10-Q

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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 September 30, 2023

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.)
2858 De La Cruz Blvd.
Santa Clara, California	95050
(Address of Principal Executive Offices)	(Zip Code)

(408) 280-7900

(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.00015 par value	PDFS	The Nasdaq Stock Market LLC

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 every Interactive Data File required to be submitted 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 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 an 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 ☐	Smaller reporting company ☐
	Emerging growth company ☐

If an emerging growth company, indicate 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 38,261,403 shares of the Registrant’s Common Stock outstanding as of November 3, 2023.

TABLE OF CONTENTS

	Page
PART I   FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets	3
Condensed Consolidated Statements of Comprehensive Income (Loss)	4
Condensed Consolidated Statements of Stockholders’ Equity	5
Condensed Consolidated Statements of Cash Flows	7
Notes to Condensed Consolidated Financial Statements	8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	26
Item 3. Quantitative and Qualitative Disclosures About Market Risk	39
Item 4. Controls and Procedures	39
PART II  OTHER INFORMATION
Item 1. Legal Proceedings	40
Item 1A. Risk Factors	40
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	40
Item 3. Defaults Upon Senior Securities	41
Item 4. Mine Safety Disclosures	41
Item 5. Other Information	41
Item 6. Exhibits	41
INDEX TO EXHIBITS	41
SIGNATURES	42

2

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

PDF SOLUTIONS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(in thousands, except par value)

	September 30,		December 31,
	2023		2022
ASSETS
Current assets:
Cash and cash equivalents	$	111,620	$	119,624
Short-term investments		23,744		19,557
Accounts receivable, net of allowance for credit losses of $890 as of September 30, 2023 and December 31, 2022		40,959		42,164
Prepaid expenses and other current assets		18,001		12,063
Total current assets		194,324		193,408
Property and equipment, net		37,833		40,174
Operating lease right-of-use assets, net		5,069		6,002
Goodwill		15,008		14,123
Intangible assets, net		16,486		18,055
Deferred tax assets, net		32		64
Other non-current assets		13,701		6,845
Total assets	$	282,453	$	278,671
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	2,633	$	6,388
Accrued compensation and related benefits		11,502		16,948
Accrued and other current liabilities		4,772		5,581
Operating lease liabilities – current portion		1,504		1,412
Deferred revenues – current portion		29,267		26,019
Billings in excess of recognized revenues		240		1,852
Total current liabilities		49,918		58,200
Long-term income taxes payable		2,820		2,622
Non-current portion of operating lease liabilities		4,922		5,932
Other non-current liabilities		3,229		1,905
Total liabilities		60,889		68,659
Commitments and contingencies (Note 11)
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 49,694 and 48,613, respectively; shares outstanding 38,245 and 37,431, respectively		6		6
Additional paid-in-capital		467,304		447,415
Treasury stock at cost, 11,449 and 11,182 shares, respectively		(143,587)		(133,709)
Accumulated deficit		(98,932)		(101,150)
Accumulated other comprehensive loss		(3,227)		(2,550)
Total stockholders’ equity		221,564		210,012
Total liabilities and stockholders’ equity	$	282,453	$	278,671

See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited)

3

PDF SOLUTIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(in thousands, except per share amounts)

	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Revenues:
Analytics	$	39,497	$	32,879	$	112,957	$	94,422
Integrated Yield Ramp		2,853		6,981		11,753		13,604
Total revenues		42,350		39,860		124,710		108,026
Costs and Expenses:
Costs of revenues		14,282		12,545		38,555		36,116
Research and development		13,113		14,303		38,428		41,766
Selling, general, and administrative		15,611		12,005		46,022		32,614
Amortization of acquired intangible assets		328		318		979		946
Interest and other expense (income), net		(2,018)		(1,511)		(4,000)		(2,812)
Income (loss) before income tax expense		1,034		2,200		4,726		(604)
Income tax expense		(6,006)		(815)		(2,508)		(3,308)
Net income (loss)		(4,972)		1,385		2,218		(3,912)
Other comprehensive income (loss):
Foreign currency translation adjustments, net of tax		(552)		(1,394)		(679)		(2,828)
Change in unrealized gain (loss) related to available-for-sale debt securities, net of tax		(5)		17		2		(17)
Total other comprehensive loss		(557)		(1,377)		(677)		(2,845)
Comprehensive income (loss)	$	(5,529)	$	8	$	1,541	$	(6,757)
Net income (loss) per share:
Basic	$	(0.13)	$	0.04	$	0.06	$	(0.10)
Diluted	$	(0.13)	$	0.04	$	0.06	$	(0.10)
Weighted average common shares used to calculate net income (loss) per share:
Basic		38,187		37,226		37,930		37,285
Diluted		38,187		38,054		38,977		37,285

See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited)

4

PDF SOLUTIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

(in thousands)

