six Months Ended June 30,
	2018			2017		2018			2017
Numerator:
Net income (loss)	$	(2,096	)	$	189	$	(2,520	)	$	706
Denominator:
Basic weighted-average common shares outstanding		31,962			32,111		32,065			32,051
Effect of dilutive options and restricted stock		-			1,277		-			1,440
Diluted weighted average shares outstanding		31,962			33,388		32,065			33,491
Net income (loss) per share - Basic	$	(0.07	)	$	0.01	$	(0.08	)	$	0.02
Net income (loss) per share - Diluted	$	(0.07	)	$	0.01	$	(0.08	)	$	0.02

For the three and six months ended June 30, 2018, there are no potential dilutive common shares included in the computation of diluted net income (loss) per share because there was a net loss for both periods.

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

	Three Months Ended June 30,				Six Months Ended June 30,
	2018		2017		2018		2017
Outstanding options		-		102		-		79
Nonvested restricted stock units		-		13		-		4
Employee Stock Purchase Plan		-		27		-		29
Total		-		142		-		112

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  7. CUSTOMER AND GEOGRAPHIC INFORMATION

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

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

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

	Three Months Ended June 30,						Six Months Ended June 30,
Customer	2018			2017			2018			2017
A		40	%		36	%		39	%		42	%
B		10	%		15	%		*	%		10	%

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

Customer	June 30, 2018			December 31, 2017
A		43	%		41	%
B		18	%		15	%

* represents less than 10%

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

	Three Months Ended June 30,
	2018					2017
	Revenues		Percentage of Revenues			Revenues		Percentage of Revenues
United States	$	8,982		42	%	$	9,226		38	%
China		4,360		21			4,753		20
Taiwan		1,038		5			3,643		15
Rest of the world		6,739		32			6,667		27
Total revenue	$	21,119		100	%	$	24,289		100	%

	Six Months Ended June 30,
	2018					2017
	Revenues		Percentage of Revenues			Revenues		Percentage of Revenues
United States	$	19,065		41	%	$	20,860		44	%
China		9,542		21			6,440		13
Taiwan		3,173		7			7,480		15
Rest of the world		14,076		31			13,798		28
Total revenue	$	45,856		100	%	$	48,578		100	%

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

	June 30, 2018		December 31, 2017
United States	$	27,612	$	24,883
Rest of the world		483		503
Total long-lived assets, net	$	28,095	$	25,386

8. FAIR VALUE MEASUREMENTS

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

Level 1 - Inputs are quoted prices in active markets for identical assets or liabilities.

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

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

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

Assets	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Money market mutual funds	$	26,814	$	26,814	$	—	$	—

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

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

The Company enters into foreign currency forward contracts to reduce the exposure to foreign currency exchange rate fluctuations on certain foreign currency denominated monetary assets and liabilities, primarily on third-party accounts payables and intercompany balances. The primary objective of the Company’s hedging program is to reduce volatility of earnings related to foreign currency exchange rate fluctuations. The counterparty to these foreign currency forward contracts is a large global financial institution that the Company believes is creditworthy, and therefore, the Company believes the credit risk of counterparty nonperformance is not significant. These foreign currency forward contracts are not designated for hedge accounting treatment. Therefore, the change in fair value of these contracts is recorded into earnings as a component of other income (expense), net, and offsets the change in fair value of the foreign currency denominated assets and liabilities, which is also recorded in other income (expense), net. For the three months ended June 30, 2018 and 2017, the Company recognized a realized loss of $0.6 million and a realized gain $0.4 million on the contracts, respectively, which was recorded in other income (expense), net in the Company’s Statements of Operations and Comprehensive Income. For the six months ended June 30, 2018 and 2017, the Company recognized a realized loss of $0.4 million and a realized gain $0.5 million on the contracts, respectively, which was recorded in other income (expense), net in the Company’s Statements of Operations and Comprehensive Income.  

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The Company carries these derivatives financial instruments on its Consolidated Balance Sheets at their fair values. The Company’s foreign currency forward contracts are classified as Level 2 because it is not actively traded and the valuation inputs are based on quoted prices and market observable data of similar instruments. As of June 30, 2018, the Company had one outstanding forward contract with a notional amount of $8.1 million and recorded $35,000 other current liabilities associated with this outstanding forward contract. As of December 31, 2017, the Company had one outstanding forward contract with a notional amount of $8.2 million and recorded $12,000 other current assets associated with the outstanding forward contract.  

9. COMMITMENTS AND CONTINGENCIES

Leases

The Company leases administrative and sales offices and certain equipment under noncancelable operating leases, which contain various renewal options and, in some cases, require payment of common area costs, taxes and utilities. These operating leases expire at various times through 2028. Rent expense was $0.7 million and $0.6 million for the three months ended June 30, 2018 and 2017, respectively. Rent expense was $1.3 million and $1.1 million for the six months ended June 30, 2018 and 2017, respectively.  

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

Year ending December 31,	Amount
2018 (remaining six months)	$	718
2019		1,307
2020		1,374
2021		1,291
2022		1,061
2023 and thereafter		4,264
Total future minimum lease payments	$	10,015

In April 2018, the Company entered into a new approximately 20,800 square foot lease, located in Santa Clara, California. The term of the new lease is approximately ten years commencing on or around September 1, 2018. Total lease obligation over the new lease term is approximately $7.0 million, less a lease abatement allowance of approximately $0.4 million. The terms of the new lease include a tenant improvement allowance of approximately $1.3 million. Future minimum lease payments under the lease are included in the above table.

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

 Purchase obligations — The Company has purchase obligations with certain suppliers for the purchase of goods and services entered in the ordinary course of business. As of June 30, 2018, total outstanding purchase obligations were $13.7 million, which are primarily due within the next 12 months.

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

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

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Litigation — From time to time, the Company is subject to various claims and legal proceedings that arise in the ordinary course of business. The Company accrues for losses related to litigation when a potential loss is probable and the loss can be reasonably estimated in accordance with FASB requirements. As of June 30, 2018, the Company was not party to any material legal proceedings, thus no loss was probable and no amount was accrued.   

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

Forward-Looking Statements 

The following discussion of our financial condition and results of operations contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements other than statements of historical fact may be forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may,” “could,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential”, “target” or “continue,” the negative effect of terms like these or other similar expressions. Any statement concerning future financial performance (including future revenues, earnings or growth rates), ongoing business strategies or prospects, and possible actions taken by us or our subsidiaries, which may be provided by us are also forward-looking statements. These forward-looking statements are only predictions. Forward-looking statements are based on current expectations and projections about future events and are inherently subject to a variety of risks and uncertainties, many of which are beyond our control, which could cause actual results to differ materially from those anticipated or projected. All forward-looking statements included in this document are based on information available to us on the date of filing and we further caution investors that our business and financial performance are subject to substantial risks and uncertainties. We assume no obligation to update any such forward-looking statements. In evaluating these statements, you should specifically consider various factors, including the risk factors set forth in Item 1. “Business” and Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2017, filed with the Securities and Exchange Commission on March 16, 2018. All references to “we”, “us”, “our”, “PDF”, “PDF Solutions” or “the Company” refer to PDF Solutions, Inc. 

Overview

 We analyze our customers’ integrated circuit ("IC") design and manufacturing processes to identify, quantify, and correct the issues that cause yield loss to improve our customers’ profitability by improving time-to-market, increasing yield and reducing total design and manufacturing costs. We package our solutions in various ways to meet our customers’ specific business and budgetary needs, each of which provides us with various revenue streams. We receive a mix of fixed fees and variable, performance-based fees for the vast majority of our yield improvement solutions. The fixed fees are typically reflective of the length of time and the resources needed to characterize a customer’s manufacturing process and receive preliminary results of proposed yield improvement suggestions. We receive license fees and service fees for related installation, integration, training, and maintenance and support services for our software and hardware that we license on a stand-alone basis.

Industry Trend

 Consistent with the trend since 2010, in 2018, we expect that the largest logic foundries will continue to invest significantly in leading edge nodes. However, capacity levels in 2018 at advanced nodes, such as 10 and 7 nanometers, may be significantly lower at introduction than some previous nodes, such as 28 nanometers. We also expect that most logic foundries will increase investment in 2018 in derivatives of older process nodes to extract additional value as many of their customers will not move to advanced nodes due to either technological barriers or restrictive economics. Leading foundries are expected to continue to invest in new technologies such as 3-D transistors, memory, and packaging, multi-patterned and EUV lithography, as well as new innovations in process control and variability management. We expect China’s investment in 2018 in semiconductors to continue to accelerate the growth of the industry for the next few years. All these trends provide opportunities to increase our business.  

 Generally, the demand for consumer electronics and communications devices continues to drive technological innovation in the semiconductor industry as the need for products with greater performance, lower power consumption, reduced costs and smaller size continues to grow with each new product generation. In addition, advances in computing systems and mobile devices have fueled demand for higher capacity memory chips. To meet these demands, IC manufacturers and designers are constantly challenged to improve the overall performance of their ICs by designing and manufacturing ICs with more embedded applications to create greater functionality while lowering cost per transistor. As a result, both logic and memory manufacturers have migrated to more and more advanced manufacturing nodes, capable of integrating more devices with higher performance, higher density, and lower power. 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 as new advanced nodes continue to be introduced and industry dynamics drive the introduction of derivative nodes, the difficulties of integrating IC designs with their respective processes will create a greater need for products and services that address yield loss across the IC product life cycle.    

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Customer Contracts 

 Although a substantial portion of our total revenues are concentrated in a small number of customers, the total revenues for each of these customers in any period is the result of Design-to-silicon-yield solutions and Gainshare performance incentives revenues recognized in the period under multiple, separate contracts, with no interdependent performance obligations. These contracts were all entered into in the ordinary course of our business and contain general terms and conditions that are standard across most of our yield improvement solutions customers, including providing services typically targeted to one manufacturing process node, for example the 28 or 20 nanometer node. Fluctuations in future results may occur if any of these customers renegotiate pre-existing contractual commitments due to adverse changes in their own business. See the additional discussion in Part I, Item 1, “Customers,” on page 9 of our Annual Report on Form 10-K for the year ended December 31, 2017, and in Item 1A, “Risk Factors,” on pages 13 through 19 of our Annual Report on Form 10-K for the year ended December 31, 2017, for related information on the risks associated with customer concentration and Gainshare performance incentives revenue.

 Financial Highlights  

Financial highlights for the three months ended June 30, 2018, were as follows: 

• Total revenues were $21.1 million, which was a decrease of $3.2 million, or 13%, compared to the three months ended June 30, 2017. Design-to-silicon-yield solutions revenues were $15.3 million, which was a decrease of $1.2 million, or 7%, compared to the three months ended June 30, 2017. The decrease in Design-to-silicon-yield solutions revenue was primarily related to lower hours worked across multiple contracts and customers, which was partially offset by increases in Exensio big data solution revenues. Gainshare performance incentives revenue was $5.9 million, a decrease of $1.9 million, or 25%, compared to the three months ended June 30, 2017. While volumes were relatively flat during the quarter, this was offset by a one-time performance bonus achievement that occurred in the prior year that was not expected to reoccur. Our Gainshare performance incentives revenue may continue to fluctuate from period to period. Gainshare performance incentives revenue is dependent on many factors that are outside our control, including among others, continued production of ICs by our customers at facilities at which we generate Gainshare, sustained yield improvements by our customers, and our ability to enter into new Design-to-silicon-yield solutions contracts containing Gainshare performance incentives.  

• Net loss was $2.1 million, compared to net income of $0.2 million for the three months ended June 30, 2017. The decrease in net income was primarily attributable to lower total revenue for the three months ended June 30, 2018 compared to the three months ended June 30, 2017.

• Net loss per basic and diluted share was $(0.07) for the three months ended June 30, 2018, compared to net income per basic and diluted share of $0.01, for the three months ended June 30, 2017, a decrease of $0.08 per basic and diluted share. 

• Cash, cash equivalents and investments decreased $0.4 million to $100.9 million at June 30, 2018, from $101.3 million at December 31, 2017, primarily due to cash used in investing activities related to the development of our DFI solution, and cash used in financing activities primarily due to repurchases of our common stock, offset by cash generated from operating activities during the quarter.

Financial highlights for the six months ended June 30, 2018, were as follows:

● Total revenues were $45.9 million, which was a decrease of $2.7 million, or 6%, compared to the six months ended June 30, 2017. Design-to-silicon-yield solutions revenues were $33.5 million, which was a decrease of $2.7 million, or 8%, compared to the six months ended June 30, 2017. The decrease in design-to-silicon-yield solutions revenue was primarily related to lower hours worked across multiple contracts and customers, which was partially offset by increases in Exensio big data solution revenues. Gainshare performance incentives revenue was $12.4 million, comparable to $12.4 million for the six months ended June 30, 2017. Gross margin for the six months ended June 30, 2018 was 51%, compared to 53% for the six months ended June 30, 2017.

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● Net loss was $2.5 million, compared to net income of $0.7 million for the six months ended June 30, 2017. The decrease in net income was primarily attributable to lower total revenue for the six months ended June 30, 2018 compared to the six months ended June 30, 2017 and a $1.2 million decrease in income tax benefit primarily due to lower excess tax benefits related to employee stock compensation and the impact of the recently enacted U.S. Tax Cuts and Jobs Act ("Tax Act"), such as, a decrease in the maximum federal tax rate from 35% to 21%, global intangible low-taxed income (“GILTI”), and foreign derived intangible income (“FDII”).

● Net loss per basic and diluted share was $(0.08) for the six months ended June 30, 2018, compared to net income per basic and diluted share of $0.02, for the six months ended June 30, 2017, a decrease of $0.10 per basic and diluted share.

    Critical Accounting Policies

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 consolidated financial statements, and to Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2017. 

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

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

General

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

Revenue Recognition

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

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

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

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

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

We license some of our software products separately from solution implementations, primarily our Exensio big data platform and related products.  The majority of these products are delivered as on-premise software licenses, while others can be delivered entirely or partially through Software-as-a-Service (SaaS) or cloud delivery models. Revenue from perpetual (one-time charge) license software is recognized at the time of the inception of the arrangement when control transfers to the client, if the software license is distinct from the services offered by us. Revenue from post-contract support subscription is recognized over the contract term on a straight-line basis, because we are providing a service of standing ready to provide support, when-and-if needed, and is providing unspecified software upgrades on a when-and-if available basis over the contract term. Revenue from time-based license software is allocated to each performance obligation and is recognized either at a point in time or over time. The license component is recognized at the time of the delivery of the software license, with the post-contract support subscription component being recognized ratably over for the committed term of the contract. Revenue from software hosting or SaaS arrangements that allow for the use of a hosted software product or service over a contractually determined period of time without taking possession of software are accounted for as subscriptions and are recognized  as revenue ratably, on a straight-line basis, over the coverage period beginning on the date the service is made available to customers.

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

Income Taxes

       We are required to assess whether it is more-likely-than-not that our deferred tax assets will be recovered from future taxable income and if we believe that they are not likely to be realizable before the expiration dates applicable to such assets then, to the extent we believe that recovery is not likely, establish a valuation allowance. Changes in the net deferred tax assets, less offsetting valuation allowance, in a financial reporting period are recorded through the income tax provision and could have a material impact to the condensed consolidated statements of operations. The valuation allowance was approximately $9.5 million and $9.1 million as of June 30, 2018 and December 31, 2017, respectively, which was related to California R&D tax credits and California net operating losses related to 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.

          Our income tax calculations are based on application of the respective U.S. federal, state or foreign tax law. Our tax filings, however, are subject to audit by the respective tax authorities. Accordingly, we recognize tax liabilities based upon our estimate of whether, and the extent to which, additional taxes will be due when such estimates are more-likely-than-not to be sustained. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. To the extent the final tax liabilities are different than the amounts originally accrued, the increases or decreases are recorded as an income tax expense or benefit in the consolidated statements of operations. The Company intends to reinvest the earnings of its non-U.S. subsidiaries in those operations indefinitely. As such, the Company has not provided for any taxes on the earnings of foreign subsidiaries as of June 30, 2018. It is not practicable to determine the amount of the unrecognized tax liability at this time. 

 Recent Accounting Pronouncements and Accounting Changes

See Note 1 of “Notes to Condensed Consolidated Financial Statements (Unaudited)” of this Quarterly Report on Form 10-Q for a description of recent accounting pronouncements and accounting changes, including the expected dates of adoption and estimated effects, if any, on our consolidated financial statements.   

