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 September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
Costs of Design-to-silicon-yield solutions	$	787	$	1,184	$	2,768	$	3,445
Research and development		725		877		2,449		2,558
Selling, general and administrative		756		888		2,608		2,734
Stock-based compensation expenses	$	2,268	$	2,949	$	7,825	$	8,737

September 30, 2018,

the Company had the following stock-based compensation plans:

Stock Plans —

November 16, 2011,

the Company’s stockholders approved the

2011

Stock Incentive Plan, which was amended and restated

four

times thereafter, most recently on

May 31, 2017,

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

2011

Stock Incentive Plan (as amended, the

“2011

Stock Plan”). Under the

2011

Stock Plan, the Company

may

award stock options, stock appreciation rights, stock grants or stock units covering shares of the Company's 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

Stock Plan that are forfeited or repurchased by the Company or shares subject to awards previously issued. In the case of awards other than options or stock appreciation rights, the aggregate number of shares reserved under the plan will be decreased at a rate of

1.33

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

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.

As of

September 30, 2018,

the Company has reserved

9,600,000

shares of common stock to cover stock-based awards under the

2011

Stock Plan, of which approximately

4.0

million shares were available for future grant. The number of shares reserved and available under the

2011

Stock Plan includes

0.5

million shares that were subject to awards previously made under the

2001

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

2011

Stock Plan through

September 30, 2018.

As of

September 30, 2018,

there were

outstanding awards that had been granted outside of the

2011

Stock Plan, the

2001

Stock Plan or the

2001

Stock Option/Stock Issuance Plan assumed under the acquisition of IDS Systems Inc. (collectively, the "Stock Plans").

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

2011

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

	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
Expected life (in years)		4.43			4.41			4.43			4.41
Volatility		44.01	%		41.49	%		43.82	%		41.53	%
Risk-free interest rate		2.73	%		1.65	%		2.71	%		1.69	%
Expected dividend		-			-			-			-
Weighted average fair value per share of options granted during the period	$	4.21		$	5.78		$	4.22		$	6.14

The Company granted

87,000

shares of options to purchase shares of common stock during the

three

months ended

September 30, 2018.

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

nine

months ended

September 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 $4.22 per share)		98		$	10.71
Exercised		(68	)	$	6.88
Canceled or expired		(30	)	$	13.84
Outstanding, September 30, 2018		1,045		$	9.81		4.64	$	1,422
Vested and expected to vest, September 30, 2018		1,039		$	9.77		4.59	$	1,422
Exercisable, September 30, 2018		806		$	8.60		3.31	$	1,422

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

$9.03

per share as of

September 30, 2018.

The total intrinsic value of options exercised during the

nine

months ended

September 30, 2018

was

$0.3

million.

As of

September 30, 2018,

there was

$1.1

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 was

$0.3

million during the

nine

months ended

September 30, 2018.

Restricted stock unit activity during the

nine

months ended

September 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		113		$	10.70
Vested		(440	)	$	15.73
Forfeited		(116	)	$	15.21
Outstanding, September 30, 2018		1,174		$	15.21

As of

September 30, 2018,

there was

$14

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

2.2

years. Restricted stock units do

not

have rights to dividends prior to vesting.

Employee Stock Purchase Plan

— In

July 2001,

the Company adopted a

ten

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

10%

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

85%

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

twenty-four

-month offering periods with

four six

-month purchase periods in each offering period which commence every

six

months. Under the ESPP, on

January 1

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

)

675,000

shares, (

)

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

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

May 18, 2010,

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

May 17, 2020.

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

	Nine Months Ended September 30,
	2018			2017
Expected life (in years)		1.25			1.25
Volatility		42.85	%		40.63	%
Risk-free interest rate		2.48	%		1.25	%
Expected dividend		—			—
Weighted average fair value per share of options granted during the period	$	3.62		$	5.22

During the

three

months ended

September 30, 2018

and

2017,

a total of

92,345

and

99,550

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

$8.925

and

$9.53

per share. During the

nine

months ended

September 30, 2018

and

2017,

a total of

200,704

and

199,827

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

$9.12

and

$9.33

per share, respectively. As of

September 30, 2018,

there was

$1.7

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

1.83

years. As of

September 30, 2018,

4.7

million shares were available for future issuance under the ESPP.

Stock Repurchase Program

- On

May 29, 2018,

the Board of Directors terminated the previous

2016

stock repurchase program, and adopted a new

2018

program to repurchase up to

$25.0

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

two

years. During the

three

and

nine

months ended

September 30, 2018,

the Company repurchased

zero

and

437,007

shares, respectively, under the

2016

and

2018

programs. As of

September 30, 2018,

1,279,189

shares had been repurchased at an average price of

$14.59

per share under the

2016

program, for a total purchase of

$18.7

million. Under the

2018

program, as of

September 30, 2018,

$25.0

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