	Three Month Periods in the Nine Months Ended September 30, 2023
											Accumulated
				Additional							Other		Total
	Common Stock			Paid-In		Treasury Stock			Accumulated		Comprehensive		Stockholders’
	Shares	Amount		Capital		Shares	Amount		Deficit		Loss		Equity
Balances, December 31, 2022	37,431	$	6	$	447,415	11,182	$	(133,709)	$	(101,150)	$	(2,550)	$	210,012
Issuance of common stock in connection with employee stock purchase plans	98		—		1,663	—		—		—		—		1,663
Issuance of common stock in connection with exercise of options	21		—		345	—		—		—		—		345
Vesting of restricted stock units	286		—		—	—		—		—		—		—
Purchases of treasury stock in connection with tax withholdings on restricted stock awards	—		—		—	133		(4,101)		—		—		(4,101)
Stock-based compensation expense	—		—		4,884	—		—		—		—		4,884
Comprehensive income	—		—		—	—		—		355		267		622
Balances, March 31, 2023	37,836		6		454,307	11,315		(137,810)		(100,795)		(2,283)		213,425
Issuance of common stock in connection with exercise of options	6		—		87	—		—		—		—		87
Vesting of restricted stock units	37		—		—	—		—		—		—		—
Purchases of treasury stock in connection with tax withholdings on restricted stock awards	—		—		—	11		(468)		—		—		(468)
Stock-based compensation expense	—		—		4,678	—		—		—		—		4,678
Comprehensive income (loss)	—		—		—	—		—		6,835		(387)		6,448
Balances, June 30, 2023	37,879		6		459,072	11,326		(138,278)		(93,960)		(2,670)		224,170
Issuance of common stock in connection with employee stock purchase plan	125		—		2,169	—		—		—		—		2,169
Issuance of common stock in connection with exercise of options	2		—		37	—		—		—		—		37
Vesting of restricted stock units	260		—		—	—		—		—		—		—
Purchases of treasury stock in connection with tax withholdings on restricted stock grants	—		—		—	102		(4,566)		—		—		(4,566)
Repurchase of common stock	(21)		—		—	21		(743)		—		—		(743)
Stock-based compensation expense	—		—		6,026	—		—		—		—		6,026
Comprehensive loss	—		—		—	—		—		(4,972)		(557)		(5,529)
Balances, September 30, 2023	38,245	$	6	$	467,304	11,449	$	(143,587)	$	(98,932)	$	(3,227)	$	221,564

See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited)

5

PDF SOLUTIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY – CONTINUED

(Unaudited)

(in thousands)

	Three Month Periods in the Nine Months Ended September 30, 2022
											Accumulated
				Additional							Other		Total
	Common Stock			Paid-In		Treasury Stock			Accumulated		Comprehensive		Stockholders’
	Shares	Amount		Capital		Shares	Amount		Deficit		Loss		Equity
Balances, December 31, 2021	37,411	$	6	$	423,069	10,003	$	(104,705)	$	(97,721)	$	(1,064)	$	219,585
Issuance of common stock in connection with employee stock purchase plans	95		—		1,502	—		—		—		—		1,502
Issuance of common stock in connection with exercise of options	75		—		675	—		—		—		—		675
Vesting of restricted stock units	232		—		—	—		—		—		—		—
Purchases of treasury stock in connection with tax withholdings on restricted stock awards	—		—		—	113		(3,389)		—		—		(3,389)
Repurchase of common stock	(219)		—		—	219		(5,778)		—		—		(5,778)
Stock-based compensation expense	—		—		5,553	—		—		—		—		5,553
Comprehensive loss	—		—		—	—		—		(4,150)		(431)		(4,581)
Balances, March 31, 2022	37,594		6		430,799	10,335		(113,872)		(101,871)		(1,495)		213,567
Issuance of common stock in connection with exercise of options	12		—		113	—		—		—		—		113
Vesting of restricted stock units	84		—		—	—		—		—		—		—
Purchases of treasury stock in connection with tax withholdings on restricted stock awards	—		—		—	33		(800)		—		—		(800)
Repurchase of common stock	(715)		—		—	715		(16,693)		—		—		(16,693)
Stock-based compensation expense	—		—		3,872	—		—		—		—		3,872
Comprehensive loss	—		—		—	—		—		(1,147)		(1,037)		(2,184)
Balances, June 30, 2022	36,975		6		434,784	11,083		(131,365)		(103,018)		(2,532)		197,875
Issuance of common stock in connection with employee stock purchase plan	92		—		1,509	—		—		—		—		1,509
Issuance of common stock in connection with exercise of options	22		—		276	—		—		—		—		276
Vesting of restricted stock units	206		—		—	—		—		—		—		—
Purchases of treasury stock in connection with tax withholdings on restricted stock grants	—		—		—	70		(1,601)		—		—		(1,601)
Stock-based compensation expense	—		—		5,136	—		—		—		—		5,136
Comprehensive income (loss)	—		—		—	—		—		1,385		(1,377)		8
Balances, September 30, 2022	37,295	$	6	$	441,705	11,153	$	(132,966)	$	(101,633)	$	(3,909)	$	203,203

See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited)

6

PDF SOLUTIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)

	Nine Months Ended September 30,
	2023		2022
Cash flows from operating activities:
Net income (loss)	$	2,218	$	(3,912)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization		3,778		4,173
Stock-based compensation expense		15,561		14,561
Amortization of acquired intangible assets		2,659		2,605
Amortization of costs capitalized to obtain revenue contracts		1,494		1,127
Net accretion of discounts on short-term investments		(734)		(41)
Deferred taxes		43		46
Other		(106)		—
Changes in operating assets and liabilities:
Accounts receivable		1,185		(14,999)
Prepaid expenses and other current assets		(7,038)		(2,750)
Operating lease right-of-use assets		904		1,510
Other non-current assets		(928)		1,479
Accounts payable		(2,697)		(2,852)
Accrued compensation and related benefits		(5,342)		3,624
Accrued and other liabilities		393		2,560
Deferred revenues		3,681		2,322
Billings in excess of recognized revenues		(1,612)		183
Operating lease liabilities		(888)		(1,613)
Net cash provided by operating activities		12,571		8,023
Cash flows from investing activities:
Proceeds from maturities and sales of short-term investments		28,800		136,000
Purchases of short-term investments		(32,250)		(45,791)
Proceeds from sale of property and equipment		105		—
Purchases of property and equipment		(8,574)		(6,651)
Prepayment for the purchase of property and equipment		(343)		(54)
Purchases of intangible assets		(150)		(150)
Payment for business acquisition, net of cash acquired		(1,823)		—
Net cash provided by (used in) investing activities		(14,235)		83,354
Cash flows from financing activities:
Proceeds from exercise of stock options		469		1,064
Proceeds from employee stock purchase plans		3,832		3,011
Payments for taxes related to net share settlement of equity awards		(9,135)		(5,790)
Repurchases of common stock		(743)		(22,471)
Net cash used in financing activities		(5,577)		(24,186)
Effect of exchange rate changes on cash and cash equivalents		(763)		(1,147)
Net change in cash and cash equivalents		(8,004)		66,044
Cash and cash equivalents at beginning of period		119,624		27,684
Cash and cash equivalents at end of period	$	111,620	$	93,728
Supplemental disclosure of cash flow information:
Cash paid during the period for taxes	$	3,568	$	2,001
Cash paid for amounts included in the measurement of operating lease liabilities	$	1,160	$	1,219
Supplemental disclosure of noncash information:
Property and equipment received and accrued in accounts payable and accrued and other liabilities	$	697	$	2,200
Advances for purchase of fixed assets transferred from prepaid assets to property and equipment	$	66	$	336
Operating lease liabilities arising from obtaining right-of-use assets	$	—	$	2,268
Property and equipment transferred to sales-type leases	$	6,002	$	—