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  Results of Operations

The following table sets forth, for the periods indicated, the percentage of total revenues represented by the line items reflected in our condensed consolidated statements of operations:  

	Three Months Ended June 30,						Six Months Ended June 30,
	2018			2017			2018			2017
Revenues:
Design-to-silicon-yield solutions		72	%		68	%		73	%		74	%
Gainshare performance incentives		28			32			27			26
Total revenues		100			100	%		100			100	%
Costs of design-to-silicon-yield solutions		51			47			48			47
Amortization of acquired technology		1			-			1			-
Total costs of Design-to-silicon-yield solutions		52			47			49			47
Gross profit		48			47			51			53
Operating expenses:
Research and development		34			30			31			30
Selling, general and administrative		28			26			27			25
Amortization of other acquired intangible assets		1			-			0			-
Total operating expenses		63			56			58			55
Income (loss) from operations		(14	)		(3	)		(7	)		(2	)
Interest and other income (expense), net		2			-			0			(1	)
Income (loss) before taxes		(12	)		(3	)		(7	)		(3	)
Income tax provision (benefit)		(2	)		(4	)		(2	)		(4	)
Net income (loss)		(10	)%		1	%		(5	)%		1	%

Comparison of the Three Months Ended June 30, 2018 and 2017 

	Three Months Ended June 30,				$			%
Revenues	2018		2017		Change			Change
(in thousands, except for percentages)
Design-to-silicon-yield solutions	$	15,266	$	16,500	$	(1,234	)		(7	)%
Gainshare performance incentives		5,853		7,789		(1,936	)		(25	)%
Total revenues	$	21,119	$	24,289	$	(3,170	)		(13	)%

Design-to-silicon-yield solutions. Design-to-silicon-yield solutions revenue is derived from services (including solution implementations, software support and maintenance, consulting, and training) and software licenses, provided during our customer yield improvement engagements as well as during solution product sales.  Design-to-silicon-yield solutions revenue decreased $1.2 million for the three months ended June 30, 2018, compared to the three months ended June 30, 2017. The decrease in Design-to-silicon-yield solutions was primarily due to the decrease in revenue from our yield ramp solutions due to lower hours worked across multiple contracts and customers, which was partially offset by increases in Exensio big data solution revenues that were driven by strong business activities. Our Design-to-silicon-yield solutions revenue may fluctuate in the future and is dependent on a number of factors, including the semiconductor industry’s continued acceptance of our solutions, the timing of purchases by existing and new customers, 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 due to adverse changes in their own business, or if any of our significant customers, who have entered into a time and materials contract, take advantage of certain contractual provisions that permit the suspension of contracted work for a period if their business experiences a financial hardship.

Gainshare Performance Incentives. Gainshare performance incentives revenues represent royalties and performance incentives earned contingent upon our customers reaching certain defined operational levels. Revenue derived from Gainshare performance incentives decreased $1.9 million for the three months ended June 30, 2018, compared to the three months ended June 30, 2017. While volumes were relatively flat during the quarter, this was offset by a one-time performance bonus achievement that occurred in the prior year that was not expected to reoccur. Our Gainshare performance incentives revenue may continue to fluctuate from period to period. Gainshare performance incentives revenue is dependent on many factors that are outside our control, including among others, continued production of ICs by our customers at facilities at which we generate Gainshare, sustained yield improvements by our customers, and our ability to enter into new Design-to-silicon-yield solutions contracts containing Gainshare performance incentives.  

	Three Months Ended June 30,				$			%
Costs of Design-to-silicon-yield solutions	2018		2017		Change			Change
(in thousands, except for percentages)
Direct costs of Design-to-silicon-yield solutions	$	10,774	$	11,283	$	(509	)		(5	)%
Amortization of acquired technology		143		96		47			49	%
Total costs of Design-to-silicon-yield solutions	$	10,917	$	11,379	$	(462	)		(4	)%

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Costs of Design-to-silicon-yield solutions. Costs of Design-to-silicon-yield solutions consist of costs incurred to provide and support our services, costs recognized in connection with licensing our software, and amortization of acquired technology. Direct costs of Design-to-silicon-yield solutions consist of service and software licenses costs. Service costs consist of material, employee compensation and related benefits, overhead costs, travel and facilities-related costs. Software license costs consist of costs associated with licensing third-party software used by the Company in providing services to our customers in solution engagements, or sold in conjunction with our software products. Direct costs of Design-to-silicon-yield solutions decreased for the three months ended June 30, 2018, compared to the three months ended June 30, 2017. The change in direct cost of Design-to-silicon-yield solutions was primarily due to a $0.5 million decrease in personnel-related cost driven by lower headcount, Amortization of acquired technology for the three months ended June 30, 2018, slightly increased slightly due to the amortization of acquired technology from our acquisition of certain assets from Kinesys. 

	Three Months Ended
	June 30				$			%
Research and Development	2018		2017		Change			Change
(in thousands, except for percentages)
Research and development	$	7,100	$	7,276	$	(176	)		(2	)%

Research and Development. 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 or the three months ended June 30, 2018, compared to the three months ended June 30, 2017. The change in the research and development expenses was primarily due to a $0.2 million decrease in personnel-related expense due to lower headcount. We anticipate our expenses in research and development will fluctuate in absolute dollars from period to period as a result of cost control initiatives and the timing of product development projects and revenue generating activity requirements. 

	Three Months Ended
	June 30,				$			%
Selling, General and Administrative	2018		2017		Change			Change
(in thousands, except for percentages)
Selling, general and administrative	$	5,919	$	6,195	$	(276	)		(4	)%

Selling, General and Administrative. Selling, general and administrative expenses consist primarily of compensation and benefits for sales, marketing and general and administrative personnel, legal and accounting services, marketing communications, travel and facilities cost allocations, and stock-based compensation charges. Selling, general and administrative expenses decreased for the three months ended June 30, 2018, compared to the three months ended June 30, 2017, primarily due to a $0.3 million decrease in personnel-related 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 increased selling efforts in the future.

	Three Months Ended
	June 30,				$		%
Amortization of Other Acquired Intangible Assets	2018		2017		Change		Change
(In thousands, except for percentages)
Amortization of other acquired intangible assets	$	108	$	92	$	16		18	%

Amortization of Other Acquired Intangible Assets. 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 June 30, 2018, compared to the three months ended June 30, 2017, was primarily related to amortization of other acquired intangible assets related to acquisition of certain assets from Kinesys. 

	Three Months Ended
	June 30,				$		%
Interest and Other Income (Expense), Net	2018		2017		Change		Change
(in thousands, except for percentages)
Interest and other income (expense), net	$	390	$	27	$	363		1,344	%

26

Interest and Other Income (expense), net.  Interest and other income (expense), net increased $0.4 million for the three months ended June 30, 2018, compared to the three months ended June 30, 2017. The change was primarily due to foreign exchange rate movements.

	Three Months Ended
	June 30,						$			%
Income Tax Provision (Benefits)	2018			2017			Change			Change
(in thousands, except for percentages)
Income tax provision (benefits)	$	(439	)	$	(815	)	$	(376	)		(46	)%

Income Tax Provision (benefits). Income tax benefit decreased $0.4 million for the three months ended June 30, 2018, compared to three months ended June 30, 2017, primarily due to lower excess tax benefits related to employee stock compensation and the impact of recently enacted U.S. tax reform, such as, a decrease in the maximum federal tax rate from 35% to 21% and global intangible low-taxed income (GILTI).

Comparison of the Six Months Ended June 30, 2018 and 2017 

	Six Months Ended June 30,				$			%
Revenues	2018		2017		Change			Change
(in thousands, except for percentages)
Design-to-silicon-yield solutions	$	33,456	$	36,198	$	(2,742	)		(8	)%
Gainshare performance incentives		12,400		12,380		20			0	%
Total revenues	$	45,856	$	48,578	$	(2,722	)		(6	)%

Design-to-silicon-yield solutions. Design-to-silicon-yield solutions revenue decreased $2.7 million for the six months ended June 30, 2018, compared to the six months ended June 30, 2017. The decrease in Design-to-silicon-yield solutions was primarily due to the decrease in the revenue from our yield ramp solutions due to lower hours worked across multiple contracts and customers, which was partially offset by increases in Exensio big data solution revenues that were driven by strong business activities.  

Gainshare Performance Incentives. Revenue derived from Gainshare performance incentives were flat for the six months ended June 30, 2018, compared to the six months ended June 30, 2017. 

	Six Months Ended June 30,				$			%
Costs of Design-to-silicon-yield solutions	2018		2017		Change			Change
(in thousands, except for percentages)
Direct costs of Design-to-silicon-yield solutions	$	22,112	$	22,618	$	(506	)		(2	)%
Amortization of acquired technology		287		192		95			49	%
Total costs of Design-to-silicon-yield solutions	$	22,399	$	22,810	$	(411	)		(2	)%

27

Costs of Design-to-silicon-yield solutions. Direct costs of Design-to-silicon-yield solutions decreased for the six months ended June 30, 2018, compared to the six months ended June 30, 2017. The decrease in direct cost of Design-to-silicon-yield solutions was primarily due to a $0.6 million decrease in personnel-related cost driven by lower headcount, partially offset by a $0.1 million increase in support service travel expense. Amortization of acquired technology for the six months ended June 30, 2018, slightly increased due to the amortization of acquired technology from our acquisition of certain assets from Kinesys. 

	Six Months Ended
	June 30				$			%
Research and Development	2018		2017		Change			Change
(in thousands, except for percentages)
Research and development	$	14,345	$	14,557	$	(212	)		(1	)%

Research and Development. Research and development expenses decreased for the six months ended June 30, 2018, compared to the six months ended June 30, 2017. The decrease in the research and development expenses was primarily due to a $0.5 million decrease in personnel-related expense, partially offset by a $0.3 million increase in depreciation expense for lab equipment.

	Six Months Ended
	June 30,				$		%
Selling, General and Administrative	2018		2017		Change		Change
(in thousands, except for percentages)
Selling, general and administrative	$	12,294	$	12,095	$	199		2	%

Selling, General and Administrative. Selling, general and administrative expenses increased for the six months ended June 30, 2018, compared to the six months ended June 30, 2017, primarily due to a $0.1 million increase in personnel-related expense and a $0.1 million increase in travel expense.

	Six Months Ended
	June 30,				$		%
Amortization of Other Acquired Intangible Assets	2018		2017		Change		Change
(In thousands, except for percentages)
Amortization of other acquired intangible assets	$	217	$	184		33		18	%

Amortization of Other Acquired Intangible Assets. The increase in amortization of other acquired intangible assets for the six months ended June 30, 2018 compared to the six months ended June 30, 2017 was primarily related to amortization of other acquired intangible assets related to acquisition of certain assets from Kinesys. 

	Six Months Ended
	June 30,					$			%
Interest and Other Income (Expense), Net	2018		2017			Change			Change
(in thousands, except for percentages)
Interest and other income (expense), net	$	59	$	(202	)		(261	)		(129	)%

28

Interest and Other Income (expense), net.  Interest and other income (expense), net increased $0.3 million for the six months ended June 30, 2018, compared to the six months ended June 30, 2017. The change was primarily due to foreign exchange rate movements.

	Six Months Ended
	June 30,						$			%
Income Tax Provision (Benefits)	2018			2017			Change			Change
(in thousands, except for percentages)
Income tax provision (benefits)	$	(820	)	$	(1,976	)	$	(1,156	)		(58.50%	)

Income Tax Provision (benefits). Income tax benefit decreased $1.2 million for the six months ended June 30, 2018, compared to six months ended June 30, 2017, primarily due to lower excess tax benefits related to employee stock compensation and the impact of recently enacted U.S. tax reform, such as a decrease in the maximum federal tax rate from 35% to 21% and GILTI.

Liquidity and Capital Resources

As of June 30, 2018, our working capital, defined as total current assets less total current liabilities, was $143.7 million, compared to $144.3 million as of December 31, 2017. Cash and cash equivalents were $100.9 million as of June 30, 2018, compared to $101.3 million as of December 31, 2017. As of June 30, 2018, and December 31, 2017, cash and cash equivalents held by our foreign subsidiaries were $3.5 million and $3.1 million, respectively. We believe that our existing cash resources and anticipated funds from operations will satisfy our cash requirements to fund our operating activities, capital expenditures and other obligations for the next twelve months. 

During six months ended June 30, 2018, cash provided by operating activities of $9.7 million was a result of $2.5 million of net loss, non-cash adjustments to net income of $6.9 million, and an increase in the net change in operating assets and liabilities of $5.4 million. Non-cash charges consisted primarily of stock-based compensation of $5.6 million, depreciation and amortization of $2.5 million, deferred taxes of $1.7 million and amortization of acquired intangible assets of $0.5 million. Cash provided by operating activities resulting from the net change in operating assets and liabilities primarily consisted of a $4.5 million decrease in accounts receivable, a $2.7 million increase in deferred revenue, and a $1.6 million decrease in other non-current assets, partially offset by a $1.2 million increase in prepaid expenses and other assets, a $0.8 million decrease in accrued compensation and related benefits, a $0.5 million decrease in accrued and other liabilities, and a $1.0 million decrease in accounts payable. Cash flows used in investing activities of $4.8 million, consisted of payments for capital expenditures, primarily test equipment. Cash flows used in financing activities of $5.2 million for the six months ended June 30, 2018, consisted of $5.2 million of cash used to repurchase shares of our common stock, $1.4 million of cash payments for taxes related to net share settlement of equity awards, partially offset by $1.0 million of proceeds from our Employee Stock Purchase Plan and $0.4 million of proceeds from the exercise of stock options. 

    During six months ended June 30, 2017, cash provided by operating activities of $1.0 million was a result of $0.7 million of net income, non-cash adjustments to net income of $8.4 million and a cash decrease in the net change in operating assets and liabilities of $8.1 million. Non-cash charges consisted primarily of stock-based compensation of $5.8 million, depreciation and amortization of $2.3 million, amortization of acquired intangible assets of $0.4 million, and a provision for doubtful accounts of $0.1 million, partially offset by deferred taxes of $0.2 million. Cash flow decreases resulting from the net change in operating assets and liabilities primarily consisted of a $6.0 million increase in accounts receivable, mainly due to the slow payments from Asia customers, a $3.4 million increase in prepaid expense and other current assets, a $0.2 million decrease in accrued compensation and related benefits, and a $0.7 million of decrease in accrued and other liabilities, partially offset by a $0.9 million increase in accounts payable, a $0.4 million decrease in other non-current assets, a $0.7 million increase in deferred revenue, and a $0.3 million increase in billing in excess of recognized revenue. Cash flows used in investing activities of $5.0 million for the six months ended June 30, 2017, consisted of payments for capital expenditures, primarily test equipment. Cash flows used in financing activities of $3.9 million for the six months ended June 30, 2017, consisted of $4.8 million of cash used to repurchase shares of our common stock, $1.9 million of cash payments for taxes related to net share settlement of equity awards, partially offset by $1.8 million of proceeds from the exercise of stock options and $0.9 million of proceeds from our Employee Stock Purchase Plan.

Off-Balance Sheet Agreements 

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

29

Contractual Obligations

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

	Payments Due by Period
Contractual Obligations	2018 (remaining six months)		2019		2020		2021		2022		2023 and thereafter		Total
Operating lease obligations(1)	$	718	$	1,307	$	1,374	$	1,291	$	1,061	$	4,264	$	10,015
Purchase obligations(2)		11,056		2,317		218		148		-		-		13,739
Total(3)	$	11,774	$	3,624	$	1,592	$	1,439	$	1,061	$	4,264	$	23,754

(1)	In April 2018, we entered into a new approximately 20,800 square foot lease, located in Santa Clara, California. The term of the new lease is approximately ten years commencing on or around September 1, 2018. The total lease obligation over the new lease term is approximately $7.0 million, less a lease abatement allowance of approximately $0.4 million. The terms of the new lease include a tenant improvement allowance of approximately $1.3 million. Future minimum lease payments under the lease are included in the above table.
(2)	Purchase obligations consist of agreements to purchase goods and services entered in the ordinary course of business.
(3)	The contractual obligation table above excludes liabilities for uncertain tax positions of $2.9 million, which are not practicable to assign to any particular years, due to the inherent uncertainty of the tax positions.  See Note 5. of “Notes to Condensed Consolidated Financial Statements” for further discussion.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

The following discusses our exposure to market risk related to changes in interest rates and foreign currency exchange rates. We do not currently own any equity investments, nor do we expect to own any in the foreseeable future. This discussion contains forward-looking statements that are subject to risks and uncertainties. Actual results could vary materially as a result of a number of factors.

Interest Rate Risk.   As of June 30, 2018, we had cash and cash equivalents of $100.9 million. Cash and cash equivalents consisted of cash and highly liquid money market instruments. We would not expect our operating results or cash flows to be affected to any significant degree by the effect of a sudden change in market interest on our portfolio. A hypothetical increase in market interest rates of 100 basis points from the market rates in effect at June 30, 2018, would cause the fair value of these investments to decrease by an immaterial amount which would not have significantly impacted our financial position or results of operations. Declines in interest rates over time will result in lower interest income and interest expense.

Foreign Currency and Exchange Risk.   Certain of our payables for our international offices are denominated in the local currency, including the Euro, Yen and RMB. Therefore, a portion of our operating expenditures is subject to foreign currency risks. We enter into foreign currency forward contracts to reduce the exposure to foreign currency exchange rate fluctuations on certain foreign currency denominated monetary assets and liabilities. We do not use foreign currency forward contracts for speculative or trading purposes. We record these forward contracts at fair value. The counterparty to these foreign currency forward contracts is a large global financial institution that we believe is creditworthy, and therefore, we believe the credit risk of counterparty non-performance is not significant. The change in fair value of these contracts is recorded into earnings as a component of other income (expense), net and offsets the change in fair value of foreign currency denominated monetary assets and liabilities, which is also recorded in other income (expense), net. As of June 30, 2018, we had one outstanding forward contract with a notional amount of $8.1 million. The foreign currency exchange rate movement of plus-or-minus 10% will result in the change in fair value of this contract of plus-or-minus $0.8 million.  

