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

-Q and Article

of Regulation S-

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

-K for the year ended

December 31, 2019.

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

The condensed consolidated balance sheet at

December 31, 2019,

has been derived from the audited consolidated financial statements but does

not

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

Reclassification of Prior Period Amounts

Certain prior period amounts have been reclassified to conform to the current year presentation of reporting amortization of costs capitalized to obtain revenue contracts, operating lease right-of-use assets, and operating lease liabilities on the Condensed Consolidated Statements of Cash Flows. This reclassification had

effect on the Company’s reported net loss or net cash used in operating activities.

Change in Presentation

In the

fourth

quarter of fiscal

2019,

in order to enhance the transparency of our revenue reporting, the Company updated its Condensed Consolidated Statements of Comprehensive Loss to change its historical presentation of revenue categories. Previously, the Company presented revenue on

two

lines: Solutions and Gainshare performance incentives. Included within Solutions, was revenue from software and related revenue, SaaS solutions, Design-for-Inspection (DFI™) licenses, and fixed-price project-based solution implementation services. The previous Gainshare performance incentive category included only revenue from performance incentive programs. The Company now presents revenue in the following categories: Analytics and Integrated Yield Ramp. Integrated Yield Ramp revenue is comprised of all revenue from the Company’s Integrated Yield Ramp services engagements that include performance incentives based on customers’ yield achievement, i.e. both fixed-fees and Gainshare royalty from such engagements. Analytics comprises all other revenue, including from the Company’s licenses and services for Exensio Software, Exensio SaaS, DFI™ and Characterization Vehicle (CV) systems that do

not

include performance incentives based on customers’ yield achievement.

The change in presentation of revenue does

not

change the Company’s net revenues or total cost of net revenues. The following table shows reclassified amounts to conform to the current period’s presentation (in thousands):

	For the Three Months Ended March 31, 2019
			Change in
	Previously		Presentation			Current
	Reported		Reclassification			Presentation
Revenues:
Design-to-silicon-yield solutions	$	16,661	$	(16,661	)		N/A
Gainshare performance incentives		3,880		(3,880	)		N/A
Analytics		N/A		11,434		$	11,434
Integrated Yield Ramp		N/A		9,107			9,107
Total revenues	$	20,541	$	—		$	20,541

Since certain costs of revenues are attributed to both Analytics and Integrated Yield Ramp revenue categories, the Company believes it is more appropriate and meaningful to present the Condensed Consolidated Statements of Comprehensive Loss under a

one

-step presentation format that excludes any measure of gross margin. In the

fourth

quarter of fiscal

2019,

the Company elected to change its Condensed Consolidated Statements of Comprehensive Loss presentation from a

two

-step presentation, where total costs of revenues was deducted from total revenues to report a gross profit line, to a

one

-step presentation, where total costs and expenses are deducted from total revenues. The change in presentation does

not

change previously presented amounts for costs of revenues, operating expenses and other expenses (income), or loss before income taxes.

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 revenue recognition, impairment of goodwill and long-lived assets, accounting for stock-based compensation expense, and income taxes. Actual results could differ from those estimates.

The global COVID-

pandemic has impacted the operations and purchasing decisions of companies worldwide. It also has created and

may

continue to create significant uncertainty in the global economy. The Company has undertaken measures to protect its employees, partners, customers, and vendors. In addition, the Company’s personnel worldwide are subject to various travel restrictions, which limit the ability of the Company to provide services to customers and affiliates. This impacts the Company's normal operations. To date, the Company has been able to provide uninterrupted access to its products and services due to its globally distributed workforce, many of whom are working remotely, and its pre-existing infrastructure that supports secure access to the Company’s internal systems. If, however, the COVID-

pandemic has a substantial impact on the productivity of the Company’s employees or its partners’ or customers’ decision to use the Company’s products and services, the results of the Company’s operations and overall financial performance

may

be adversely impacted. The duration and extent of the impact from the COVID-

pandemic depends on future developments that cannot be accurately predicted at this time. As of the date of issuance of the financial statements, the Company is

not

aware of any specific event or circumstance that would require updates to the Company’s estimates and judgments or revisions to the carrying value of its assets or liabilities. These estimates

may

change, as new events occur and additional information is obtained, and are recognized in the condensed consolidated financial statements as soon as they become known. Actual results could differ from those estimates and any such differences

may

be material to the financial statements.

Recently Adopted Accounting Standards

Intangibles – Goodwill and Other

January 2017,

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

No.

2017

04,

Intangibles – Goodwill and Other (Topic

350

). This standard eliminates step

from the annual goodwill impairment test. This update is effective for the Company beginning in the

first

quarter of

2020.