See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited)

7

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, 2022, filed with the SEC on March 1, 2023.

The interim unaudited 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 accompanying interim unaudited condensed consolidated balance sheet as of December 31, 2022 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 accounting principles generally accepted in the United States of America 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 condensed consolidated financial statements include revenue recognition, the estimated useful lives of property and equipment and intangible assets, assumptions made in analysis of allowance for credit losses, impairment of goodwill and long-lived assets, valuation for deferred tax assets (“DTAs”), and accounting for lease obligations, stock-based compensation expense, and income tax uncertainties and contingencies. Actual results could differ from those estimates and may result in material effects on the Company’s operating results and financial position.

Recent Accounting Standards

Accounting Standards Adopted

In June 2016, the Financial Accounting Standards Board (“FASB’) issued Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU No. 2016-13”), which requires measurement and recognition of expected credit losses for financial assets held at the reporting date based on internal information, external information, or a combination of both relating to past events, current conditions, and reasonable and supportable forecasts. ASU No. 2016-13 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, ASU No. 2019-10 Financial Instruments-Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842), and ASU No. 2019-11 Codification Improvements to Topic 326, Financial Instruments-Credit Losses. The subsequent ASUs do not change the core principle of the guidance in

8

ASU No. 2016-13. Instead, these amendments are intended to clarify and improve operability of certain topics included within ASU No. 2016-13.

The Company adopted this standard on January 1, 2023, using a modified retrospective approach, which requires a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption with prior periods not restated. The adoption of ASU No. 2016-13 did not have a material impact on the Company’s condensed consolidated financial statements.

Accounting Standards Not Yet Adopted

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

2. REVENUE FROM CONTRACTS WITH CUSTOMERS

The Company derives revenue from two sources: Analytics revenue and Integrated Yield Ramp revenue.

The Company recognizes revenue in accordance with FASB Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers, and its related amendments (collectively known as “ASC 606”). ASC 606 outlines a single comprehensive model to use in accounting for revenue arising from contracts with customers. 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 collectibility of consideration is probable.

Contracts with multiple performance obligations

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 on a relative basis using the standalone selling price (“SSP”).

Analytics Revenue

Analytics revenue is derived from the following primary offerings: licenses and services for standalone software (which is primarily Exensio^® and Cimetrix^® products), software-as-a-service (“SaaS”) (which is primarily Exensio^® products), and Design-for-Inspection™ (“DFI™”) systems and Characterization Vehicle^® (“CV^®”) systems that do not include performance incentives based on customers’ yield achievement.

Revenue from standalone software is recognized depending on whether the license is perpetual or time-based. Perpetual (one-time charge) license software is recognized at the time of the inception of the arrangement when control transfers to the customers if the software license is considered as a separate performance obligation from the services offered by the Company.

9

Revenue from post-contract support is recognized over the contract term on a straight-line basis, because the Company is providing (i) support and (ii) unspecified software updates on a when-and-if available basis over the contract term. Revenue from time-based-licensed software is allocated to each performance obligation and is recognized either at a point in time or over time as follows. The license component is recognized at the time when control transfers to customers, with the post-contract support component recognized ratably over the committed term of the contract. For contracts with any combination of licenses, support, and other services, distinct performance obligations are accounted for separately. For contracts with multiple performance obligations, the Company allocates the transaction price of the contract to each performance obligation on a relative basis using the SSP attributed to each performance obligation.

Revenue from SaaS arrangements, which allow for the use of a cloud-based software product or service over a contractually determined period of time without the customer having to take possession of software, is accounted for as a subscription and is recognized as revenue ratably, on a straight-line basis, over the subscription period beginning on the date the service is first made available to customers. For contracts with any combination of SaaS and related services, distinct performance obligations are accounted for separately. For contracts with multiple performance obligations, the Company allocates the transaction price of the contract to each performance obligation on a relative basis using the SSP attributed to each performance obligation.

Revenue from DFI systems and CV systems (including Characterization services) that do not include performance incentives based on customers’ yield achievement is recognized primarily as services are performed. Where there are distinct performance obligations, the Company allocates revenue to all deliverables based on their SSPs. For those contracts with multiple performance obligations, the Company allocates the transaction price of the contract to each performance obligation on a relative basis using the SSP attributed to each performance obligation. Where there are not discrete performance obligations, historically, revenue is primarily recognized as services are performed using a percentage of completion method based on costs or labor-hours inputs, whichever is the most appropriate measure of the progress towards completion of the contract. The estimation of percentage of completion method is complex and subject to many variables that require significant judgment. Please refer to the “Significant Judgments” section of this Note for further discussion.