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our principal executive officer and principal financial and accounting officer, evaluated the effectiveness of our "disclosure controls and procedures" as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) as of June 30, 2018, in connection with the filing of this Quarterly Report on Form 10-Q. Based on that evaluation as of June 30, 2018, our principal executive officer and principal financial and accounting officer concluded that our disclosure controls and procedures were effective to ensure that the information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in rules and forms of the SEC and accumulated and communicated to our management as appropriate to allow timely decisions regarding required disclosure.    

Changes in Internal Control over Financial Reporting

There were no changes in the Company's internal control over financial reporting during the three months ended June 30, 2018, that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. 

30

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

From time to time, we are subject to various claims and legal proceedings that arise in the ordinary course of business. We accrue for losses related to litigation when a potential loss is probable and the loss can be reasonably estimated in accordance with FASB requirements. During the reported period, we were not a party to any material legal proceedings, thus no loss was probable and no amount was accrued at June 30, 2018.

Item 1A. Risk Factors

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

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

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

ISSUER PURCHASES OF EQUITY SECURITIES

Period	Total Number of Shares Purchased (in thousands) (1)		Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Programs (in thousands) (1)		Approximate Dollar Value of Shares that May Yet Be Purchased Under Programs (in thousands) (1)
Month #4 (April 1, 2018 through April 30, 2018)		—	$	—		—	$
Month #5 (May 1, 2018 through May 31, 2018)		98.8	$	11.39		98.8	$
Month #6 (June 1, 2018 through June 30, 2018)		—	$	—		—	$	25,000
Total		98.8	$	11.39		98.8	$	25,000

(1) On May 29, 2018, the Board of Directors terminated the 2016 program and adopted a new 2018 program to repurchase up to $25.0 million of common stock both on the open market and in privately negotiated transactions, from time to time, over the next two years. During the three and six months ended June 30, 2018, 98,800 and 437,007 shares had been repurchased, respectively, under the 2016 program. As of June 30, 2018, 1,279,189 total shares had been repurchased at an average price of $14.59 per share under the 2016 program, for a total purchase of $18.7 million. Under the 2018 program, $25.0 million of common stock remained available for future repurchases.  

31

Item 3. Defaults Upon Senior Securities

None.  

Item 4. Mine Safety Disclosures

None. 

Item 5. Other Information

None. 

Item 6. Exhibits

Exhibit Number	Description
31.01	Certification of the principal executive officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.02	Certification of the principal financial and accounting officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.01	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.02	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS	XBRL Instance Document.
101.SCH	XBRL Taxonomy Extension Schema Document.
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB	XBRL Taxonomy Extension Label Linkbase Document.
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	PDF SOLUTIONS, INC.
Date: August 9, 2018	By:	/s/ JOHN K. KIBARIAN
		John K. Kibarian
		President and Chief Executive Officer
		(principal executive officer)

Date: August 9, 2018	By:	/s/ GREGORY C. WALKER
		Gregory C. Walker
		Vice President, Finance and Chief Financial Officer
		(principal financial and accounting officer)

32

EX-31.01

Exhibit 31.01

CERTIFICATIONS

 I, John K. Kibarian, certify that:

1. I have reviewed this quarterly report on Form 10-Q of PDF Solutions, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

By:	/s/ John K. Kibarian
	John K. Kibarian
	President and Chief Executive Officer
	(principal executive officer)

Date: August 9, 2018

EX-31.02

Exhibit 31.02

CERTIFICATIONS

I, Gregory C. Walker, certify that:

1. I have reviewed this quarterly report on Form 10-Q of PDF Solutions, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

By:	/s/ Gregory C. Walker
	Gregory C. Walker
	Vice President, Finance and Chief Financial Officer
	(principal financial and accounting officer)

Date: August 9, 2018

EX-32.01

 Exhibit 32.01

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of PDF Solutions, Inc. (the “Company”) on Form 10-Q for the quarter ended June 30, 2018, as filed with the Securities and Exchange Commission on August 9, 2018 (the “Report”), I, John K. Kibarian, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

By:	/s/ John K. Kibarian
	John K. Kibarian
	President and Chief Executive Officer
	(principal executive officer)

Date: August 9, 2018

EX-32.02

Exhibit 32.02

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of PDF Solutions, Inc. (the “Company”) on Form 10-Q for the quarter ended June 30, 2018 as filed with the Securities and Exchange Commission on August 9, 2018 (the “Report”), I, Gregory C. Walker, Vice President, Finance and Chief Financial Officer, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

By:	/s/ Gregory C. Walker
	Gregory C. Walker
	Vice President, Finance and Chief Financial Officer
	(principal financial and accounting officer)

Date: August 9, 2018

XML

Document And Entity Information - shares	6 Months Ended
	Jun. 30, 2018	Aug. 01, 2018
Document Information [Line Items]
Entity Registrant Name	PDF SOLUTIONS INC
Entity Central Index Key	0001120914
Trading Symbol	pdfs
Current Fiscal Year End Date	--12-31
Entity Filer Category	Accelerated Filer
Entity Current Reporting Status	Yes
Entity Voluntary Filers	No
Entity Well-known Seasoned Issuer	No
Entity Common Stock, Shares Outstanding (in shares)		32,140,816
Document Type	10-Q
Document Period End Date	Jun. 30, 2018
Document Fiscal Year Focus	2018
Document Fiscal Period Focus	Q2
Amendment Flag	false

XML

Condensed Consolidated Balance Sheets (Current Period Unaudited) - USD ($) $ in Thousands	Jun. 30, 2018	Dec. 31, 2017
Current assets:
Cash and cash equivalents	$ 100,916	$ 101,267
Accounts receivable, net of allowance of $333 and $374, respectively	53,919	57,564
Prepaid expenses and other current assets	8,660	5,069
Total current assets	163,495	163,900
Property and equipment, net	28,095	25,386
Goodwill	1,923	1,923
Intangible assets, net	5,569	6,074
Deferred tax assets	17,747	16,348
Other non-current assets	8,943	10,545
Total assets	225,772	224,176
Current liabilities:
Accounts payable	2,495	2,536
Accrued compensation and related benefits	5,608	6,493
Accrued and other current liabilities	2,330	2,627
Deferred revenues – current portion	9,369	7,981
Total current liabilities	19,802	19,637
Long-term income taxes payable	4,652	3,902
Other non-current liabilities	994	2,269
Total liabilities	25,448	25,808
Commitments and contingencies (Note 9)
Stockholders’ equity:
Preferred stock, $0.00015 par value, 5,000 shares authorized, no shares issued and outstanding	0	0
Common stock, $0.00015 par value, 70,000 shares authorized: shares issued 40,298 and 39,799, respectively; shares outstanding 32,075 and 32,112, respectively	5	5
Additional paid-in-capital	304,948	297,950
Treasury stock at cost, 8,224 and 7,688 shares, respectively	(78,422)	(71,793)
Accumulated deficit	(25,256)	(27,089)
Accumulated other comprehensive loss	(951)	(705)
Total stockholders’ equity	200,324	198,368
Total liabilities and stockholders’ equity	$ 225,772	$ 224,176

XML

Condensed Consolidated Balance Sheets (Current Period Unaudited) (Parentheticals) - USD ($) shares in Thousands, $ in Thousands	Jun. 30, 2018	Dec. 31, 2017
Accounts receivable, allowance	$ 333	$ 374
Preferred stock, par value (in dollars per share)	$ 0.00015	$ 0.00015
Preferred stock, shares authorized (in shares)	5,000	5,000
Preferred stock, shares issued (in shares)	0	0
Preferred stock, shares outstanding (in shares)	0	0
Common stock, par value (in dollars per share)	$ 0.00015	$ 0.00015
Common stock, shares authorized (in shares)	70,000	70,000
Common stock, shares issued (in shares)	40,298	39,799
Common stock, shares outstanding (in shares)	32,075	32,112
Treasury stock, shares (in shares)	8,224	7,688

XML

Condensed Consolidated Statements of Operations and Comprehensive Income (Unaudited) - USD ($) shares in Thousands, $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2018	Jun. 30, 2017	Jun. 30, 2018	Jun. 30, 2017
Revenues:
Revenues	$ 21,119	$ 24,289	$ 45,856	$ 48,578
Costs of Design-to-silicon-yield solutions
Gross profit	10,202	12,910	23,457	25,768
Operating expenses:
Research and development	7,100	7,276	14,345	14,557
Selling, general and administrative	5,919	6,195	12,294	12,095
Amortization of other acquired intangible assets	108	92	217	184
Total operating expenses	13,127	13,563	26,856	26,836
Loss from operations	(2,925)	(653)	(3,399)	(1,068)
Interest and other income (expense), net	390	27	59	(202)
Loss before income taxes	(2,535)	(626)	(3,340)	(1,270)
Income tax benefits	(439)	(815)	(820)	(1,976)
Net income (loss)	$ (2,096)	$ 189	$ (2,520)	$ 706
Net income (loss) per share:
Basic (in dollars per share)	$ (0.07)	$ 0.01	$ (0.08)	$ 0.02
Diluted (in dollars per share)	$ (0.07)	$ 0.01	$ (0.08)	$ 0.02
Weighted average common shares:
Basic (in shares)	31,962	32,111	32,065	32,051
Diluted (in shares)	31,962	33,388	32,065	33,491
Net income (loss)	$ (2,096)	$ 189	$ (2,520)	$ 706
Other comprehensive income:
Foreign currency translation adjustments, net of tax	(771)	435	(246)	708
Comprehensive income (loss)	(2,867)	624	(2,766)	1,414
License and Service [Member]
Revenues:
Revenues	15,266	16,500	33,456	36,198
Costs of Design-to-silicon-yield solutions
Direct costs of Design-to-silicon-yield solutions	10,774	11,283	22,112	22,618
Amortization of acquired technology	143	96	287	192
Total cost of Design-to-silicon-yield solutions	10,917	11,379	22,399	22,810
Gainshare Performance Incentives [Member]
Revenues:
Revenues	$ 5,853	$ 7,789	$ 12,400	$ 12,380

XML

Condensed Consolidated Statements of Cash Flows (Unaudited) - USD ($) $ in Thousands	6 Months Ended
	Jun. 30, 2018	Jun. 30, 2017
Operating activities:
Net income (loss)	$ (2,520)	$ 706
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	2,531	2,286
Stock-based compensation expense	5,557	5,788
Amortization of acquired intangible assets	505	376
Deferred taxes	(1,701)	(193)
Loss on disposal of property and equipment	3	5
Provision for (reversal of) allowance for doubtful accounts	(42)	124
Unrealized loss (gain) on foreign currency forward contract	47	33
Changes in operating assets and liabilities:
Accounts receivable, net of allowance	4,479	(5,996)
Prepaid expenses and other current assets	(1,204)	(3,435)
Accounts payable	(992)	851
Accrued compensation and related benefits	(818)	(223)
Accrued and other liabilities	(475)	(745)
Deferred revenues	2,745	726
Billings in excess of recognized revenues	7	301
Other non-current assets	1,597	377
Net cash provided by operating activities	9,719	981
Investing activities:
Purchases of property and equipment	(4,810)	(4,964)
Net cash used in investing activities	(4,810)	(4,964)
Financing activities:
Proceeds from exercise of stock options	416	1,808
Repurchases of common stock	(5,248)	(4,770)
Proceeds from employee stock purchase plan	1,007	910
Payments for taxes related to net share settlement of equity awards	(1,376)	(1,879)
Net cash (used in) provided by financing activities	(5,201)	(3,931)
Effect of exchange rate changes on cash and cash equivalents	(59)	134
Net change in cash and cash equivalents	(351)	(7,780)
Cash and cash equivalents, beginning of period	101,267	116,787
Cash and cash equivalents, end of period	100,916	109,007
Supplemental disclosure of cash flow information:
Taxes	1,104	1,339
Property and equipment received and accrued in accounts payable and accrued and other liabilities	$ 1,673	$ 1,726

XML

Note 1 - Basis of Presentation and Summary of Significant Accounting Policies

6 Months Ended

Jun. 30, 2018

Notes to Financial Statements

Organization, Consolidation and Presentation of Financial Statements Disclosure [Text Block]

1.

BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

— 

The interim unaudited condensed consolidated financial statements included herein have been prepared by PDF Solutions, Inc. (the “Company”) pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”), including the instructions to the Quarterly Report on Form

10

-Q and Article

10

of Regulation S-

X.

Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. The interim unaudited condensed consolidated financial statements reflect, in the opinion of management, all adjustments necessary (consisting only of normal recurring adjustments), to present a fair statement of results for the interim periods presented. The operating results for any interim period are

not

necessarily indicative of the results that

may

be expected for other interim periods or the full fiscal year. The accompanying interim unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto in the Company’s Annual Report on Form

10

-K for the year ended

December 31, 2017.

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

The condensed consolidated balance sheet at

December 31, 2017, 

has been derived from the audited consolidated financial statements but does

not

include all disclosures required by accounting principles generally accepted in the United States of America.

Use of Estimates

 — 

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

2.

Revenue Recognition.

Recent Accounting Pronouncements –

Recently Adopted Accounting Standards

In

May 2014,

the Financial Accounting Standards Board ("FASB") issued ASU

No.

2014

-

09,

Revenue from Contracts with Customers (Topic

606

), which supersedes the revenue recognition requirements in “Revenue Recognition (Topic

605

).” Subsequently, the FASB has issued several amendments to the standard, including clarification on accounting for licenses of intellectual property and identifying performance obligations. Under Topic

606,

the new revenue recognition standard provides a

five

-step analysis of transactions to determine when and how revenue is recognized. The core principle is that a company should recognize revenue to reflect the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The Company adopted this new standard on the

first

day of the

first

fiscal quarter of fiscal

2018.

The Company chose to adopt the standard using the modified retrospective transition method. See Note

2.

Revenue Recognition, below for further information, including further discussion on the impact of adoption and changes in accounting policies relating to revenue recognition.

In

August 2016,

the FASB issued ASU

No.

2016

-

15,

Statement of Cash Flows (Topic

230

): Classification of Certain Cash Receipts and Cash Payments. The purpose of this standard is to clarify the treatment of several cash flow categories. This update is effective for annual periods beginning after

December 15, 2017,

and interim periods within those fiscal years. The Company adopted this standard on

January 1, 2018

and it did

not

have a material impact on its financial statements and footnote disclosures.

In 

November 2016,

the FASB issued ASU

No.

2016

-

18,

Statement of Cash Flows (Topic

230

): Restricted Cash, that will require that the amounts generally described as restricted cash and restricted cash equivalents would be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period amounts shown on the statement of cash flows. The new guidance also requires certain disclosures to supplement the statement of cash flows. This update is effective for annual periods beginning after

December 15, 2017,

and interim periods within those fiscal years. The Company adopted this standard on

January 1, 2018,

and it did

not

have a material impact on our financial statements and footnote disclosures.

In

January 2017,

the FASB issued ASU

No.

2017

-

01,

Business Combinations: Clarifying the Definition of a Business, which narrows the existing definition of a business and provides a framework for evaluating whether a transaction should be accounted for as an acquisition (or disposal) of assets or a business. The guidance is effective for fiscal years beginning after

December 15, 2017.

The Company adopted this standard on

January 1, 2018,

and it did

not

have a material impact on its financial statements and footnote disclosures.

In

May 2017,

the FASB issued ASU

No.

2017

-

09,

Compensation-Stock Compensation (Topic

718

) Scope of Modification Accounting. This standard clarifies which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic

718.

The standard is effective for interim and annual reporting periods beginning after

December 15, 2017.

The Company adopted this standard on

January 1, 2018,

and it did

not

have a material impact on our financial statements and footnote disclosures.

Accounting Standards

Not

Yet Effective

In

February 2016,

the FASB issued ASU

No.

2016

-

02,

Leases (Topic

842

). The update requires that most leases, including operating leases, be recorded on the balance sheet as an asset and a liability, initially measured at the present value of the lease payments. Subsequently, the lease asset will be amortized generally on a straight-line basis over the lease term, and the lease liability will bear interest expense and be reduced for lease payments. The amendments in this update are effective for public companies’ financial statements issued for fiscal years beginning after

December 15, 2018,

including interim periods within those fiscal years. The Company is still in the process of evaluating the impact of adopting this new accounting standard on its consolidated financial statements and footnote disclosures.

In

January 2017,

the FASB issued ASU

No.

2017

-

04,

Intangibles - Goodwill and Other (Topic

350

). This standard eliminates step

2

from the annual goodwill impairment test. This update is effective for annual periods beginning after

December 15, 2019,

and interim periods within those fiscal years, with early adoption permitted, and is to be applied on a prospective basis. The Company does

not

anticipate that the adoption of this standard will have a significant impact on its consolidated financial statements or the related disclosures.

In

February 2018,

the FASB issued ASU

No.

