. EMPLOYEE BENEFIT PLANS

Employee Stock Purchase Plan

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 (

)

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 Purchase Plan to extend it through

May 17, 2020.

As of

December 31, 2019

9,381,000

shares of the Company’s common stock have been reserved for issuance under the Purchase Plan. During

2019

and

2018,

the number of shares issued were

172,000

and

201,000,

respectively, at a weighted average price of

$8.92

and

$9.12

per share, respectively. As of

December 31, 2019

5.2

million shares were available for future issuance under the Purchase Plan. The weighted average estimated fair value of shares granted under the Purchase Plan during

2019

and

2018

was

$3.72

and

$3.62,

respectively. As of

December 31, 2019

, there was

$0.8

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

1.13

years.

Stock Incentive Plans

November 16, 2011,

the Company’s stockholders initially approved the

2011

Stock Incentive Plan, which has been amended and restated and approved by the Company’s stockholders a number of times since then (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

10,300,000

shares, plus up to

3,500,000

shares previously issued under the

2001

Stock Plan adopted by the Company in

2001,

which expired in

2011

(the

“2001

Plan”) that are (i) forfeited or (ii) repurchased by the Company or shares subject to awards previously issued under 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 (SARs), the aggregate number of shares reserved under the

2011

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.

2003,

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

2001

Stock Option / Stock Issuance Plan (the “IDS Plan”). The IDS Plan expired in

2011.

Stock options granted under the

2001

and IDS Plans generally expire

ten

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

four

-year period. Although

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

December 31, 2019

10.8

million shares of common stock were reserved to cover stock-based awards under the

2011

Plan, of which

3.5

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

2011

Plan includes

0.5

million shares that were subject to awards previously made under the

2001

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

2011

Plan through

December 31, 2019

. As of

December 31, 2019

, there were

outstanding awards that had been granted outside of the

2011,

2001

or the IDS Plans (collectively, the “Stock Plans”).

The Company has elected to use the Black-Scholes-Merton option-pricing model, which incorporates various assumptions including volatility, expected life, interest rate and expected dividend. The expected volatility is based on the historical volatility of the Company’s common stock over the most recent period commensurate with the estimated expected life of the Company’s stock options. The expected life of an award is based on historical experience and on the terms and conditions of the stock awards granted to employees. The interest rate assumption is based upon observed Treasury yield curve rates appropriate for the expected life of the Company’s stock options.

The fair value of equity awards granted was estimated on the date of grant with the following weighted average assumptions:

	Stock Plans						Employee Stock Purchase Plan
	2019			2018			2019			2018
Expected life (in years)		4.46			4.43			1.25			1.25
Volatility		41.56	%		43.91	%		44.85	%		42.85	%
Risk-free interest rate		1.86	%		2.73	%		2.49	%		2.48	%
Expected dividend		—			—			—			—

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. As stock-based compensation expense recognized is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

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

	Year Ended December 31,
	2019		2018
Costs of revenues	$	3,185	$	3,554
Research and development		4,764		3,260
Selling, general and administrative		3,474		3,481
Stock-based compensation expenses	$	11,423	$	10,295

The stock-based compensation expense in the table above includes immaterial expense or credit adjustments related to cash-settled SARs granted to certain employees. The Company accounted for these awards as liability awards and the amount was included in accrued compensation and related benefits. Stock-based compensation capitalized in the capitalized software development costs included in the Property and Equipment, net, was approximately

$0.3

million at

December 31, 2019

Additional information with respect to options under the Plans is as follows:

	Outstanding Options
	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 $4.08 per share)		116		$	10.35
Exercised		(81	)	$	6.93
Canceled		(30	)	$	13.41
Expired		(23	)	$	13.16
Outstanding, December 31, 2018		1,027		$	9.75
Granted (weighted average fair value of $5.00 per share)		102		$	13.79
Exercised		(238	)	$	5.41
Canceled		(87	)	$	14.57
Expired		(59	)	$	15.83
Outstanding, December 31, 2019		745		$	10.64		4.49	$	4,777
Vested and expected to vest, December 31, 2019		731		$	10.59		4.40	$	4,722
Exercisable, December 31, 2019		571		$	9.92		3.21	$	4,090

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

$16.89

as of

December 31, 2019

, which would have been received by the option holders had all option holders exercised their options as of that date. The total intrinsic value of options exercised during the years ended

December 31, 2019

and

2018

was

$1.7

million and

$0.4

million, respectively.

As of

December 31, 2019

, there was

$0.7

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

2.8

years. The total fair value of options vested during the year ended

December 31, 2019

, was

$0.3

million.

Nonvested shares (restricted stock units) were as follows:

	Shares (in thousands)			Fair Value
Nonvested, January 1, 2018		1,617		$	15.66
Granted		983		$	8.66
Vested		(596	)	$	15.84
Forfeited		(169	)	$	14.83
Nonvested, December 31, 2018		1,835		$	11.93
Granted		952		$	13.52
Vested		(710	)	$	13.05
Forfeited		(190	)	$	12.18
Nonvested, December 31, 2019		1,887		$	12.30

As of

December 31, 2019

, there was

$17.7

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

2.6

years. Restricted stock units do

not

have rights to dividends prior to vesting.

401

(k) Savings Plan

1999,

the Company established a

401

(k) tax-deferred savings plan, whereby eligible employees

may

elect to defer up to

60%

of their eligible compensation but

not

to exceed the statutorily prescribed limit to the

401

(k) plan. The

401

(k) plan also has a catch-up contribution feature for employees aged

or older who can defer up to

100%

of their eligible compensation but

not

to exceed the statutorily prescribed limit to the

401

(k) plan. Company contributions to this plan are discretionary;

such Company contributions have been made since the inception of this plan.