Integrated Yield Ramp Revenue

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

Revenue under these project-based contracts, which are delivered over a specific period of time, typically for a fixed fee component paid on a set schedule, is recognized as services are performed using a percentage of completion method based on costs or labor-hours inputs, whichever is the most appropriate measure of the progress towards completion of the contract. Where there are distinct performance obligations, the Company allocates revenue to all deliverables based on their SSPs and allocates the transaction price of the contract to each performance obligation on a relative basis using SSP. Similar to the services provided in connection with DFI systems and CV systems that are contributing to Analytics revenue, due to the nature of the work performed in these arrangements, the estimation of percentage of completion method is complex and subject to many variables that require significant judgment. Please refer to the “Significant Judgments” section of this Note for further discussion.

The Gainshare contained in Integrated Yield Ramp contracts is a variable fee related to continued usage of the Company’s intellectual property after the fixed-fee service period ends, based on a customer’s yield achievement. Revenue derived from Gainshare is contingent upon the Company’s customers reaching certain defined production yield levels. Gainshare periods are generally subsequent to the delivery of all contractual services and performance obligations. The Company records Gainshare as a usage-based royalty derived from customers’ usage of intellectual property and records it in the same period in which the usage occurs.

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Disaggregation of Revenue

The Company disaggregates revenue from contracts with customers into the timing of the transfer of goods and services and the geographical regions. 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 Company’s performance obligations are satisfied either over time or at a point-in-time. The following table represents a disaggregation of revenue percentage by timing of revenue:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Over time	68	%	68	%	74	%	70	%
Point-in-time	32	%	32	%	26	%	30	%
Total	100	%	100	%	100	%	100	%

International revenues accounted for approximately 42% and 54% of the Company’s total revenues during the three months ended September 30, 2023 and 2022, respectively. International revenues accounted for approximately 44% and 51% of the Company’s total revenues during the nine months ended September 30, 2023 and 2022, respectively. See Note 9, Customer and Geographic Information.

Significant Judgments

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

For revenue under project-based contracts for fixed-price 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, software licenses and provide services, including professional services, technical support services, and rights to unspecified updates to a customer. Determining whether licenses and services are distinct performance obligations that should be accounted for separately, or not distinct and thus accounted for together, requires significant judgment. The Company rarely licenses software on a standalone basis, so the Company is required to estimate the range of SSPs for each performance obligation. In instances where SSP is not directly observable because the Company does not license the software or sell the service separately, the Company determines the SSP using information that may include market conditions and other observable inputs.

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

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Contract Balances

The Company performs its obligations under a contract with a customer by licensing software or providing 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 software or services transferred to a customer 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 service contracts when the revenue recognized exceeds the amount billed to the customer. The contract assets are generally classified as current and are recorded on a net basis with deferred revenue (i.e., contract liabilities) at the contract level. As of September 30, 2023 and December 31, 2022, the total contract assets included in prepaid expenses and other current assets in the accompanying condensed consolidated balance sheets were $8.1 million and $3.3 million, respectively. The Company did not record any asset impairment charges related to contract assets for the periods presented.

Deferred revenues and billings in excess of recognized revenues consist substantially of amounts invoiced in advance of revenue recognition and are recognized as the revenue recognition criteria are met. Deferred revenues that will be recognized during the succeeding twelve-month period are recorded as current deferred revenues and the remaining portion is recorded in other non-current liabilities in the accompanying condensed consolidated balance sheets. As of September 30, 2023, and December 31, 2022, the non-current portion of deferred revenues included in non-current liabilities was $2.3 million and $1.9 million, respectively. Revenue recognized that was included in the deferred revenues and billings in excess of recognized revenues balances at the beginning of each reporting period was $13.1 million and $10.6 million during the three months ended September 30, 2023 and 2022, respectively, and $23.8 million and $16.3 million during the nine months ended September 30, 2023 and 2022, respectively.

As of September 30, 2023, 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 $218.3 million. Given the applicable contract terms with customers, more than half of this amount is expected to be recognized as revenue over the next two years with the remainder to be recognized thereafter. This amount does not include insignificant contracts to which the customer is not committed, nor significant contracts for which the Company recognizes revenue equal to the amount the Company has the right to invoice for services performed, or future sales-based or usage-based royalty payments in exchange for a license of intellectual property. This amount is subject to change due to future revaluations of variable consideration, terminations, other contract modifications, or currency adjustments. The estimated timing of the recognition of remaining unsatisfied performance obligations is subject to change and is affected by changes to the scope, change in timing of delivery of products and services, or contract modifications.

The adjustment to revenue recognized from performance obligations satisfied (or partially satisfied) in previous periods was a decrease of $0.6 million and an increase of $1.9 million during the three months ended September 30, 2023 and 2022, respectively, and an increase of $4.3 million and an increase of $0.4 million during the nine months ended September 30, 2023 and 2022, respectively. These amounts primarily represent changes in estimated percentage-of-completion based contracts and changes in actual versus estimated Gainshare.

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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. Amortization expense related to these capitalized costs is recognized over the period associated with the revenue from which the cost was incurred. Total capitalized direct sales commission costs included in prepaid expenses and other current assets in the accompanying condensed consolidated balance sheets as of September 30, 2023, and December 31, 2022, were $2.0 million and $1.7 million, respectively. Total capitalized direct sales commission costs included in other non-current assets in the accompanying condensed consolidated balance sheets as of September 30, 2023, and December 31, 2022, were $2.5 million and $2.1 million, respectively. Amortization of these assets was $0.5 million and $0.4 million during the three months ended September 30, 2023 and 2022, respectively, and $1.5 million and $1.1 million during the nine months ended September 30, 2023 and 2022. There was no impairment loss in relation to the costs capitalized for the periods presented.

Practical expedient

The Company does not adjust the transaction price for the effects of a significant financing component when the period between the transfers of the promised good or service to the customer and payment for that good or service by the customer is expected to be one year or less. The Company assessed each of its revenue generating arrangements in order to determine whether a significant financing component exists, and determined its contracts did not include a significant financing component during the three and nine months ended September 30, 2023 and 2022.