2018

-

02,

Income Statement – Reporting Comprehensive Income (Topic

220

): Reclassification of Certain Tax Effect from Accumulated Other Comprehensive Income. This update allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Job Act ("TCJA") enacted in

December 2017.

This update will be effective for the Company for fiscal years beginning after

December 15, 2018

and interim periods within those fiscal years. Early adoption is permitted. The Company does

not

anticipate that the adoption of this standard will have a significant impact on its consolidated financial statements or the related disclosures.

In

March 2018,

the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 

2018

-

05,

 "Income Taxes (Topic

740

): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin

No.

118".

The staff of the SEC recognized the complexity of reflecting the impacts of the TCJA, and on

December 22, 2017

issued guidance in Staff Accounting Bulletin

118

(SAB

118

), which clarifies accounting for income taxes under Accounting Standards Codification (ASC)

740

if information is

not

yet available or complete and provides for up to a

one

year period in which to complete the required analysis and accounting (the measurement period).  Refer to Note

5.

Income Taxes, for further discussion regarding the impact of this standard to the Company's consolidated financial statements.

XML

Note 2 - Revenue Recognition

6 Months Ended

Jun. 30, 2018

Notes to Financial Statements

Revenue from Contract with Customer [Text Block]

2.

REVENUE RECOGNITION

 

On

January 1, 2018,

the Company adopted Topic

606,

using the modified retrospective transition method applied to those contracts which were

not

completed as of

January 1, 2018.

Under this method, the Company evaluated contracts that were in effect at the beginning of fiscal

2018

as if those contracts had been accounted for under Topic

606

from the beginning of their terms. Upon adoption, the Company recognized the cumulative effect of adopting this guidance as an adjustment to accumulated deficit on the date of initial application. The comparative information in prior periods has

not

been restated and continues to be reported under the accounting standards in effect for those periods.

The Company also considered the impact of subtopic ASC

340

-

40.

Prior to the adoption of Topic 

606,

the Company expensed commission costs and related fringe benefits as incurred. Under ASC

340

-

40,

the Company is required to capitalize and amortize the incremental costs of obtaining or fulfilling a contract over the period of the expected benefit. Incremental costs of obtaining and fulfilling a contract are recognized as an asset if the costs are expected to be recovered.

The most significant impacts of the adoption of Topic

606

are as follows:

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

● For fiscal 2018, revenue generated under Topic 606 is expected to be slightly lower than revenue would have been under Topic 605. This is the result of a combination of factors, including the reduction of deferred revenue that under Topic 605 would continue to be recognized as revenue in 2018 and beyond, as well as changes in the timing of revenue recognition as discussed below. The actual effect on revenue recognized for the first and second quarter of fiscal 2018 was not significant.

The adoption of Topic

606

impacted the Company’s accounting for certain commercial software multi-element arrangements (“MEA”) that combine software-related deliverables, which

may

include software contracts with varying terms and service elements. Topic

605

required establishing vendor specific objective evidence of fair value ("VSOE"), for undelivered elements to recognize revenue separately for each of the different elements. Topic

606

requires the Company to allocate consideration to each separate different performance obligation through the use of stand-alone selling prices (“SSPs”) and to recognize the revenue as if those performance obligations had been sold on a standalone basis, either at a point-in-time or over time. The most significant impact of this change relates to the Company’s accounting for software license revenue. For the Company’s Exensio big data solution software which is licensed under a time-based license model, the Company will recognize a portion of revenue on these types of contracts at the time of delivery rather than ratably over the term of the license. For perpetual software license contracts, the Company will allocate consideration to the different performance obligations based on their SSPs rather than using the VSOE for undelivered elements as required under Topic

605.

 

In addition, under the Company’s previous accounting practices, revenue was recognized from Gainshare performance incentive agreements in the period of receipt of related Gainshare acknowledgement reports, generally

one

quarter in arrears from the period in which the underlying sales (usage) occurred. Under Topic

606,

the Company is now required to record Gainshare revenue in the same period in which the usage occurs. Because the Company generally does

not

receive the acknowledgment reports during a given quarter within the time frame necessary to adequately review the reports and include the actual amounts in quarterly results for such quarter, the Company accrues the related revenue based on estimates of customer's underlying sales achievement. As a result of accruing revenue for the quarter based on such estimates, adjustments will be required in the following quarter to true-up revenue to the actual amounts reported.

Under Topic

605,

the Company recognized revenue for professional services, including revenue from fixed price solution implementation service contracts, either on a percentage of completion method or time and materials method. Under Topic

606,

revenue related to these professional services will remain substantially unchanged.

The following table summarizes the effects of adopting Topic

606

on the Company’s condensed consolidated balance sheet as of

June 30, 2018:

	As reported under Topic 606			Adjustments			Balances under Topic 605
	(In thousands)
Accounts receivable, net of allowance	$	53,919		$	621		$	54,540
Prepaid expenses and other current assets		8,660			(3,546	)		5,114
Deferred tax assets		17,747			316			18,063
Other non-current assets		8,943			(78	)		8,865
Deferred revenues – current portion		9,369			1,858			11,227
Long-term income taxes payable		4,652			(1,032	)		3,620
Other non-current liabilities		994			785			1,779
Accumulated deficit		(25,256	)		(4,298	)		(29,554	)

The impact of adopting Topic

606

to revenues, cost of revenues and net income for the

three

and

six

months ended

June 30, 2018

was

not

significant. There was

no

significant impact to the basic and diluted net income (loss) per share.

The Company’s net cash provided by operating activities for the

three

and

six

months ended

June 30, 2018

did

not

change due to the adoption of Topic

606.

The following table summarizes the effects of adopting Topic

606

on the financial statement line items of the Company’s condensed consolidated statement of cash flows for the

six

months ended

June 30, 2018:

	As reported under Topic 606			Adjustments			Balances under Topic 605
	(In thousands)
Net income	$	(2,520	)	$	55		$	(2,465	)
Changes in operating assets and liabilities:
Accounts receivable, net of allowance		4,479			(1,413	)		3,066
Prepaid expenses and other current assets		(1,204	)		1,154			(50	)
Other non-current assets		1,597			79			1,676
Deferred revenue		2,745			125			2,870

The Company derives revenue from

two

sources: Design-to-silicon-yield solutions and Gainshare performance incentives.

Revenue is recognized when control of products or services is transferred to customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those promised products or services.

The Company determines revenue recognition through the following

five

steps:

● Identification of the contract, or contracts, with a customer

● Identification of the performance obligations in the contract

● Determination of the transaction price

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

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

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

The Company enters into contracts that can include various combinations of licenses, products and services, some of which are distinct and are accounted for as separate performance obligations. For contracts with multiple performance obligations, the Company allocates the transaction price of the contract to each performance obligation, generally on a relative basis using its standalone selling price.

Nature of Products and Services

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

The Company generates a significant portion of its Design-to-silicon-yield solutions revenue from fixed-price solution implementation service contracts delivered over a specific period of time. Revenue under project–based contracts for solution implementation services is recognized as services are performed using a percentage of completion method based on costs or labor-hours inputs, whichever is the most appropriate measure of the progress towards completion of the contract. Due to the nature of the work performed in these arrangements, the estimation of costs or hours at completion is complex, subject to many variables and requires significant judgment. Key factors reviewed by the Company to estimate costs to complete each contract are future labor and product costs and expected productivity efficiencies. If circumstances arise that change the original estimates of revenues, costs,

or extent of progress toward completion, revisions to the estimates are made. These revisions

may

result in increases or decreases in estimated revenues or costs. Losses on fixed-price solution implementation contracts are recognized in the period when they become probable. Revisions in profit estimates are reflected in the period in which the conditions that require the revisions become known and can be estimated (cumulative catch-up method).

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

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

The Company licenses some of its software products separately from solution implementations, primarily its Exensio big data platform and related products.  The majority of these products are delivered as on premise software licenses, while others can be delivered entirely or partially through Software-as-a-Service (SaaS) or cloud delivery models. Revenue from perpetual (

one

-time charge) license software is recognized at the time of the inception of the arrangement when control transfers to the client, if the software license is distinct from the services offered by the Company. Revenue from post-contract support subscription is recognized over the contract term on a straight-line basis, because the Company is providing a service of standing ready to provide support, when-and-if needed, and is providing unspecified software upgrades on a when-and-if available basis over the contract term. Revenue from time-based license software is allocated to each performance obligation and is recognized either at a point in time or over time. The license component is recognized at the time of the delivery of the software license, with the post-contract support subscription component being recognized ratably over for the committed term of the contract. Revenue from software hosting or SaaS arrangements that allow for the use of a hosted software product or service over a contractually determined period of time without taking possession of software are accounted for as subscriptions and recognized as revenue ratably, on a straight-line basis, over the coverage period beginning on the date the service is made available to customers.

Gainshare Performance Incentives — When the Company enters into a contract to provide yield improvement services, the contract usually includes

two

components: (

1

) a fixed fee for performance by the Company of services delivered over a specific period of time; and (

2

) a Gainshare performance incentive component where the customer pays a variable fee, usually after the fixed fee period has ended, related to the usage of the Company's intellectual property.  Revenue derived from Gainshare performance incentives is contingent upon the Company’s customers reaching certain defined production yield levels. Gainshare performance incentive periods are usually subsequent to the delivery of all contractual services and performance obligations. The Company records Gainshare revenue as a usage-based royalty based on customers' usage of intellectual property and records it in the same period in which the usage occurs. 

The following table summarizes the effects of adopting Topic

606

on the financial statement line items of the Company’s condensed consolidated statements of operations for the

three

months ended

June 30, 2018:

	As reported under Topic 606			Adjustments			Balances under Topic 605
				(In thousands)
Design-to-silicon-yield solutions	$	15,266		$	12		$	15,278
Total revenue		21,119			12			21,131
Gross margin		10,202			12			10,214
Selling, general and administrative		5,919			(73	)		5,846
Total operating expenses		13,127			(73	)		13,054
Income (loss) from operations		(2,925	)		85			(2,840	)
Income (loss) before taxes		(2,535	)		85			(2,450	)
Net income (loss)		(2,096	)		85			(2,011	)

The following table summarizes the effects of adopting Topic

606

on the financial statement line items of the Company’s condensed consolidated statements of operations for the

six

months ended

June 30, 2018:

	As reported under Topic 606			Adjustments			Balances under Topic 605
				(In thousands)
Design-to-silicon-yield solutions	$	33,456		$	(18	)	$	33,438
Total revenue		45,856			(18	)		45,838
Gross margin		23,457			(18	)		23,439
Selling, general and administrative		12,294			(73	)		12,221
Total operating expenses		26,856			(73	)		26,783
Income (loss) from operations		(3,399	)		55			(3,344	)
Income (loss) before taxes		(3,340	)		55			(3,285	)
Net income (loss)		(2,520	)		55			(2,465	)

Disaggregation of revenue

In accordance with ASC

606

-

10

-

50,

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

The following table shows the revenues from contracts with customers by the nature of transactions for the

three

and

six

months ended

June 30, 2018:

	Three Months Ended		Six Months Ended
	June 30, 2018		June 30, 2018
Product and licenses	$	6,828	$	14,315
Support and Services		14,200		31,190
Other		90		351
Total	$	21,119	$	45,856

          Product and licenses include a portion of time-based software which is recognized in the period, perpetual software and Gainshare performance incentives. The remaining portions of revenue from these contracts correspond to services or other types of performance obligations reported as either services revenue or other revenue.

Under Topic

606,

the Company’s performance obligations are satisfied either over-time or at a point-in-time. Revenue from performance obligations, satisfied over time and at a point-in-time, accounted for approximately

68%

and

32%

for the

three

and

six

months ended

June 30, 2018,

respectively. International revenues accounted for approximately

57%

and

58%

of our total revenues for the

three

and

six

months ended

June 30, 2018,

respectively, compared to

62%

and

57%

for the

three

and

six

months ended

June 30, 2017,

respectively. See Note

7.

Customer and Geographic Information.

Significant Judgments

More judgments and estimates are required under Topic

606

than were required under Topic

605.

Due to the complexity of certain contracts, the actual revenue recognition treatment required under Topic

606

for the Company’s arrangements

may

be dependent on contract-specific terms and

may

vary in some instances.

In services arrangements, the Company typically satisfies the performance obligation and recognizes revenue over time. In Design-to-silicon-yield service arrangements, the performance obligation is satisfied over time either because the client controls the asset as it is created (e.g., when the asset is built at the customer site) or because the Company’s performance does

not

create an asset with an alternative use and the Company has an enforceable right to payment plus a reasonable profit for performance completed to date. In most other services arrangements, the performance obligation is satisfied over time because the client simultaneously receives and consumes the benefits provided as the Company performs the services. 

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

may

result in increases or decreases in estimated revenues or costs, and such revisions are reflected in revenue on a cumulative catch-up basis in the period in which the circumstances that gave rise to the revision become known.

The Company’s contracts with customers often include promises to transfer products, licenses and services, including professional services, technical support services, and rights to unspecified updates to a customer. Determining whether products, licenses and services are distinct performance obligations that should be accounted for separately, or

not

distinct and thus accounted for together, requires significant judgment. The Company rarely licenses or sells products on a standalone basis, so the Company is required to estimate the range of SSPs for each performance obligation. In instances where SSP is

not

directly observable because the Company does

not

sell the license, product or service separately, the Company determines the SSP using information that

may

include market conditions and other observable inputs. The Company, in some cases, has more than

one

SSP for individual performance obligations. In these instances, the Company

may

use information such as the size of the customer and geographic region of the customer in determining the SSP.

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

not

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

   Contract Balances  

The Company performs its obligation under a contract with a customer by transferring products or services in exchange for consideration from the customer. The timing of the Company’s performance often differs from the timing of the customer’s payment, which results in the recognition of a receivable, a contract asset or a contract liability. The Company classifies the right to consideration in exchange for products or services transferred to a client as either a receivable or a contract asset. A receivable is a right to consideration that is unconditional as compared to a contract asset which is a right to consideration that is conditional upon factors other than the passage of time. The majority of the Company’s contract assets represent unbilled amounts related to fixed-price solution implementation service contracts when the costs or labor-hours input method of revenue recognition is utilized and revenue recognized exceeds the amount billed to the client, and the right to consideration is subject to milestone completion or client acceptance. The contract assets are generally classified as current and are recorded on a net basis with deferred revenue (i.e., contract liabilities) at the contract level. The contract assets is included in prepaid expenses and other in the condensed consolidated balance sheets. At

June 30, 2018

and

January 1, 2018,

contract assets of

$3.2

 million and

$1.9

million, respectively, are included in prepaid expenses and other current assets in the condensed consolidated balance sheets. The change in the contract assets balance during the period relates to the recording of revenues for which the right to consideration is subject to milestone completion or client acceptance and movement of previously recorded contract assets to receivables as the right to consideration becomes unconditional. Deferred revenues consist substantially of amounts invoiced in advance of revenue recognition and is recognized as the revenue recognition criteria are met. Deferred revenues that will be recognized during the succeeding

twelve

month period is recorded as current deferred revenues and the remaining portion is recorded as non- current deferred revenues. This balance was recorded in the other non-current liabilities in the accompanying condensed consolidated balance sheets. Non-current portion of deferred revenue was

$0.5

million and

$0.9

 million, respectively, as of

June 30, 2018

and

January 1, 2018.

           During the

three

and

six

months ended

June 30, 2018,

the Company recognized

$5.0

million and

$7.6

million, respectively, of revenue that was included in the deferred revenue balance, as adjusted for Topic

606,

at the beginning of

2018.

 At

June 30, 2018,

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

$45.3

million. Given the applicable contract terms, the majority of this amount is expected to be recognized as revenue over the next

2

years, with the remainder in the following

5

years.  This amount does

not

include contracts to which the customer is

not

committed, nor contracts with original expected lengths of

one

year or less, nor contracts for which we recognize revenue equal to the amount we have the right to invoice for services performed, or future sales-based or usage-based royalty payments in exchange for a license of intellectual property. This amount is subject to change due to future revaluations of variable consideration, terminations, other contract modifications, or currency adjustments.  The estimated timing of the recognition of remaining unsatisfied performance obligations is subject to change and are affected by changes to the scope, change in timing of delivery of products and services, or contract modifications.

Payment terms and conditions vary by contract type, although terms generally include a requirement of payment within

30

to

90

days. In instances where the timing of revenue recognition differs from the timing of invoicing, the Company has determined that its contracts generally do

not

include a significant financing component. The primary purpose of invoicing terms is to provide customers with simplified and predictable ways of purchasing the Company’s products and services, and

not

to facilitate financing arrangements.

The amount of revenue recognized in the

three

and

six

months ended

June 30, 2018

from performance obligations satisfied (or partially satisfied) in previous periods was (

$0.2

) million and

$0.3

million, respectively. This amount primarily represents changes of estimated  percentage-of –completion based contracts and changes in estimated Gainshare performance incentives for those customers that reported actual Gainshare revenue with some time lag.