The Company adopted this standard on

January 1, 2020,

and it did

not

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

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

August 2018,

the FASB issued ASU

No.

2018

15,

Intangibles – Goodwill and Other – Internal-Use Software (Subtopic

350

): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The new guidance clarifies the accounting for implementation costs incurred to develop or obtain internal-use software in cloud computing arrangements. Further, the standard also requires entities to expense the capitalized implementation costs of a hosting arrangement over the term of the hosting arrangement. This standard is effective for the Company beginning in the

first

quarter of

2020.

Early adoption is permitted. ASU

No.

2018

should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The Company adopted ASU

No.

2018

January 1, 2020

on a prospective basis. There was

material impact on the Company’s condensed consolidated financial statements as a result of adoption of ASU

No.

2018

as of

January 1, 2020.

As of

March 31, 2020,

the implementation costs capitalized by the Company pertaining to a cloud computing arrangement related to sales order and customer relation management was

not

material. The capitalized implementation costs were included in “Other noncurrent assets” on the Condensed Consolidated Balance sheet and within the operating activities section of the Company’s Condensed Consolidated Statement of Cash Flows for the months ended

March 31, 2020.

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

amortization expense related these assets for the months ended

March 31, 2020.

Management has reviewed other recently issued accounting pronouncements and has determined there are

not

any that would have a material impact on the condensed consolidated financial statements.

Accounting Standards

Not

Yet Effective

June 2016,

the FASB issued ASU

No.

2016

13,

Financial Instruments – Credit Losses (Topic

326

): Measurement of Credit Losses on Financial Instruments (ASU

2016

), which requires measurement and recognition of expected credit losses for financial assets held at the reporting date based on external information, or a combination of both relating to past events, current conditions, and reasonable and supportable forecasts. ASU

No.

2016

replaces the existing incurred loss impairment model with a forward-looking expected credit loss model which will result in earlier recognition of credit losses. Subsequent to the issuance of ASU

No.

2016

13,

the FASB issued ASU

No.

2018

19,

Codification Improvements to Topic

326,

Financial Instruments – Credit Losses, ASU

No.

2019

04,

Codification Improvements to Topic

326,

Financial Instruments – Credit Losses, Topic

815,

Derivatives and Hedging, and Topic

825,

Financial Instrument, ASU

No.

2019

05,

Financial Instruments – Credit Losses (Topic

326

) Targeted Transition Relief, ASU

No.

2016

13,

the FASB issued ASU

No.

2019

Financial Instruments-Credit Losses (Topic

326

), Derivatives and Hedging (Topic

815

), and Leases (Topic

842

), and ASU

No.

2019

Codification Improvements to Topic

326,

Financial Instruments-Credit Losses. The subsequent ASUs do

not

change the core principle of the guidance in ASU

No.

2016

13.

Instead, these amendments are intended to clarify and improve operability of certain topics included within ASU

No.

2016

13.

Additionally, ASU

No.

2019

defers the effective date for the adoption of the new standard on credit losses for public filers that are considered small reporting companies (“SRC”) as defined by the SEC to fiscal years beginning after

December 15, 2022,

including interim periods within those fiscal years, which will be fiscal

2023

for the Company if it continue to be classified as a SRC. In

February 2020,

the FASB issued ASU

2020

02,

which provides guidance regarding methodologies, documentation, and internal controls related to expected credit losses. The subsequent amendments will have the same effective date and transition requirements as ASU

No.

2016

13.

Early adoption is permitted. Topic

326

requires a modified retrospective approach by recording a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. While the Company is currently evaluating the impact of Topic

326,

the Company does

not

expect the adoption of this ASU to have a material impact on its condensed consolidated financial statements and the related disclosure.

December 2019,

the FASB issued ASU

No.

2019

12,

Income Taxes (Topic

740

) related to simplifying the accounting for income taxes. The guidance is effective for the Company beginning in the

first

quarter of

2021

on a prospective basis. Early adoption is permitted. The Company is currently evaluating the impact of this ASU, and does

not

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

January 2020,

the FASB issued ASU

No.

2020

-Investments-Equity Securities (Topic

321

), Investments-Equity Method and Joint Ventures (Topic

323

), and Derivatives and Hedging (Topic

815

)-Clarifying the Interactions between Topic

321,

Topic

323,

and Topic

815.

This ASU clarifies the interaction between accounting standards related to equity securities (ASC

321

), equity method investments (ASC

323

), and certain derivatives (ASC

815

). The amendments in this ASU are effective for fiscal years beginning after

December 15, 2020.

The Company does

not

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