3. BALANCE SHEET COMPONENTS

Accounts receivable

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 $14.3 million and $13.5 million as of September 30, 2023, and December 31, 2022, 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 $0.8 million and $0.8 million as of September 30, 2023, and December 31, 2022, respectively.

The Company performs ongoing credit evaluations of its customers’ financial condition. An allowance for credit losses is maintained for probable credit losses based upon the Company’s assessment of the expected collectability of the accounts receivable. The allowance for credit losses is reviewed on a quarterly basis to assess the adequacy of the allowance.

Property and equipment

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

	September 30,		December 31,
	2023		2022
Computer equipment	$	12,076	$	11,853
Software		5,575		5,395
Furniture, fixtures, and equipment		2,491		2,484
Leasehold improvements		6,456		6,467
Laboratory and other equipment		4,770		4,431
Test equipment		27,866		28,403
Property and equipment in progress:
DFI™ system assets		21,123		22,231
CV® system and other assets		6,963		5,105
		87,320		86,369
Less: Accumulated depreciation and amortization		(49,487)		(46,195)
Total	$	37,833	$	40,174

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Test equipment mainly includes DFI™ system and CV^® system assets at customer sites that are contributing to revenue. Property and equipment in progress represent the development or construction of property and equipment that have not yet been placed in service for the Company’s intended use and are not depreciated. 

Depreciation and amortization expense was $1.2 million and $1.4 million during the three months ended September 30, 2023 and 2022, respectively, and $3.8 million and $4.2 million during the nine months ended September 30, 2023 and 2022, respectively.

Goodwill and Intangible Assets, Net

As of September 30, 2023, and December 31, 2022, the carrying amount of goodwill was $15.0 million and $14.1 million, respectively. Refer to Note 13, Business Combination, for the discussion about additional goodwill recognized during the three and nine months ended September 30, 2023.

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

		September 30, 2023						December 31, 2022
	Amortization	Gross				Net		Gross				Net
	Period	Carrying		Accumulated		Carrying		Carrying		Accumulated		Carrying
	(Years)	Amount		Amortization		Amount		Amount		Amortization		Amount
Acquired identifiable intangibles:
Customer relationships	1-10	$	9,505	$	(7,170)	$	2,335	$	9,407	$	(6,684)	$	2,723
Developed technology	4-9		34,627		(21,463)		13,164		33,635		(19,647)		13,988
Tradename and trademarks	2-10		1,598		(999)		599		1,598		(918)		680
Patent	6-10		2,100		(1,760)		340		2,100		(1,696)		404
Noncompetition agreements	3		848		(800)		48		848		(588)		260
Total		$	48,678	$	(32,192)	$	16,486	$	47,588	$	(29,533)	$	18,055

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The weighted average amortization period for acquired identifiable intangible assets was 5.5 years as of September 30, 2023. The following table summarizes intangible assets amortization expense in the accompanying condensed consolidated statements of comprehensive income (loss) (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Amortization of acquired technology included under costs of revenues	$	574	$	553	$	1,680	$	1,659
Amortization of acquired intangible assets presented separately under costs and expenses		328		318		979		946
Total amortization of acquired intangible assets	$	902	$	871	$	2,659	$	2,605

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

Year Ending December 31,	Amount
2023 (remaining three months)	$	890
2024		3,233
2025		3,069
2026		2,899
2027		2,747
2028 and thereafter		3,648
Total future amortization expense	$	16,486

There were no impairment charges for goodwill and intangible assets during the three and nine months ended September 30, 2023 and 2022.

4. LEASES

The Company leases administrative and sales offices and certain equipment under non-cancellable operating leases, which contain various renewal options and, in some cases, require payment of common area costs, taxes and utilities. These operating leases expire at various dates through 2028. The Company had no leases that were classified as a financing lease as of September 30, 2023, and December 31, 2022.

In the first quarter of 2022, the Company early terminated an office lease contract. The termination of this lease reduced the Company’s operating lease right-of-use assets and lease liabilities by approximately $0.5 million and $0.6 million, respectively. The gain from the lease termination of approximately $0.1 million was recorded under selling, general, and administrative expense in the accompanying condensed consolidated statement of comprehensive income (loss) for the nine months ended September 30, 2022.

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

	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Operating lease expense (1)	$	382	$	375	$	1,153	$	1,073
Short-term lease and variable lease expense (2)		239		244		673		801
Total lease expense	$	621	$	619	$	1,826	$	1,874

(1) Net of gain recognized upon lease termination of $0.1 million in the nine months ended September 30, 2022.

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(2) Leases with an initial term of 12 months or less are not recorded on the accompanying condensed consolidated balance sheets, and the Company recognizes lease expense for these leases on a straight-line basis over the lease term. Variable lease expense for the periods presented primarily included common area maintenance charges.

Supplemental condensed consolidated balance sheets information related to operating leases was as follows:

	September 30,			December 31,
	2023			2022
Weighted average remaining lease term under operating leases (in years)		4.7			5.3
Weighted average discount rate for operating lease liabilities		4.89	%		4.87	%

Maturities of operating lease liabilities as of September 30, 2023, were as follows (in thousands):

Year Ending December 31,	Amount (1)
2023 (remaining three months)	$	422
2024		1,619
2025		1,539
2026		1,354
2027		1,294
2028 and thereafter		992
Total future minimum lease payments		7,220
Less: Interest (2)		(794)
Present value of future minimum lease payments under operating lease liabilities (3)	$	6,426

(1) As of September 30, 2023, the total operating lease liability includes approximately $0.9 million related to an option to extend a lease term that is reasonably certain to be exercised.

(2) Calculated using incremental borrowing interest rate for each lease.

(3) Includes the current portion of operating lease liabilities of $1.5 million as of September 30, 2023.