Costs to obtain or fulfill a contract

The Company capitalizes the incremental costs to obtain or fulfill a contract with a customer, including direct sales commissions and related fees, when it expects to recover those costs. As a result, these costs will need to be capitalized and amortized over an appropriate period, which

may

exceed the initial contract term. The incremental costs of obtaining a contract are costs that would

not

have been incurred if the contract had

not

been obtained. The Company uses the portfolio method to recognize the amortization expense related to these capitalized costs related to initial contracts and renewals and such expense is recognized over the period associated with the revenue of the related portfolio. Total capitalized direct sales commission costs as of 

June 30, 2018 

were 

$0.5

 million and the amortization of these assets were 

$0.1

million and

$0.2

million during the

three

and

six

months ended

June 30, 2018,

respectively. There was

no

impairment loss in relation to the costs capitalized for the periods presented. Certain eligible initial project costs are capitalized when the costs relate directly to the contract, the costs generate or enhance resources of the company that will be used in satisfying the performance obligation in the future, and the costs are expected to be recovered. These costs primarily consist of transition and set-up costs related to the installation of systems and processes and other deferred fulfillment costs eligible for capitalization.  Capitalized costs are amortized consistent with the transfer to the client of the services to which the asset relates and recorded as a component of cost of revenues. The Company also incurred certain direct costs to provide solution implementation services in relation to the specific anticipated contracts. The Company recognizes such costs as a component of cost of revenues, the timing of which is dependent upon identification of a contract arrangement. The Company also defers costs from arrangements that required us to defer the revenues, typically due to the pattern of transfer of the performance obligations in the contract. These costs are recognized in proportion to the related revenue. At the end of the reporting period, the Company evaluates its deferred costs for their probable recoverability. The Company recognizes impairment of deferred costs when it is determined that the costs

no

longer have future benefits and are

no

longer recoverable. Deferred costs balance was

$0.4

million and

$0.6

million as of

June 30, 2018

and

December 31, 2017,

respectively. The balance was included in prepaid expenses and other current assets and other non-current assets in the accompanying condensed consolidated balance sheets.

XML

Note 3 - Balance Sheet Components

6 Months Ended

Jun. 30, 2018

Notes to Financial Statements

Supplemental Balance Sheet Disclosures [Text Block]

3.

BALANCE SHEET COMPONENTS

 

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

$23.2

 million and

$22.2

million as of

June 30, 2018,

and

December 31, 2017,

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

$7.3

million and

$8.6

million as of

June 30, 2018

and

December 31, 2017,

respectively. 

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

	June 30, 2018			December 31, 2017
Property and equipment, net:
Computer equipment	$	10,568		$	10,729
Software		4,120			3,348
Furniture, fixtures and equipment		4,119			3,676
Leasehold improvements		2,002			1,980
Test equipment		14,659			13,796
Construction-in-progress		14,992			12,527
		50,460			46,056
Less: accumulated depreciation		(22,365	)		(20,670	)
Total	$	28,095		$	25,386

Test equipment includes DFI assets at customer sites that are contributing to DFI solution revenues. The construction-in-progress balance as of

June 30, 2018

and

December 31, 2017

was primarily related to construction of DFI assets. Depreciation and amortization expense was

$1.3

million and

$1.2

million for the

three

months ended

June 30, 2018

and

2017,

respectively. Depreciation and amortization expense was

$2.5

million and

$2.3

million for the

six

months ended

June 30, 2018

and

2017,

respectively.  

As of both

June 30, 2018,

and

December 31, 2017,

the carrying amount of goodwill was 

$1.9

million.

Intangible assets balance was

$5.6

million and

$6.1

million as of

June 30, 2018,

and

December 31, 2017,

respectively. Intangible assets as of

June 30, 2018

and

December 31, 2017

consist of the following (in thousands):

				June 30, 2018							December 31, 2017
	Amortization Period (Years)			Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Acquired identifiable intangibles:
Customer relationships	1	-	9	$	6,740	$	(4,329	)	$	2,411	$	6,740	$	(4,145	)	$	2,595
Developed technology	4	-	6		15,820		(13,117	)		2,703		15,820		(12,829	)		2,991
Tradename	2	-	4		790		(635	)		155		790		(622	)		168
Backlog		1			100		(100	)		-		100		(100	)		-
Patent	7	-	10		1,800		(1,500	)		300		1,800		(1,480	)		320
Other acquired intangibles		4			255		(255	)		-		255		(255	)		-
Total				$	25,505	$	(19,936	)	$	5,569	$	25,505	$	(19,431	)	$	6,074

The weighted average amortization period for acquired identifiable intangible assets was

6.31

years as of

June 30, 2018.

For the

three

and

six

months ended

June 30, 2018,

total intangible asset amortization expense was

$0.3

million and

$0.5

million, respectively. For the

three

and

six

months ended

June 30, 2017,

total intangible asset amortization expense was

$0.2

million and

$0.4

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

Year ending December 31,	Amount
2018 (remaining six months)	$	505
2019		1,009
2020		1,009
2021		833
2022		626
2023 and thereafter		1,587
Total future amortization expense	$	5,569

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

six

months ended

June 30, 2018,

there were

no

indicators of impairment related to the Company’s intangible assets.

XML

Note 4 - Stockholders' Equity

6 Months Ended

Jun. 30, 2018

Notes to Financial Statements

Shareholders' Equity and Share-based Payments [Text Block]

4.

STOCKHOLDERS’ EQUITY

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

four

years

.

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

	Three Months Ended June 30,				Six Months Ended June 30,
	2018		2017		2018		2017
Cost of Design-to-silicon yield-solutions	$	968	$	1,069	$	1,981	$	2,261
Research and development		845		848		1,724		1,682
Selling, general and administrative		889		987		1,852		1,845
Stock-based compensation expenses	$	2,702	$	2,904	$	5,557	$	5,788

On

June 30, 2018,

the Company had the following stock-based compensation plans:

Stock Plans —

At the annual meeting of stockholders on

November 16, 2011,

the Company’s stockholders approved the

2011

Stock Incentive Plan, which was most recently amended and restated at the

2017

annual meeting of stockholders on

May 31, 2017,

when the Company’s stockholders approved the Fourth Amended and Restated

2011

Stock Incentive Plan (as amended, the

“2011

Plan”). Under the

2011

Plan, the Company

may

award stock options, stock appreciation rights, stock grants or stock units covering shares of the Company's common stock to employees, directors, non-employee directors and contractors. The aggregate number of shares reserved for awards under this plan is

7,800,000

shares, plus up to

3,500,000

shares previously issued under the

2001

Plan that are forfeited or repurchased by the Company or shares subject to awards previously issued under the

2001

Stock Plan (the

"2001

Plan") that expire or that terminate without having been exercised or settled in full on or after

November 16, 2011.

In case of awards other than options or stock appreciation rights, the aggregate number of shares reserved under the plan will be decreased at a rate of

1.33

shares issued pursuant to such awards. The exercise price for stock options must generally be at prices

no

less than the fair market value at the date of grant. Stock options generally expire

ten

years from the date of grant and become vested and exercisable over a

four

-year period.

In

2001,

the Company adopted a

2001

Plan. In

2003,

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

2001

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

2001

and the IDS Plans expired in

2011.

Stock options granted under the

2001

and IDS Plans generally expire

ten

years from the date of grant and become vested and exercisable over a

four

-year period. Although

no

new awards

may

be granted under the

2001

or IDS Plans, awards made under the

2001

and IDS Plans that are currently outstanding remain subject to the terms of each such plan.   

As of

June 30, 2018,

9.6

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 which were forfeited, expired or repurchased by the Company after adoption of the

2011

Plan through

June 30, 2018.

As of

June 30, 2018,

there were

no

outstanding awards that had been granted outside of the

2011,

2001

or the IDS Plans (collectively, the "Stock Plans"). 

The Company estimated the fair value of share-based awards granted under the

2011

Stock Plan during the period using the Black-Scholes-Merton option-pricing model with the following weighted average assumptions, resulting in the following weighted average fair values: 

	Three Months Ended June 30,					Six Months Ended June 30,
	2018		2017			2018			2017
Expected life (in years)		-		4.41			4.43			4.41
Volatility		-		41.63	%		42.22	%		41.53	%
Risk-free interest rate		-		1.67	%		2.52	%		1.69	%
Expected dividend		-		-			-			-
Weighted average fair value per share of options granted during the period	$	-	$	5.98		$	4.28		$	6.16

No

stock options were granted during the

three

months ended

June 30, 2018.

Stock option activity under the Company’s Stock Plans during the

six

months ended

June 30, 2018,

was as follows:

	Number of Options (in thousands)			Weighted Average Exercise Price per Share		Weighted Average Remaining Contractual Term (years)		Aggregate Intrinsic Value (in thousands)
Outstanding, January 1, 2018		1,045		$	9.65
Granted (weighted average fair value of $4.28 per share)		10		$	11.26
Exercised		(59	)	$	7.069
Canceled		(6	)	$	14.02
Expired		(4	)	$	16.22
Outstanding, June 30, 2018		986		$	9.80		4.51	$	3,404
Vested and expected to vest, June 30, 2018		977		$	9.71		4.44	$	3,403
Exercisable, June 30, 2018		808		$	8.50		3.56	$	3,380

The aggregate intrinsic value in the table above represents the total intrinsic value based on the Company’s closing stock price of

$11.98

per share as of

June 30, 2018.

The total intrinsic value of options exercised during the

six

months ended

June 30, 2018,

was

$0.3

million.

As of

June 30, 2018,

there was

$0.9

million of total unrecognized compensation cost related to unvested stock options. That cost is expected to be recognized over a weighted average period of

3.0

years. The total fair value of shares vested during the

six

months ended

June 30, 2018,

was

$0.2

million.

Restricted stock unit activity during the

six

months ended

June 30, 2018,

was as follows:

	Shares (in thousands)			Weighted Average Grant Date Fair Value Per Share
Outstanding, January 1, 2018		1,617		$	15.66
Granted		10		$	11.26
Vested		(332	)	$	16.19
Forfeited		(84	)	$	15.53
Outstanding, June 30, 2018		1,211		$	15.49

As of

June 30, 2018,

there was

$15.3

million of total unrecognized compensation cost related to outstanding restricted stock units. That cost is expected to be recognized over a weighted average period of

2.3

years. Restricted stock units do

not

have rights to dividends prior to vesting.

Employee Stock Purchase Plan

— In

July 2001,

the Company adopted a

ten

-year Employee Stock Purchase Plan (as amended, the “Purchase Plan”) under which eligible employees can contribute up to

10%

of their compensation, as defined in the Purchase Plan, towards the purchase of shares of PDF common stock at a price of

85%

of the lower of the fair market value at the beginning of the offering period or the end of the purchase period. The Purchase Plan consists of

twenty-four

-month offering periods with

four six

-month purchase periods in each offering period. Under the Purchase Plan, on

January 1

of each year, starting with

2002,

the number of shares reserved for issuance will automatically increase by the lesser of (

1

) 

675,000

 shares, (

2

) 

2%

of the Company’s outstanding common stock on the last day of the immediately preceding year, or (

3

) the number of shares determined by the board of directors. At the annual meeting of stockholders on

May 18, 2010,

the Company’s stockholders approved an amendment to the Purchase Plan to extend it through

May 17, 2020. 

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

	Six Months Ended June 30,
	2018			2017
Expected life (in years)		1.25			1.25
Volatility		37.23	%		33.32	%
Risk-free interest rate		1.93	%		0.93	%
Expected dividend		—			—
Weighted average fair value per share of options granted during the period	$	4.32		$	6.78

During the

three

months ended

June 30, 2018

and

2017,

no

shares were issued under the Purchase Plan. During the

six

months ended

June 30, 2018

and

2017,

a total of

108,000

and

100,000

shares, respectively, were issued at a weighted-average purchase price of

$9.29

 and

$9.13

per share, respectively. As of

June 30, 2018,

there was

$1.3

million of unrecognized compensation cost related to the Purchase Plan. That cost is expected to be recognized over a weighted average period of

1.58

years. As of

June 30, 2018,

4.2

million shares were available for future issuance under the Purchase Plan.   

Stock Repurchase Program

- On

May 29, 2018,

the Board of Directors terminated the previous

2016

program, and adopted a new

2018

program to repurchase up to

$25.0

million of the Company’s common stock both on the open market and in privately negotiated transactions, from time to time, over the next

two

years. During the

three

and

six

months ended

June 30, 2018,

the Company repurchased

98,800

 and

437,007

shares, respectively, under the

2016

program. As of

June 30, 2018,

1,279,189

shares had been repurchased at an average price of

$14.59

per share under the

2016

program, for a total purchase of

$18.7

million. Under the

2018

program, as of

June

30,.2018,

$25.0

million of the Company’s common stock remained available for future repurchases. 

XML

Note 5 - Income Taxes

6 Months Ended

Jun. 30, 2018

Notes to Financial Statements

Income Tax Disclosure [Text Block]

5.

INCOME TAXES

  

Income tax benefit decreased

$1.2

million for the

six

months ended

June 30, 2018

to a

$0.8

million compared to

$2.0

million for the

six

months ended

June 30, 2017.

The Company’s effective tax rate benefit was

23%

and

156%

for the

six

months ended

June 30, 2018

and

2017,

respectively. The Company’s effective tax rate benefit decreased in the

six

months ended

June 30, 2018,

as compared to the same period in

2017,

primarily due to lower excess tax benefits related to employee stock compensation and the impact of the recently enacted TCJA, such as a decrease in the maximum federal tax rate from

35%

to

21%.

The Company’s total amount of unrecognized tax benefits, excluding interest and penalties, as of

June 30, 2018,

was

$13.0

 million, of which

$7.7

 million, if recognized, would affect the Company’s effective tax rate. The Company’s total amount of unrecognized tax benefits, excluding interest and penalties, as of

December 31, 2017,

was

$12.9

million, of which

$7.7

million, if recognized, would affect the Company's effective tax rate. As of

June 30, 2018,

the Company has recorded unrecognized tax benefits of 

$2.9

million, including interest and penalties, as long-term taxes payable in its condensed consolidated balance sheet. The remaining

$10.8

million has been recorded net of our deferred tax assets, of which

$5.3

 million is subject to a full valuation allowance. 

The valuation allowance was approximately

$9.5

million and

$9.1

million as of

June 30, 2018,

and

December 31, 2017,

respectively, which was related to California R&D tax credits and California net operating losses related to the Company's acquisition of Syntricity that it currently does

not

believe are more likely than

not

to be ultimately realized.

         The Company is required to assess whether it is more-likely-than-

not

that deferred tax assets will be recovered from future taxable income and if the Company believes that they are

not

likely to be realizable before the expiration dates applicable to such assets then, to the extent the Company believes that recovery is

not

likely, establish a valuation allowance. Changes in the net deferred tax assets, less offsetting valuation allowance, in a financial reporting period are recorded through the income tax provision and could have a material impact to the condensed consolidated statements of operations.

In

December 2017,

the SEC issued Staff Accounting Bulletin

No.

118,

Income Tax Accounting Implications of the Tax Cuts and Jobs Act (SAB

118

), which allows companies to record provisional amounts during a measurement period

not

to extend more than

one

year beyond the TCJA enactment date. Since the TCJA was passed late in the

fourth

quarter of

2017,

and ongoing guidance and accounting interpretation are expected during the year, we consider the accounting for deferred tax remeasurements, the impact of the transition of U.S. international taxation from a worldwide tax system to a territorial system and other provisions to be incomplete. There have been

no

material changes to the provisional adjustments disclosed in our

2017

Form

10

-K. The Company is continuing to evaluate the estimates used to record and disclose the effects of the TCJA.

Effective

January 1, 2018,

the TCJA creates a new requirement to include in U.S. income global intangible low-taxed income (“GILTI”) earned by controlled foreign corporations (“CFCs”). The GILTI must be included currently in the gross income of the CFCs’ U.S. shareholder. Under U.S. GAAP, we are allowed to make an accounting policy choice of either (

1

) treating taxes due on future U.S. inclusions related to GILTI as a current-period expense when incurred (the “period cost method”) or (

2

) factoring such amounts into a company’s measurement of its deferred taxes (the “deferred method”). During the

first

quarter of

2018,

the Company selected the period cost method in recording the tax effects of GILTI in its financial statements.

The Company conducts business globally and, as a result, files numerous consolidated and separate income tax returns in the U.S. 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, statutes of limitation remain open for all tax years to the extent of the attributes carried forward into tax year

2002

for federal and California tax purposes. The Company is

not

subject to income tax examinations in any of its major foreign subsidiaries’ jurisdictions.

XML

Note 6 - Net Income Per Share

6 Months Ended

Jun. 30, 2018

Notes to Financial Statements

Earnings Per Share [Text Block]

6.

NET INCOME PER SHARE

Basic net income per share is computed by dividing net income by weighted average number of common shares outstanding for the period (excluding outstanding stock options and shares subject to repurchase). Diluted net income 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 income per share (in thousands except per share amount): 

	Three Months Ended June 30,					Six Months Ended June 30,
	2018			2017		2018			2017
Numerator:
Net income (loss)	$	(2,096	)	$	189	$	(2,520	)	$	706
Denominator:
Basic weighted-average common shares outstanding		31,962			32,111		32,065			32,051
Effect of dilutive options and restricted stock		-			1,277		-			1,440
Diluted weighted average shares outstanding		31,962			33,388		32,065			33,491
Net income (loss) per share - Basic	$	(0.07	)	$	0.01	$	(0.08	)	$	0.02
Net income (loss) per share - Diluted	$	(0.07	)	$	0.01	$	(0.08	)	$	0.02

For the

three

and

six

months ended

June 30, 2018, 

there are 

no

 potential dilutive common shares included in the computation of diluted net income (loss) per share because there was a net loss for both periods.