5. STOCKHOLDERS’ EQUITY

Stock Repurchase Program

On June 4, 2020, the Company’s Board of Directors adopted a stock repurchase program (the “2020 Program”) to repurchase up to $25.0 million of the Company’s common stock both on the open market and in privately negotiated transactions, including through Rule 10b5-1 plans, over the next two years. During the nine months ended September 30, 2022, 218,858 shares were repurchased by the Company under the 2020 Program at an average price of $26.40 per share for an aggregate total price of $5.8 million. In total, 470,070 shares were repurchased under the 2020 Program at an average price of $21.91 per share, for an aggregate total price of $10.3 million.

On April 11, 2022, the Board of Directors terminated the 2020 Program, and adopted a new program (the “2022 Program”) to repurchase up to $35.0 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 nine months ended September 30, 2022, 714,600 shares were repurchased by the Company under the 2022 Program at an average price of $23.36 per share for an aggregate total price of $16.7 million. During the nine months ended September 30, 2023, 21,340 shares were repurchased by the Company under the 2022 Program at an average price of $34.81 per share for an aggregate total price of $0.7 million. In total, the Company has repurchased 735,940 shares under the 2022 Program at an average price of $23.69 per share for an aggregate total price of $17.4 million.

6. EMPLOYEE BENEFIT PLANS

On September 30, 2023, the Company had the following stock-based compensation plans:

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Employee Stock Purchase Plan

In July 2001, the Company’s stockholders initially approved the 2001 Employee Stock Purchase Plan, which was subsequently amended and restated in 2010 (as amended, the “2010 Purchase Plan”) to extend the term of the plan through May 17, 2020. Under the 2010 Purchase Plan, eligible employees could contribute up to 10% of their compensation, as defined in the 2010 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 2010 Purchase Plan provided for twenty-four-month offering periods with four six-month purchase periods in each offering period. The 2010 Purchase Plan expired on May 17, 2020. Existing offering periods under the 2010 Plan continued through the applicable expiration date and the final offering period expired on January 31, 2022. On June 15, 2021, the Company’s stockholders approved the 2021 Employee Stock Purchase Plan, which has a ten-year term (the “2021 Purchase Plan” and, together with the 2010 Purchase Plan, the “Employee Purchase Plans”). The terms of the 2021 Purchase Plan are substantially similar to those of the 2010 Purchase Plan. A twenty-four-month offering period under the 2021 Purchase Plan commenced on August 1, 2021.

The Company estimated the fair value of purchase rights granted under the 2021 Purchase Plan during the period using the Black-Scholes-Merton option-pricing model with the following weighted average assumptions, resulting in the following weighted average fair values:

	Nine Months Ended September 30,
	2023			2022
Expected life (in years)		1.25			1.25
Volatility		43.66	%		48.73	%
Risk-free interest rate		5.15	%		2.75	%
Expected dividend		—			—
Weighted average fair value of purchase rights granted during the period	$	15.71		$	10.00

During the three months ended September 30, 2023, a total of 125,392 shares were issued under the 2021 Purchase Plan, at a weighted average purchase price of $17.30 per share. During the three months ended September 30, 2022, a total of 92,043 shares were issued under the 2021 Purchase Plan, at a weighted-average purchase price of $16.40 per share. During the nine months ended September 30, 2023, a total of 223,608 shares were issued under the 2021 Purchase Plan, at a weighted average purchase price of $17.14 per share. During the nine months ended September 30, 2022, a total of 182,083 shares were issued under the 2021 Purchase Plan, at a weighted average purchase price of $16.15 per share. During the nine months ended September 30, 2022, a total of 5,203 shares were issued under the 2010 Purchase Plan, at a weighted average purchase price of $13.40 per share. As of September 30, 2023, unrecognized compensation cost related to the 2021 Purchase Plan was $3.9 million. This estimated unrecognized cost is expected to be recognized over a weighted average period of 1.7 years.

As of September 30, 2023, 594,309 shares were available for future issuance under the 2021 Purchase Plan.

Stock Incentive Plans

On 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 approved by the stockholders through the date of this report, the “2011 Plan”) and currently expires in 2033. Under the 2011 Plan, the Company may award stock options, stock appreciation rights (“SARs”), 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 the 2011 Plan is 13.8 million shares, plus up to 3.5 million shares previously issued under the 2001 Stock Plan adopted by the Company in 2001, which expired in 2011 (the “2001 Plan”) that are either (i) forfeited or (ii) repurchased by the Company or are 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 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 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.

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As of September 30, 2023, 14.3 million shares of common stock were reserved to cover stock-based awards under the 2011 Plan, of which 3.7 million shares were available for future grant. The number of shares reserved and available under the 2011 Plan includes 0.5 million shares that were subject to awards previously made under the 2001 Plan and were forfeited, expired or repurchased by the Company after the adoption of the 2011 Plan through September 30, 2023. As of September 30, 2023, there were no outstanding awards that had been granted outside of the 2011 or 2001 Plans (collectively, the “Stock Plans”).

The Company estimated the fair value of share-based awards granted under the 2011 Stock Plan during the period using the Black-Scholes-Merton option-pricing model. There were no stock options granted during the three and nine months ended September 30, 2023 and 2022.

Stock-Based Compensation

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

	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Costs of revenues	$	1,120	$	854	$	3,022	$	2,237
Research and development		2,196		2,180		5,609		7,158
Selling, general, and administrative		2,683		2,102		6,930		5,166
Stock-based compensation expense	$	5,999	$	5,136	$	15,561	$	14,561

Stock-based compensation capitalized in the capitalized software development costs included in property and equipment, net, was immaterial for the three and nine months ended September 30, 2023.