The following table sets forth potential shares of common stock that are

not

included in the diluted net income per share calculation above because to do so would be anti-dilutive for the periods indicated (in thousands):  

	Three Months Ended June 30,				Six Months Ended June 30,
	2018		2017		2018		2017
Outstanding options		-		102		-		79
Nonvested restricted stock units		-		13		-		4
Employee Stock Purchase Plan		-		27		-		29
Total		-		142		-		112

XML

Note 7 - Customer and Geographic Information

6 Months Ended

Jun. 30, 2018

Notes to Financial Statements

Segment Reporting Disclosure [Text Block]

  

7.

CUSTOMER AND GEOGRAPHIC INFORMATION

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

The Company’s chief operating decision maker, the chief executive officer, reviews discrete financial information presented on a consolidated basis for purposes of regularly making operating decisions and assessing financial performance. Accordingly, the Company considers itself to be in

one

operating segment, specifically the licensing and implementation of yield improvement solutions for companies designing and/or manufacturing integrated circuits. 

The Company had revenues from individual customers in excess of

10%

of total revenues as follows: 

	Three Months Ended June 30,						Six Months Ended June 30,
Customer	2018			2017			2018			2017
A		40	%		36	%		39	%		42	%
B		10	%		15	%		*	%		10	%

The Company had gross accounts receivable from individual customers in excess of

10%

of gross accounts receivable as follows: 

Customer	June 30, 2018			December 31, 2017
A		43	%		41	%
B		18	%		15	%

* represents less than 10%

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

	Three Months Ended June 30,
	2018					2017
	Revenues		Percentage of Revenues			Revenues		Percentage of Revenues
United States	$	8,982		42	%	$	9,226		38	%
China		4,360		21			4,753		20
Taiwan		1,038		5			3,643		15
Rest of the world		6,739		32			6,667		27
Total revenue	$	21,119		100	%	$	24,289		100	%

	Six Months Ended June 30,
	2018					2017
	Revenues		Percentage of Revenues			Revenues		Percentage of Revenues
United States	$	19,065		41	%	$	20,860		44	%
China		9,542		21			6,440		13
Taiwan		3,173		7			7,480		15
Rest of the world		14,076		31			13,798		28
Total revenue	$	45,856		100	%	$	48,578		100	%

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

	June 30, 2018		December 31, 2017
United States	$	27,612	$	24,883
Rest of the world		483		503
Total long-lived assets, net	$	28,095	$	25,386

XML

Note 8 - Fair Value Measurements

6 Months Ended

Jun. 30, 2018

Notes to Financial Statements

Fair Value Disclosures [Text Block]

8.

FAIR VALUE MEASUREMENTS

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

three

broad levels.

Level 1 - Inputs are quoted prices in active markets for identical assets or liabilities.

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

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

The following table represents the Company’s assets measured at fair value on a recurring basis as of

June 30, 2018,

and the basis for that measurement (in thousands):

Assets	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Money market mutual funds	$	26,814	$	26,814	$	—	$	—

The following table represents the Company’s assets measured at fair value on a recurring basis as of

December 31, 2017,

and the basis for that measurement (in thousands):

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

The Company enters into foreign currency forward contracts to reduce the exposure to foreign currency exchange rate fluctuations on certain foreign currency denominated monetary assets and liabilities, primarily on

third

-party accounts payables and intercompany balances. The primary objective of the Company’s hedging program is to reduce volatility of earnings related to foreign currency exchange rate fluctuations. The counterparty to these foreign currency forward contracts is a large global financial institution that the Company believes is creditworthy, and therefore, the Company believes the credit risk of counterparty nonperformance is

not

significant. These foreign currency forward contracts are

not

designated for hedge accounting treatment. Therefore, the change in fair value of these contracts is recorded into earnings as a component of other income (expense), net, and offsets the change in fair value of the foreign currency denominated assets and liabilities, which is also recorded in other income (expense), net. For the

three

months ended

June 30, 2018

and

2017,

the Company recognized a realized loss of

$0.6

million and a realized gain

$0.4

million on the contracts, respectively, which was recorded in other income (expense), net in the Company’s Statements of Operations and Comprehensive Income. For the

six

months ended

June 30, 2018

and

2017,

the Company recognized a realized loss of

$0.4

million and a realized gain

$0.5

million on the contracts, respectively, which was recorded in other income (expense), net in the Company’s Statements of Operations and Comprehensive Income.  

The Company carries these derivatives financial instruments on its Consolidated Balance Sheets at their fair values. The Company’s foreign currency forward contracts are classified as Level

2

because it is

not

actively traded and the valuation inputs are based on quoted prices and market observable data of similar instruments. As of

June 30, 2018,

the Company had

one

outstanding forward contract with a notional amount of

$8.1

million and recorded

$35,000

other current liabilities associated with this outstanding forward contract. As of

December 31, 2017,

the Company had

one

outstanding forward contract with a notional amount of

$8.2

million and recorded

$12,000

other current assets associated with the outstanding forward contract.  

XML

Note 9 - Commitments and Contingencies

6 Months Ended

Jun. 30, 2018

Notes to Financial Statements

Commitments and Contingencies Disclosure [Text Block]

9.

COMMITMENTS AND CONTINGENCIES

Leases

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

2028.

Rent expense was

$0.7

million and

$0.6

million for the

three

months ended

June 30, 2018

and

2017,

respectively. Rent expense was

$1.3

million and

$1.1

million for the

six

months ended

June 30, 2018

and

2017,

respectively.  

Future minimum lease payments under noncancelable operating leases at

June 30, 2018,

are as follows (in thousands): 

Year ending December 31,	Amount
2018 (remaining six months)	$	718
2019		1,307
2020		1,374
2021		1,291
2022		1,061
2023 and thereafter		4,264
Total future minimum lease payments	$	10,015

In

April 2018,

the Company entered into a new approximately

20,800

 square foot lease, located in Santa Clara, California. The term of the new lease is approximately

ten

years commencing on or around

September 1, 2018.

Total lease obligation over the new lease term is approximately

$7.0

million, less a lease abatement allowance of approximately

$0.4

million. The terms of the new lease include a tenant improvement allowance of approximately

$1.3

million. Future minimum lease payments under the lease are included in the above table.

Indemnifications

— The Company generally provides a warranty to its customers that its software will perform substantially in accordance with documented specifications typically for a period of

90

 days following initial delivery of its products. The Company also indemnifies certain customers from

third

-party claims of intellectual property infringement relating to the use of its products. Historically, costs related to these guarantees have

not

been significant. The Company is unable to estimate the maximum potential impact of these guarantees on its future results of operations.

 

Purchase obligations

— The Company has purchase obligations with certain suppliers for the purchase of goods and services entered in the ordinary course of business. As of

June 30, 2018,

total outstanding purchase obligations were

$13.7

 million, which are primarily due within the next

12

months.

Indemnification of Officers and Directors

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

In addition, the Bylaws of the Company provide that the Company is required to indemnify its officers and directors even when indemnification would otherwise be discretionary, and the Company is required to advance expenses to its officers and directors as incurred in connection with proceedings against them for which they

may

be indemnified. The Company has entered into indemnification agreements with its officers and directors containing provisions that are in some respects broader than the specific indemnification provisions contained in the Delaware general corporation law. The indemnification agreements require the Company to indemnify its officers and directors against liabilities that

may

arise by reason of their status or service as officers and directors other than for liabilities arising from willful misconduct of a culpable nature, to advance their expenses incurred as a result of any proceeding against them as to which they could be indemnified, and to obtain directors’ and officers’ insurance if available on reasonable terms. The Company has obtained directors’ and officers’ liability insurance in amounts comparable to other companies of the Company’s size and in the Company’s industry. Since a maximum obligation of the Company is

not

explicitly stated in the Company’s Bylaws or in its indemnification agreements and will depend on the facts and circumstances that arise out of any future claims, the overall maximum amount of the obligations cannot be reasonably estimated.

Litigation

— From time to time, the Company is subject to various claims and legal proceedings that arise in the ordinary course of business. The Company accrues for losses related to litigation when a potential loss is probable and the loss can be reasonably estimated in accordance with FASB requirements. As of

June 30, 2018,

the Company was

not

party to any material legal proceedings, thus

no

loss was probable and 

no

amount was accrued.   

XML

Significant Accounting Policies (Policies)

6 Months Ended

Jun. 30, 2018

Accounting Policies [Abstract]

Basis of Accounting, Policy [Policy Text Block]

Basis of Presentation

— 

The interim unaudited condensed consolidated financial statements included herein have been prepared by PDF Solutions, Inc. (the “Company”) pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”), including the instructions to the Quarterly Report on Form

10

-Q and Article

10

of Regulation S-

X.

Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. The interim unaudited condensed consolidated financial statements reflect, in the opinion of management, all adjustments necessary (consisting only of normal recurring adjustments), to present a fair statement of results for the interim periods presented. The operating results for any interim period are

not

necessarily indicative of the results that

may

be expected for other interim periods or the full fiscal year. The accompanying interim unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto in the Company’s Annual Report on Form

10

-K for the year ended

December 31, 2017.

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

The condensed consolidated balance sheet at

December 31, 2017, 

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, Policy [Policy Text Block]

Use of Estimates

 — 

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

2.

Revenue Recognition.

New Accounting Pronouncements, Policy [Policy Text Block]

Recent Accounting Pronouncements –

Recently Adopted Accounting Standards

In

May 2014,

the Financial Accounting Standards Board ("FASB") issued ASU

No.

2014

-

09,

Revenue from Contracts with Customers (Topic

606

), which supersedes the revenue recognition requirements in “Revenue Recognition (Topic

605

).” Subsequently, the FASB has issued several amendments to the standard, including clarification on accounting for licenses of intellectual property and identifying performance obligations. Under Topic

606,

the new revenue recognition standard provides a

five

-step analysis of transactions to determine when and how revenue is recognized. The core principle is that a company should recognize revenue to reflect the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The Company adopted this new standard on the

first

day of the

first

fiscal quarter of fiscal

2018.

The Company chose to adopt the standard using the modified retrospective transition method. See Note

2.

Revenue Recognition, below for further information, including further discussion on the impact of adoption and changes in accounting policies relating to revenue recognition.

In

August 2016,

the FASB issued ASU

No.

2016

-

15,

Statement of Cash Flows (Topic

230

): Classification of Certain Cash Receipts and Cash Payments. The purpose of this standard is to clarify the treatment of several cash flow categories. This update is effective for annual periods beginning after

December 15, 2017,

and interim periods within those fiscal years. The Company adopted this standard on

January 1, 2018

and it did

not

have a material impact on its financial statements and footnote disclosures.

In 

November 2016,

the FASB issued ASU

No.

2016

-

18,

Statement of Cash Flows (Topic

230

): Restricted Cash, that will require that the amounts generally described as restricted cash and restricted cash equivalents would be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period amounts shown on the statement of cash flows. The new guidance also requires certain disclosures to supplement the statement of cash flows. This update is effective for annual periods beginning after

December 15, 2017,

and interim periods within those fiscal years. The Company adopted this standard on

January 1, 2018,

and it did

not

have a material impact on our financial statements and footnote disclosures.

In

January 2017,

the FASB issued ASU

No.

2017

-

01,

Business Combinations: Clarifying the Definition of a Business, which narrows the existing definition of a business and provides a framework for evaluating whether a transaction should be accounted for as an acquisition (or disposal) of assets or a business. The guidance is effective for fiscal years beginning after

December 15, 2017.

The Company adopted this standard on

January 1, 2018,

and it did

not

have a material impact on its financial statements and footnote disclosures.

In

May 2017,

the FASB issued ASU

No.

2017

-

09,

Compensation-Stock Compensation (Topic

718

) Scope of Modification Accounting. This standard clarifies which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic

718.

The standard is effective for interim and annual reporting periods beginning after

December 15, 2017.

The Company adopted this standard on

January 1, 2018,

and it did

not

have a material impact on our financial statements and footnote disclosures.

Accounting Standards

Not

Yet Effective

In

February 2016,

the FASB issued ASU

No.

2016

-

02,

Leases (Topic

842

). The update requires that most leases, including operating leases, be recorded on the balance sheet as an asset and a liability, initially measured at the present value of the lease payments. Subsequently, the lease asset will be amortized generally on a straight-line basis over the lease term, and the lease liability will bear interest expense and be reduced for lease payments. The amendments in this update are effective for public companies’ financial statements issued for fiscal years beginning after

December 15, 2018,

including interim periods within those fiscal years. The Company is still in the process of evaluating the impact of adopting this new accounting standard on its consolidated financial statements and footnote disclosures.

In

January 2017,

the FASB issued ASU

No.

2017

-

04,

Intangibles - Goodwill and Other (Topic

350

). This standard eliminates step

2

from the annual goodwill impairment test. This update is effective for annual periods beginning after

December 15, 2019,

and interim periods within those fiscal years, with early adoption permitted, and is to be applied on a prospective basis. The Company does

not

anticipate that the adoption of this standard will have a significant impact on its consolidated financial statements or the related disclosures.

In

February 2018,

the FASB issued ASU

No.

2018

-

02,

Income Statement – Reporting Comprehensive Income (Topic

220

): Reclassification of Certain Tax Effect from Accumulated Other Comprehensive Income. This update allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Job Act ("TCJA") enacted in

December 2017.

This update will be effective for the Company for fiscal years beginning after

December 15, 2018

and interim periods within those fiscal years. Early adoption is permitted. The Company does

not

anticipate that the adoption of this standard will have a significant impact on its consolidated financial statements or the related disclosures.

In

March 2018,

the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 

2018

-

05,

 "Income Taxes (Topic

740

): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin

No.

118".

The staff of the SEC recognized the complexity of reflecting the impacts of the TCJA, and on

December 22, 2017

issued guidance in Staff Accounting Bulletin

118

(SAB

118

), which clarifies accounting for income taxes under Accounting Standards Codification (ASC)

740

if information is

not

yet available or complete and provides for up to a

one

year period in which to complete the required analysis and accounting (the measurement period).  Refer to Note

5.

Income Taxes, for further discussion regarding the impact of this standard to the Company's consolidated financial statements.

XML

Note 2 - Revenue Recognition (Tables)

6 Months Ended

Jun. 30, 2018

Notes Tables

Schedule of New Accounting Pronouncements and Changes in Accounting Principles [Table Text Block]

	As reported under Topic 606			Adjustments			Balances under Topic 605
	(In thousands)
Accounts receivable, net of allowance	$	53,919		$	621		$	54,540
Prepaid expenses and other current assets		8,660			(3,546	)		5,114
Deferred tax assets		17,747			316			18,063
Other non-current assets		8,943			(78	)		8,865
Deferred revenues – current portion		9,369			1,858			11,227
Long-term income taxes payable		4,652			(1,032	)		3,620
Other non-current liabilities		994			785			1,779
Accumulated deficit		(25,256	)		(4,298	)		(29,554	)

	As reported under Topic 606			Adjustments			Balances under Topic 605
	(In thousands)
Net income	$	(2,520	)	$	55		$	(2,465	)
Changes in operating assets and liabilities:
Accounts receivable, net of allowance		4,479			(1,413	)		3,066
Prepaid expenses and other current assets		(1,204	)		1,154			(50	)
Other non-current assets		1,597			79			1,676
Deferred revenue		2,745			125			2,870

	As reported under Topic 606			Adjustments			Balances under Topic 605
				(In thousands)
Design-to-silicon-yield solutions	$	15,266		$	12		$	15,278
Total revenue		21,119			12			21,131
Gross margin		10,202			12			10,214
Selling, general and administrative		5,919			(73	)		5,846
Total operating expenses		13,127			(73	)		13,054
Income (loss) from operations		(2,925	)		85			(2,840	)
Income (loss) before taxes		(2,535	)		85			(2,450	)
Net income (loss)		(2,096	)		85			(2,011	)

	As reported under Topic 606			Adjustments			Balances under Topic 605
				(In thousands)
Design-to-silicon-yield solutions	$	33,456		$	(18	)	$	33,438
Total revenue		45,856			(18	)		45,838
Gross margin		23,457			(18	)		23,439
Selling, general and administrative		12,294			(73	)		12,221
Total operating expenses		26,856			(73	)		26,783
Income (loss) from operations		(3,399	)		55			(3,344	)
Income (loss) before taxes		(3,340	)		55			(3,285	)
Net income (loss)		(2,520	)		55			(2,465	)

Disaggregation of Revenue [Table Text Block]

	Three Months Ended		Six Months Ended
	June 30, 2018		June 30, 2018
Product and licenses	$	6,828	$	14,315
Support and Services		14,200		31,190
Other		90		351
Total	$	21,119	$	45,856

XML

Note 3 - Balance Sheet Components (Tables)

6 Months Ended

Jun. 30, 2018

Notes Tables

Property, Plant and Equipment [Table Text Block]

	June 30, 2018			December 31, 2017
Property and equipment, net:
Computer equipment	$	10,568		$	10,729
Software		4,120			3,348
Furniture, fixtures and equipment		4,119			3,676
Leasehold improvements		2,002			1,980
Test equipment		14,659			13,796
Construction-in-progress		14,992			12,527
		50,460			46,056
Less: accumulated depreciation		(22,365	)		(20,670	)
Total	$	28,095		$	25,386

Schedule of Finite-Lived Intangible Assets [Table Text Block]

				June 30, 2018							December 31, 2017
	Amortization Period (Years)			Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Acquired identifiable intangibles:
Customer relationships	1	-	9	$	6,740	$	(4,329	)	$	2,411	$	6,740	$	(4,145	)	$	2,595
Developed technology	4	-	6		15,820		(13,117	)		2,703		15,820		(12,829	)		2,991
Tradename	2	-	4		790		(635	)		155		790		(622	)		168
Backlog		1			100		(100	)		-		100		(100	)		-
Patent	7	-	10		1,800		(1,500	)		300		1,800		(1,480	)		320
Other acquired intangibles		4			255		(255	)		-		255		(255	)		-
Total				$	25,505	$	(19,936	)	$	5,569	$	25,505	$	(19,431	)	$	6,074

Schedule of Finite-Lived Intangible Assets, Future Amortization Expense [Table Text Block]

Year ending December 31,	Amount
2018 (remaining six months)	$	505
2019		1,009
2020		1,009
2021		833
2022		626
2023 and thereafter		1,587
Total future amortization expense	$	5,569

XML

Note 4 - Stockholders' Equity (Tables)

6 Months Ended

Jun. 30, 2018

Notes Tables

Schedule of Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Table Text Block]

	Three Months Ended June 30,				Six Months Ended June 30,
	2018		2017		2018		2017
Cost of Design-to-silicon yield-solutions	$	968	$	1,069	$	1,981	$	2,261
Research and development		845		848		1,724		1,682
Selling, general and administrative		889		987		1,852		1,845
Stock-based compensation expenses	$	2,702	$	2,904	$	5,557	$	5,788

Schedule of Share-based Payment Award, Stock Options, Valuation Assumptions [Table Text Block]

	Three Months Ended June 30,					Six Months Ended June 30,
	2018		2017			2018			2017
Expected life (in years)		-		4.41			4.43			4.41
Volatility		-		41.63	%		42.22	%		41.53	%
Risk-free interest rate		-		1.67	%		2.52	%		1.69	%
Expected dividend		-		-			-			-
Weighted average fair value per share of options granted during the period	$	-	$	5.98		$	4.28		$	6.16

	Six Months Ended June 30,
	2018			2017
Expected life (in years)		1.25			1.25
Volatility		37.23	%		33.32	%
Risk-free interest rate		1.93	%		0.93	%
Expected dividend		—			—
Weighted average fair value per share of options granted during the period	$	4.32		$	6.78

Share-based Compensation, Stock Options, Activity [Table Text Block]

	Number of Options (in thousands)			Weighted Average Exercise Price per Share		Weighted Average Remaining Contractual Term (years)		Aggregate Intrinsic Value (in thousands)
Outstanding, January 1, 2018		1,045		$	9.65
Granted (weighted average fair value of $4.28 per share)		10		$	11.26
Exercised		(59	)	$	7.069
Canceled		(6	)	$	14.02
Expired		(4	)	$	16.22
Outstanding, June 30, 2018		986		$	9.80		4.51	$	3,404
Vested and expected to vest, June 30, 2018		977		$	9.71		4.44	$	3,403
Exercisable, June 30, 2018		808		$	8.50		3.56	$	3,380

Schedule of Share-based Compensation, Restricted Stock Units Award Activity [Table Text Block]

	Shares (in thousands)			Weighted Average Grant Date Fair Value Per Share
Outstanding, January 1, 2018		1,617		$	15.66
Granted		10		$	11.26
Vested		(332	)	$	16.19
Forfeited		(84	)	$	15.53
Outstanding, June 30, 2018		1,211		$	15.49

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Note 6 - Net Income Per Share (Tables)

6 Months Ended

Jun. 30, 2018

Notes Tables

Schedule of Earnings Per Share, Basic and Diluted [Table Text Block]

	Three Months Ended June 30,					Six Months Ended June 30,
	2018			2017		2018			2017
Numerator:
Net income (loss)	$	(2,096	)	$	189	$	(2,520	)	$	706
Denominator:
Basic weighted-average common shares outstanding		31,962			32,111		32,065			32,051
Effect of dilutive options and restricted stock		-			1,277		-			1,440
Diluted weighted average shares outstanding		31,962			33,388		32,065			33,491
Net income (loss) per share - Basic	$	(0.07	)	$	0.01	$	(0.08	)	$	0.02
Net income (loss) per share - Diluted	$	(0.07	)	$	0.01	$	(0.08	)	$	0.02

Schedule of Antidilutive Securities Excluded from Computation of Earnings Per Share [Table Text Block]

	Three Months Ended June 30,				Six Months Ended June 30,
	2018		2017		2018		2017
Outstanding options		-		102		-		79
Nonvested restricted stock units		-		13		-		4
Employee Stock Purchase Plan		-		27		-		29
Total		-		142		-		112

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Note 7 - Customer and Geographic Information (Tables)

6 Months Ended

Jun. 30, 2018

Notes Tables

Schedule of Revenue by Major Customers by Reporting Segments [Table Text Block]

	Three Months Ended June 30,						Six Months Ended June 30,
Customer	2018			2017			2018			2017
A		40	%		36	%		39	%		42	%
B		10	%		15	%		*	%		10	%

Receivables by Major Customers [Table Text Block]

Customer	June 30, 2018			December 31, 2017
A		43	%		41	%
B		18	%		15	%

Schedule of Revenue from External Customers Attributed to Foreign Countries by Geographic Area [Table Text Block]

	Three Months Ended June 30,
	2018					2017
	Revenues		Percentage of Revenues			Revenues		Percentage of Revenues
United States	$	8,982		42	%	$	9,226		38	%
China		4,360		21			4,753		20
Taiwan		1,038		5			3,643		15
Rest of the world		6,739		32			6,667		27
Total revenue	$	21,119		100	%	$	24,289		100	%

	Six Months Ended June 30,
	2018					2017
	Revenues		Percentage of Revenues			Revenues		Percentage of Revenues
United States	$	19,065		41	%	$	20,860		44	%
China		9,542		21			6,440		13
Taiwan		3,173		7			7,480		15
Rest of the world		14,076		31			13,798		28
Total revenue	$	45,856		100	%	$	48,578		100	%

Schedule of Disclosure on Geographic Areas, Long-Lived Assets in Individual Foreign Countries by Country [Table Text Block]

	June 30, 2018		December 31, 2017
United States	$	27,612	$	24,883
Rest of the world		483		503
Total long-lived assets, net	$	28,095	$	25,386

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Note 8 - Fair Value Measurements (Tables)

6 Months Ended

Jun. 30, 2018

Notes Tables

Fair Value, Assets Measured on Recurring Basis [Table Text Block]

Assets	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Money market mutual funds	$	26,814	$	26,814	$	—	$	—

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

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Note 9 - Commitments and Contingencies (Tables)

6 Months Ended

Jun. 30, 2018

Notes Tables

Schedule of Future Minimum Rental Payments for Operating Leases [Table Text Block]

Year ending December 31,	Amount
2018 (remaining six months)	$	718
2019		1,307
2020		1,374
2021		1,291
2022		1,061
2023 and thereafter		4,264
Total future minimum lease payments	$	10,015

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Note 2 - Revenue Recognition (Details Textual) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2018	Jun. 30, 2017	Jun. 30, 2018	Jun. 30, 2017	Jan. 01, 2018	Dec. 31, 2017
Retained Earnings (Accumulated Deficit), Ending Balance	$ (25,256)		$ (25,256)			$ (27,089)
Capitalized Contract Cost, Net, Total					$ 500
Contract with Customer, Liability, Noncurrent	500		500		900
Contract with Customer, Liability, Revenue Recognized	5,000		7,600
Revenue, Remaining Performance Obligation, Amount	45,300		45,300
Contract with Customer, Performance Obligation Satisfied in Previous Period	200		300
Capitalized Contract Cost, Amortization	100		200
Capitalized Contract Cost, Impairment Loss	0		0
Prepaid Expenses and Other Current Assets [Member]
Contract with Customer, Asset, Net, Current, Total	3,200		3,200		1,900
Prepaid Expenses and Other Current Assets and Other Non-current Assets [Member]
Deferred Costs, Total	$ 400		$ 400			$ 600
Customer Concentration Risk [Member] | Sales Revenue, Net [Member] | Transferred over Time [Member]
Concentration Risk, Percentage	68.00%		32.00%
Geographic Concentration Risk [Member] | Sales Revenue, Net [Member]
Concentration Risk, Percentage	100.00%	100.00%	100.00%	100.00%
Geographic Concentration Risk [Member] | Sales Revenue, Net [Member] | Countries other than the United States [Member]
Concentration Risk, Percentage	57.00%	62.00%	58.00%	57.00%
Accounting Standards Update 2014-09 [Member]
Retained Earnings (Accumulated Deficit), Ending Balance					(4,400)
Accounts Receivable, Net, Total					800
Contract with Customer, Asset, Net, Total					1,900
Contract with Customer, Liability, Total					$ (2,500)

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Note 2 - Revenue Recognition - Adoption of ASC 606 (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2018	Jun. 30, 2017	Jun. 30, 2018	Jun. 30, 2017	Jan. 01, 2018	Dec. 31, 2017
Accounts receivable, net of allowance	$ 53,919		$ 53,919			$ 57,564
Prepaid expenses and other current assets	8,660		8,660			5,069
Deferred tax assets	17,747		17,747			16,348
Other non-current assets	8,943		8,943			10,545
Deferred revenues – current portion	9,369		9,369			7,981
Long-term income taxes payable	4,652		4,652			3,902
Other non-current liabilities	994		994			2,269
Accumulated deficit	(25,256)		(25,256)			$ (27,089)
Net income (loss)	(2,096)	$ 189	(2,520)	$ 706
Accounts receivable, net of allowance			4,479	(5,996)
Prepaid expenses and other current assets			(1,204)	(3,435)
Other non-current assets			1,597	377
Deferred revenue			2,745
Revenues	21,119	24,289	45,856	48,578
Gross margin	10,202	12,910	23,457	25,768
Selling, general and administrative	5,919	6,195	12,294	12,095
Total operating expenses	13,127	13,563	26,856	26,836
Income (loss) from operations	(2,925)	(653)	(3,399)	(1,068)
Income (loss) before taxes	(2,535)	(626)	(3,340)	(1,270)
Accounting Standards Update 2014-09 [Member]
Accumulated deficit					$ (4,400)
Difference between Revenue Guidance in Effect before and after Topic 606 [Member] | Accounting Standards Update 2014-09 [Member]
Accounts receivable, net of allowance	621		621
Prepaid expenses and other current assets	(3,546)		(3,546)
Deferred tax assets	316		316
Other non-current assets	(78)		(78)
Deferred revenues – current portion	1,858		1,858
Long-term income taxes payable	(1,032)		(1,032)
Other non-current liabilities	785		785
Accumulated deficit	(4,298)		(4,298)
Net income (loss)	85		55
Accounts receivable, net of allowance			(1,413)
Prepaid expenses and other current assets			1,154
Other non-current assets			79
Deferred revenue			125
Revenues	12		(18)
Gross margin	12		(18)
Selling, general and administrative	(73)		(73)
Total operating expenses	(73)		(73)
Income (loss) from operations	85		55
Income (loss) before taxes	85		55
Calculated under Revenue Guidance in Effect before Topic 606 [Member]
Accounts receivable, net of allowance	54,540		54,540
Prepaid expenses and other current assets	5,114		5,114
Deferred tax assets	18,063		18,063
Other non-current assets	8,865		8,865
Deferred revenues – current portion	11,227		11,227
Long-term income taxes payable	3,620		3,620
Other non-current liabilities	1,779		1,779
Accumulated deficit	(29,554)		(29,554)
Net income (loss)	(2,011)		(2,465)
Accounts receivable, net of allowance			3,066
Prepaid expenses and other current assets			(50)
Other non-current assets			1,676
Deferred revenue			2,870
Revenues	21,131		45,838
Gross margin	10,214		23,439
Selling, general and administrative	5,846		12,221
Total operating expenses	13,054		26,783
Income (loss) from operations	(2,840)		(3,344)
Income (loss) before taxes	(2,450)		(3,285)
License and Service [Member]
Revenues	15,266	$ 16,500	33,456	$ 36,198
License and Service [Member] | Difference between Revenue Guidance in Effect before and after Topic 606 [Member] | Accounting Standards Update 2014-09 [Member]
Revenues	12		(18)
License and Service [Member] | Calculated under Revenue Guidance in Effect before Topic 606 [Member]
Revenues	$ 15,278		$ 33,438

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Note 2 - Revenue Recognition - Disaggregation of Revenue (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2018	Jun. 30, 2017	Jun. 30, 2018	Jun. 30, 2017
Revenues	$ 21,119	$ 24,289	$ 45,856	$ 48,578
License [Member]
Revenues	6,828		14,315
Service [Member]
Revenues	14,200		31,190
Product and Service, Other [Member]
Revenues	$ 90		$ 351

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Note 3 - Balance Sheet Components (Details Textual) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2018	Jun. 30, 2017	Jun. 30, 2018	Jun. 30, 2017	Dec. 31, 2017
Unbilled Receivables, Current	$ 23,200		$ 23,200		$ 22,200
Unbilled Receivables, Not Billable, Amount Expected to be Collected after Next Twelve Months	7,300		7,300		8,600
Depreciation, Depletion and Amortization, Nonproduction, Total	1,300	$ 1,200	2,500	$ 2,300
Goodwill, Ending Balance	1,923		1,923		1,923
Finite-Lived Intangible Assets, Net, Ending Balance	5,569		$ 5,569		$ 6,074
Finite-Lived Intangible Assets, Remaining Amortization Period			6 years 113 days
Amortization of Intangible Assets, Total	300	$ 200	$ 505	$ 376
Impairment of Intangible Assets, Finite-lived	$ 0		$ 0

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Note 3 - Balance Sheet Components - Property and Equipment (Details) - USD ($) $ in Thousands	Jun. 30, 2018	Dec. 31, 2017
Property and equipment, gross	$ 50,460	$ 46,056
Less: accumulated depreciation	(22,365)	(20,670)
Total	28,095	25,386
Computer Equipment [Member]
Property and equipment, gross	10,568	10,729
Software and Software Development Costs [Member]
Property and equipment, gross	4,120	3,348
Furniture and Fixtures [Member]
Property and equipment, gross	4,119	3,676
Leasehold Improvements [Member]
Property and equipment, gross	2,002	1,980
Test Equipment [Member]
Property and equipment, gross	14,659	13,796
Construction in Progress [Member]
Property and equipment, gross	$ 14,992	$ 12,527

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Note 3 - Balance Sheet Components - Intangible Assets (Details) - USD ($) $ in Thousands	6 Months Ended
	Jun. 30, 2018	Dec. 31, 2017
Gross Carrying Amount	$ 25,505	$ 25,505
Accumulated Amortization	(19,936)	(19,431)
Intangible assets, net	5,569	6,074
Customer Relationships [Member]
Gross Carrying Amount	6,740	6,740
Accumulated Amortization	(4,329)	(4,145)
Intangible assets, net	$ 2,411	2,595
Customer Relationships [Member] | Minimum [Member]
Amortization Period (Year)	1 year
Customer Relationships [Member] | Maximum [Member]
Amortization Period (Year)	9 years
Developed Technology Rights [Member]
Gross Carrying Amount	$ 15,820	15,820
Accumulated Amortization	(13,117)	(12,829)
Intangible assets, net	$ 2,703	2,991
Developed Technology Rights [Member] | Minimum [Member]
Amortization Period (Year)	4 years
Developed Technology Rights [Member] | Maximum [Member]
Amortization Period (Year)	6 years
Trade Names [Member]
Gross Carrying Amount	$ 790	790
Accumulated Amortization	(635)	(622)
Intangible assets, net	$ 155	168
Trade Names [Member] | Minimum [Member]
Amortization Period (Year)	2 years
Trade Names [Member] | Maximum [Member]
Amortization Period (Year)	4 years
Order or Production Backlog [Member]
Amortization Period (Year)	1 year
Gross Carrying Amount	$ 100	100
Accumulated Amortization	(100)	(100)
Intangible assets, net
Patents [Member]
Gross Carrying Amount	1,800	1,800
Accumulated Amortization	(1,500)	(1,480)
Intangible assets, net	$ 300	320
Patents [Member] | Minimum [Member]
Amortization Period (Year)	7 years
Patents [Member] | Maximum [Member]
Amortization Period (Year)	10 years
Other Intangible Assets [Member]
Amortization Period (Year)	4 years
Gross Carrying Amount	$ 255	255
Accumulated Amortization	(255)	(255)
Intangible assets, net