Additional information with respect to options under the Stock Plans during the nine months ended September 30, 2023, is as follows:

	Outstanding Options
				Weighted
		Weighted		Average
		Average		Remaining	Aggregate
	Number of	Exercise		Contractual	Intrinsic
	Options	Price		Term	Value
	(in thousands)	per Share		(Years)	(in thousands)
Outstanding, December 31, 2022	68	$	16.11
Granted	—		—
Exercised	(29)		16.39
Canceled	—		—
Expired	—		—
Outstanding, September 30, 2023	39	$	15.91	4.40	$	654
Vested and expected to vest, September 30, 2023	39	$	15.91	4.40	$	653
Exercisable, September 30, 2023	36	$	15.80	4.21	$	604

The aggregate intrinsic value in the table above represents the total intrinsic value based on the Company’s closing stock price of $32.40 per share as of September 30, 2023. The total intrinsic value of options exercised was $0.6 million during the nine months ended September 30, 2023.

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Total remaining unrecognized compensation cost related to unvested stock options as of September 30, 2023, which is expected to be fully recognized in 2023, and total fair value of shares vested during the nine months ended September 30, 2023, were immaterial.

Nonvested restricted stock unit activity during the nine months ended September 30, 2023, was as follows:

		Weighted
		Average Grant
	Shares	Date Fair Value
	(in thousands)	Per Share
Nonvested, December 31, 2022	2,124	$	21.29
Granted	753	$	43.92
Vested	(829)	$	20.46
Forfeited	(18)	$	25.87
Nonvested, September 30, 2023	2,030	$	29.98

As of September 30, 2023, there was $48.6 million of total unrecognized compensation cost related to restricted stock units. That cost is expected to be recognized over a weighted average period of 2.7 years. Restricted stock units do not have rights to dividends prior to vesting.

7. INCOME TAXES

Income tax expense decreased by $0.8 million for the nine months ended September 30, 2023, to a $2.5 million income tax expense as compared to a $3.3 million income tax expense for the nine months ended September 30, 2022. The Company’s effective tax rate was 53.1% and (547.7%) for the nine months ended September 30, 2023 and 2022, respectively. The Company’s effective tax rate increased in the nine months ended September 30, 2023, as compared to the same period in 2022, primarily due to changes in the foreign and state taxes and year-to-date recognition of worldwide pre-tax income (loss) in relation to their forecasted amounts for full years. Our provision for income taxes for the nine months ended September 30, 2023, was primarily attributable to foreign and state taxes.

The Company’s total amount of unrecognized tax benefits, excluding interest and penalties, as of September 30, 2023, was $15.9 million, of which $2.0 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, 2022, was $15.1 million, of which $2.0 million, if recognized, would affect the Company’s effective tax rate. As of September 30, 2023, the Company has recorded unrecognized tax benefits of $2.5 million, including interest and penalties of $0.6 million, as long-term taxes payable in the accompanying condensed consolidated balance sheet. The remaining $14.0 million has been recorded within the Company’s DTAs, which is subject to a full valuation allowance.

The valuation allowance was approximately $59.2 million as of September 30, 2023, and December 31, 2022, which was related to U.S. net federal and state DTAs. The worldwide net DTAs balance as of September 30, 2023, and December 31, 2022, were not significant.

The Company conducts business globally and, as a result, files numerous consolidated and separate income tax returns in the U.S. federal and various state and foreign jurisdictions. For U.S. federal and California income tax purposes, the statute of limitations currently remains open for the tax years ended 2019 to present and 2018 to present, respectively. In addition, due to net operating loss carryback claims, the tax years 2013 through 2015 may be subject to federal examination and all of the net operating loss and research and development credit carryforwards that may be utilized in future years may be subject to federal and state examination. The Company is not subject to income tax examinations in any other of its major foreign subsidiaries’ jurisdictions.

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8. NET INCOME (LOSS) PER SHARE

Basic net income (loss) per share is computed by dividing net income (loss) by weighted average number of common shares outstanding for the period (excluding outstanding stock options and shares subject to repurchase). Diluted net income (loss) per share is computed using the weighted average number of common shares outstanding for the period plus the potential effect of dilutive securities which are convertible into common shares (using the treasury stock method), except in cases in which the effect would be anti-dilutive. The following is a reconciliation of the numerators and denominators used in computing basic and diluted net income (loss) per share (in thousands except per share amount):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Numerator:
Net income (loss)	$	(4,972)	$	1,385	$	2,218	$	(3,912)
Denominator:
Basic weighted average shares outstanding		38,187		37,226		37,930		37,285
Effect of dilutive stock options, unvested restricted stock units, and shares of common stock expected to be issued under employee stock purchase plan(s)		—		828		1,047		—
Diluted weighted average shares outstanding		38,187		38,054		38,977		37,285
Net income (loss) per share:
Basic	$	(0.13)	$	0.04	$	0.06	$	(0.10)
Diluted	$	(0.13)	$	0.04	$	0.06	$	(0.10)

For the three months ended September 30, 2023 and for the nine months ended September 30, 2022, because the Company was in a loss position, diluted net loss per share is the same as basic net loss per share as the inclusion of the potential common shares would have been anti-dilutive.

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

	Three Months Ended September 30,		Nine Months Ended September 30,
	2023	2022	2023	2022
Outstanding options	23	—	—	63
Non-vested restricted stock units	1,391	62	223	784
Employee Stock Purchase Plan	38	—	—	75
Total	1,452	62	223	922

9. 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, allocation of resources, and assessing financial performance. Accordingly, the Company considers itself to be in one operating and reporting segment, specifically the provision of services for differentiated data and analytics solutions to the semiconductor and electronics industries.