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Note 3 - Balance Sheet Components - Annual Amortization of Identifiable Intangible Assets (Details) - USD ($) $ in Thousands	Jun. 30, 2018	Dec. 31, 2017
2018 (remaining six months)	$ 505
2019	1,009
2020	1,009
2021	833
2022	626
2023 and thereafter	1,587
Total future amortization expense	$ 5,569	$ 6,074

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Note 4 - Stockholders' Equity (Details Textual) - USD ($) $ / shares in Units, $ in Millions			1 Months Ended	3 Months Ended		6 Months Ended		12 Months Ended	20 Months Ended
	May 31, 2017	Oct. 25, 2016	Jul. 31, 2001	Jun. 30, 2018	Jun. 30, 2017	Jun. 30, 2018	Jun. 30, 2017	Dec. 31, 2001	Jun. 30, 2018	Dec. 31, 2017
Share-based Compensation Arrangement by Share-based Payment Award, Options, Forfeitures in Period						6,000
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding, Number, Ending Balance				986,000		986,000			986,000	1,045,000
Share-based Compensation Arrangement by Share-based Payment Award, Options, Grants in Period, Gross				0		10,000
Share Price				$ 11.98		$ 11.98			$ 11.98
Share-based Compensation Arrangement by Share-based Payment Award, Options, Exercises in Period, Intrinsic Value						$ 0.3
Share-based Compensation Arrangement by Share-based Payment Award, Options, Vested in Period, Fair Value						$ 0.2
Stock Repurchase Program, Authorized Amount		$ 25.0
Stock Repurchase Program, Period in Force		2 years
Treasury Stock, Shares, Acquired				98,800		437,007			1,279,189
Treasury Stock Acquired, Average Cost Per Share									$ 14.59
Treasury Stock, Value, Acquired, Cost Method									$ 18.7
Stock Repurchase Program, Remaining Authorized Repurchase Amount				$ 25.0		$ 25.0			25.0
Employee Stock Option [Member]
Employee Service Share-based Compensation, Nonvested Awards, Compensation Cost Not yet Recognized, Total				0.9		$ 0.9			0.9
Employee Service Share-based Compensation, Nonvested Awards, Compensation Cost Not yet Recognized, Period for Recognition						3 years
Restricted Stock Units (RSUs) [Member]
Employee Service Share-based Compensation, Nonvested Awards, Compensation Cost Not yet Recognized, Total				$ 15.3		$ 15.3			$ 15.3
Employee Service Share-based Compensation, Nonvested Awards, Compensation Cost Not yet Recognized, Period for Recognition						2 years 109 days
Twenty Eleven Stock Incentive Plan [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Number of Shares Authorized	7,800,000
Share Based Compensation Arrangement By Share Based Payment Award Shares Reserved Decrease Rate	1.33
Common Stock, Capital Shares Reserved for Future Issuance				9,600,000		9,600,000			9,600,000
Share-based Compensation Arrangement by Share-based Payment Award, Number of Shares Available for Grant				4,100,000		4,100,000			4,100,000
Twenty Eleven Stock Incentive Plan [Member] | Employee Stock Option [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Expiration Period	10 years
Share-based Compensation Arrangement by Share-based Payment Award, Award Vesting Period	4 years
Shares Previously Issued Under the 2001 Plan [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Number of Shares Authorized								3,500,000
IDS Plan [Member] | Employee Stock Option [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Expiration Period								10 years
Share-based Compensation Arrangement by Share-based Payment Award, Award Vesting Period								4 years
Two Thousand One Stock Incentive Plan [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Options, Forfeitures in Period						500,000
Outside of the 2011, 2001 or IDS Plans [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding, Number, Ending Balance				0		0			0
Employee Stock Purchase Plan [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Expiration Period			10 years
Employee Service Share-based Compensation, Nonvested Awards, Compensation Cost Not yet Recognized, Total				$ 1.3		$ 1.3			$ 1.3
Employee Service Share-based Compensation, Nonvested Awards, Compensation Cost Not yet Recognized, Period for Recognition						1 year 211 days
Share-based Compensation Arrangement by Share-based Payment Award, Maximum Employee Subscription Rate			10.00%
Share-based Compensation Arrangement by Share-based Payment Award, Purchase Price of Common Stock, Percent			85.00%
ESPP Maximum Annual Share Replenishment			675,000
ESPP Maximum Annual Share Replenishment Percentage of Prior Year Outstanding Company Common Stock			2.00%
Stock Issued During Period, Shares, Employee Stock Purchase Plans				0	0	108,000	100,000
Employee Stock Purchase Plan Weighted Average Purchase Price of Shares Purchased						$ 9.29	$ 9.13
Number Of ESPP Shares Available For Future Issuance				4,200,000		4,200,000			4,200,000

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Note 4 - Stockholders' Equity - Allocation of Recognized Period Costs (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2018	Jun. 30, 2017	Jun. 30, 2018	Jun. 30, 2017
Allocation of recognized period costs	$ 2,702	$ 2,904	$ 5,557	$ 5,788
Cost of Sales [Member]
Allocation of recognized period costs	968	1,069	1,981	2,261
Research and Development Expense [Member]
Allocation of recognized period costs	845	848	1,724	1,682
Selling, General and Administrative Expenses [Member]
Allocation of recognized period costs	$ 889	$ 987	$ 1,852	$ 1,845

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Note 4 - Stockholders' Equity - Stock Options, Valuation Assumptions (Details) - $ / shares	3 Months Ended		6 Months Ended
	Jun. 30, 2018	Jun. 30, 2017	Jun. 30, 2018	Jun. 30, 2017
Weighted average fair value (in dollars per share)			$ 4.28
Stock Plans [Member]
Expected life (Year)		4 years 149 days	4 years 156 days	4 years 149 days
Volatility		41.63%	42.22%	41.53%
Risk-free interest rate		1.67%	2.52%	1.69%
Expected dividend	0.00%	0.00%
Weighted average fair value (in dollars per share)		$ 5.98	$ 4.28	$ 6.16
Employee Stock Purchase Plan [Member]
Expected life (Year)			1 year 91 days	1 year 91 days
Volatility			37.23%	33.32%
Risk-free interest rate			1.93%	0.93%
Expected dividend			0.00%	0.00%
Weighted average fair value (in dollars per share)			$ 4.32	$ 6.78

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Note 4 - Stockholders' Equity - Stock Options Activity (Details) $ / shares in Units, $ in Thousands	3 Months Ended	6 Months Ended
	Jun. 30, 2018 USD ($) $ / shares shares	Jun. 30, 2018 USD ($) $ / shares shares
Outstanding (in shares)		1,045,000
Outstanding, weighted average exercise price (in dollars per share) | $ / shares		$ 9.65
Granted (in shares)	0	10,000
Exercised (in shares)		(59,000)
Exercised, weighted average exercise price (in dollars per share) | $ / shares		$ 7.069
Canceled (in shares)		(6,000)
Canceled, weighted average exercise price (in dollars per share) | $ / shares		$ 14.02
Expired (in shares)		(4,000)
Expired, weighted average exercise price (in dollars per share) | $ / shares		$ 16.22
Outstanding (in shares)	986,000	986,000
Outstanding, weighted average exercise price (in dollars per share) | $ / shares	$ 9.80	$ 9.80
Outstanding, weighted average remaining term (Year)		4 years 186 days
Outstanding, intrinsic value | $	$ 3,404	$ 3,404
Vested and expected to vest, June 30, 2018 (in shares)	977,000	977,000
Vested and expected to vest, weighted average exercise price (in dollars per share) | $ / shares	$ 9.71	$ 9.71
Vested and expected to vest, weighted average remaining term (Year)		4 years 160 days
Vested and expected to vest, intrinsic value | $	$ 3,403	$ 3,403
Exercisable, June 30, 2018 (in shares)	808,000	808,000
Exercisable, weighted average exercise price (in dollars per share) | $ / shares	$ 8.50	$ 8.50
Exercisable, weighted average remaining term (Year)		3 years 204 days
Exercisable, intrinsic value | $	$ 3,380	$ 3,380

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Note 4 - Stockholders' Equity - Stock Options Activity (Details) (Parentheticals)	6 Months Ended
	Jun. 30, 2018 $ / shares
Weighted average fair value (in dollars per share)	$ 4.28

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Note 4 - Stockholders' Equity - Nonvested Restricted Stock Units Activity (Details) - Restricted Stock Units (RSUs) [Member] shares in Thousands	6 Months Ended
	Jun. 30, 2018 $ / shares shares
Outstanding, January 1, 2018 (in shares) | shares	1,617
Outstanding, January 1, 2018 (in dollars per share) | $ / shares	$ 15.66
Granted (in shares) | shares	10
Granted, weighted average grant date fair value (in dollars per share) | $ / shares	$ 11.26
Vested (in shares) | shares	(332)
Vested, weighted average grant date fair value (in dollars per share) | $ / shares	$ 16.19
Forfeited (in shares) | shares	(84)
Forfeited, weighted average grant date fair value (in dollars per share) | $ / shares	$ 15.53
Outstanding, June 30, 2018 (in shares) | shares	1,211
Outstanding, June 30, 2018 (in dollars per share) | $ / shares	$ 15.49

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Note 5 - Income Taxes (Details Textual) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended		12 Months Ended
	Jun. 30, 2018	Jun. 30, 2017	Jun. 30, 2018	Jun. 30, 2017	Dec. 31, 2018	Dec. 31, 2017
Increase (Decrease) in Income Taxes			$ 1,200
Income Tax Expense (Benefit), Total	$ (439)	$ (815)	$ (820)	$ (1,976)
Effective Income Tax Rate Reconciliation, Percent, Total			23.00%	156.00%
Effective Income Tax Rate Reconciliation, at Federal Statutory Income Tax Rate, Percent						35.00%
Unrecognized Tax Benefits, Ending Balance	13,000		$ 13,000			$ 12,900
Unrecognized Tax Benefits that Would Impact Effective Tax Rate	7,700		7,700			7,700
Unrecognized Tax Benefits In Long Term Liabilities	2,900		2,900
Unrecognized Tax Benefits In Deferred Tax Assets	10,800		10,800
Unrecognized Tax Benefits In Deferred Tax Asset Subject To Full Valuation Allowance	5,300		5,300
Deferred Tax Assets, Valuation Allowance, Total	$ 9,500		$ 9,500			$ 9,100
Scenario, Forecast [Member]
Effective Income Tax Rate Reconciliation, at Federal Statutory Income Tax Rate, Percent					21.00%

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Note 6 - Net Income Per Share - Calculation of Earnings Per Share (Details) - USD ($) $ / shares in Units, shares in Thousands, $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2018	Jun. 30, 2017	Jun. 30, 2018	Jun. 30, 2017
Net income (loss)	$ (2,096)	$ 189	$ (2,520)	$ 706
Basic weighted-average common shares outstanding (in shares)	31,962	32,111	32,065	32,051
Effect of dilutive options and restricted stock (in shares)		1,277		1,440
Diluted weighted average shares outstanding (in shares)	31,962	33,388	32,065	33,491
Net income (loss) per share - Basic (in dollars per share)	$ (0.07)	$ 0.01	$ (0.08)	$ 0.02
Net income (loss) per share - Diluted (in dollars per share)	$ (0.07)	$ 0.01	$ (0.08)	$ 0.02

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Note 6 - Net Income Per Share - Anti-dilutive Securities (Details) - shares shares in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2018	Jun. 30, 2017	Jun. 30, 2018	Jun. 30, 2017
Anti-dilutive securities (in shares)		142		112
Employee Stock Option [Member]
Anti-dilutive securities (in shares)		102		79
Restricted Stock Units (RSUs) [Member]
Anti-dilutive securities (in shares)		13		4
Employee Stock Purchase Plan [Member]
Anti-dilutive securities (in shares)		27		29

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Note 7 - Customer and Geographic Information (Details Textual)	6 Months Ended
	Jun. 30, 2018
Number of Operating Segments	1

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Note 7 - Customer and Geographic Information - Revenue Percentage by Major Customers (Details) - Customer Concentration Risk [Member] - Sales Revenue, Net [Member]	3 Months Ended		6 Months Ended
	Jun. 30, 2018	Jun. 30, 2017	Jun. 30, 2018		Jun. 30, 2017
Customer A [Member]
Receivables percentage by major customer	40.00%	36.00%	39.00%		42.00%
Customer B [Member]
Receivables percentage by major customer	10.00%	15.00%		[1]	10.00%

[1] represents less than 10%

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Note 7 - Customer and Geographic Information - Receivables Percentage by Major Customers (Details) - Customer Concentration Risk [Member] - Accounts Receivable [Member]	6 Months Ended	12 Months Ended
	Jun. 30, 2018	Dec. 31, 2017
Customer A [Member]
Receivables percentage by major customer	43.00%	41.00%
Customer B [Member]
Receivables percentage by major customer	18.00%	15.00%

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Note 7 - Customer and Geographic Information - Revenues by Geographic Area (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2018	Jun. 30, 2017	Jun. 30, 2018	Jun. 30, 2017
Revenues	$ 21,119	$ 24,289	$ 45,856	$ 48,578
Geographic Concentration Risk [Member] | Sales Revenue, Net [Member]
Revenues	$ 21,119	$ 24,289	$ 45,856	$ 48,578
Concentration Risk, Percentage	100.00%	100.00%	100.00%	100.00%
Geographic Concentration Risk [Member] | Sales Revenue, Net [Member] | UNITED STATES
Revenues	$ 8,982	$ 9,226	$ 19,065	$ 20,860
Concentration Risk, Percentage	42.00%	38.00%	41.00%	44.00%
Geographic Concentration Risk [Member] | Sales Revenue, Net [Member] | CHINA
Revenues	$ 4,360	$ 4,753	$ 9,542	$ 6,440
Concentration Risk, Percentage	21.00%	20.00%	21.00%	13.00%
Geographic Concentration Risk [Member] | Sales Revenue, Net [Member] | TAIWAN, PROVINCE OF CHINA
Revenues	$ 1,038	$ 3,643	$ 3,173	$ 7,480
Concentration Risk, Percentage	5.00%	15.00%	7.00%	15.00%
Geographic Concentration Risk [Member] | Sales Revenue, Net [Member] | Rest of the World [Member]
Revenues	$ 6,739	$ 6,667	$ 14,076	$ 13,798
Concentration Risk, Percentage	32.00%	27.00%	31.00%	28.00%

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Note 7 - Customer and Geographic Information - Long-lived Assets by Geographic Area (Details) - USD ($) $ in Thousands	Jun. 30, 2018	Dec. 31, 2017
Long-lived assets	$ 28,095	$ 25,386
UNITED STATES
Long-lived assets	27,612	24,883
Rest of the World [Member]
Long-lived assets	$ 483	$ 503

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Note 8 - Fair Value Measurements (Details Textual) - Foreign Exchange Contract [Member] - USD ($)	3 Months Ended		6 Months Ended
	Jun. 30, 2018	Jun. 30, 2017	Jun. 30, 2018	Jun. 30, 2017	Dec. 31, 2017
Derivative Asset, Notional Amount	$ 8,100,000		$ 8,100,000		$ 8,200,000
Other Current Assets [Member]
Derivative Asset, Current	35,000		35,000		$ 12,000
Other Nonoperating Income (Expense) [Member]
Derivative, Gain (Loss) on Derivative, Net, Total	$ (600,000)	$ 400,000	$ (400,000)	$ 500,000

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Note 8 - Fair Value Measurements - Fair Value, Assets Measured on a Recurring Basis (Details) - Money Market Funds [Member] - USD ($) $ in Thousands	Jun. 30, 2018	Dec. 31, 2017
Money market mutual funds	$ 26,814	$ 26,638
Fair Value, Inputs, Level 1 [Member]
Money market mutual funds	26,814	26,638
Fair Value, Inputs, Level 2 [Member]
Money market mutual funds
Fair Value, Inputs, Level 3 [Member]
Money market mutual funds

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Note 9 - Commitments and Contingencies (Details Textual) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2018	Jun. 30, 2017	Jun. 30, 2018	Jun. 30, 2017	Jul. 01, 2018
Operating Leases, Rent Expense, Net, Total	$ 700	$ 600	$ 1,300	$ 1,100
Operating Leases, Future Minimum Payments Due, Total	10,015		10,015
Purchase Obligation, Due in Next Twelve Months	13,700		13,700
Loss Contingency Accrual, Ending Balance	$ 0		$ 0
Lease in Santa Clara, California [Member] | Subsequent Event [Member]
Lessee, Operating Lease, Term of Contract					10 years
Operating Leases, Future Minimum Payments Due, Total					$ 7,000
Operating Lease, Abatement Allowance					400
Operating Lease, Tenant Improvement Allowance					$ 1,300

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Note 9 - Commitments and Contingencies - Future Minimum Lease Payments Under Noncancelable Operating Leases (Details) $ in Thousands	Jun. 30, 2018 USD ($)
2018 (remaining six months)	$ 718
2019	1,307
2020	1,374
2021	1,291
2022	1,061
2023 and thereafter	4,264
Total future minimum lease payments	$ 10,015