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Revenues from an individual customer that are approximately 10% or more of the Company’s consolidated total revenues are as follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
Customer	2023		2022		2023		2022
A	38	%	28	%	36	%	30	%
B	*	%	16	%	10	%	11	%

Gross accounts receivable balances (including amounts that are unbilled) from individual customers that are approximately 10% or more of the Company’s gross accounts receivable balance are as follows:

	September 30,		December 31,
Customer	2023		2022
A	44	%	29	%
B	*	%	12	%
C	*	%	12	%

* represents less than 10%

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

	Three Months Ended September 30,
	2023				2022
			Percentage				Percentage
	Revenues		of Revenues		Revenues		of Revenues
United States	$	24,477	58	%	$	18,292	46	%
China		7,549	18			9,555	24
Rest of the world		10,324	24			12,013	30
Total revenue	$	42,350	100	%	$	39,860	100	%

	Nine Months Ended September 30,
	2023				2022
			Percentage				Percentage
	Revenues		of Revenues		Revenues		of Revenues
United States	$	70,090	56	%	$	52,869	49	%
China		21,927	18			18,214	17
Rest of the world		32,693	26			36,943	34
Total revenue	$	124,710	100	%	$	108,026	100	%

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

	September 30,		December 31,
	2023		2022
United States (1)	$	45,419	$	44,730
Rest of the world		1,207		1,446
Total long-lived assets, net	$	46,626	$	46,176

(1) Includes assets deployed at customer sites which could be outside the U.S.

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10. 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 September 30, 2023, and December 31, 2022, and the basis for those measurements (in thousands):

	Fair Value Measurements Using
			Quoted
			Prices in
			Active		Significant
			Markets for		Other
			Identical		Observable		Significant
	September 30,		Assets		Inputs		Unobservable
Assets	2023		(Level 1)		(Level 2)		Inputs (Level 3)
Cash equivalents
Money market mutual funds	$	92,113	$	92,113	$	—	$	—
Short-term investments (available-for-sale debt securities)
U.S. Government securities (1)		23,744		23,744		—		—
Total	$	115,857	$	115,857	$	—	$	—

	Fair Value Measurements Using
			Quoted
			Prices in
			Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
	December 31,		Assets		Inputs		Inputs
Assets	2022		(Level 1)		(Level 2)		(Level 3)
Cash equivalents
Money market mutual funds	$	75,738	$	75,738	$	—	$	—
U.S. Government securities (1)		1,990		1,990		—		—
Short-term investments (available-for-sale debt securities)
U.S. Government securities (1)		19,557		19,557		—		—
Total	$	97,285	$	97,285	$	—	$	—

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(1) As of September 30, 2023, and December 31, 2022, the amortized cost of the Company’s investments in U.S Government securities approximated their fair value due to their short-term maturities, and there have been no events or changes in circumstances that would have had a significant effect on the fair value of these securities in the periods presented. For the three and nine months ended September 30, 2023, there were no material realized or unrealized gains or losses, either individually or in the aggregate.

11. COMMITMENTS AND CONTINGENCIES

Strategic Partnership with Advantest — See Note 12, Strategic Partnership Agreement with Advantest and Related Party Transactions, for the discussion about the Company’s commitments under the strategic partnership with Advantest.

Operating Leases — Refer to Note 4, Leases, for the discussion about the Company’s lease commitments.

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 into in the ordinary course of business. As of September 30, 2023, total outstanding purchase obligations were $24.6 million, the majority of which is due within the next 15 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.

Legal Proceedings — 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 September 30, 2023, the Company was not party to any material legal proceedings for which a loss was probable or an amount was accrued. From time to time, the Company may enter into contingent fee arrangements with external legal firms that may represent the Company in legal proceedings related to disputes. Contingent legal fees are accrued by the Company when they are probable and reasonably estimable.  

On May 6, 2020, the Company initiated an arbitration proceeding with the Hong Kong International Arbitration Center against SMIC New Technology Research & Development (Shanghai) Corporation (“SMIC”) due to SMIC’s failure to pay fees due to the Company under a series of contracts. The Company seeks to recover the unpaid fees, a declaration requiring SMIC to pay fees under the contracts in the future (or a lump sum payment to end the contract), and costs associated with

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bringing the arbitration proceeding. SMIC denies liability and an arbitration hearing was held in February 2023. Final written submissions were submitted by the parties at the end of August. A decision is expected potentially within this calendar year.

12. STRATEGIC PARTNERSHIP AGREEMENT WITH ADVANTEST AND RELATED PARTY TRANSACTIONS

In July 2020, the Company entered into a long-term strategic partnership with Advantest Corporation through its wholly-owned subsidiary, Advantest America, Inc. (collectively referred to herein as “Advantest”).

Analytics revenue recognized from Advantest was $2.6 million and $2.8 million during the three months ended September 30, 2023 and 2022, respectively, and $6.2 million and $8.1 million during the nine months ended September 30, 2023 and 2022, respectively. Accounts receivable from Advantest was not material as of September 30, 2023 and amounted to $0.3 million as of December 31, 2022. Deferred revenue amounted to $12.1 million and $7.1 million as of September 30, 2023, and December 31, 2022, respectively.

13. BUSINESS COMBINATION

On July 5, 2023 (the “Acquisition Date”), the Company, through its wholly-owned subsidiary in Canada, PDF Solutions Canada, Ltd., acquired 100% of the equity interest in Lantern Machinery Analytics, Inc. headquartered in Canada, a privately-held provider of automated image analysis and feature extraction artificial intelligence/machine learning software for critical inspection and metrology steps at battery cell development and manufacturing processes for the electric vehicle industry. This software will enhance the Company’s Exensio analytics platform and product offerings to new and existing battery manufacturer customers. The total cash consideration for this acquisition was $1.8 million, net of cash acquired, for all of the outstanding equity of Lantern Machinery Analytics, Inc.

The Company accounted for this acquisition as a business combination in accordance with FASB ASC Topic 805, Business Combinations. This method requires that assets acquired and liabilities assumed in a business combination be recognized at their respective estimated fair values as of the Acquisition Date. The excess of purchase consideration over the fair value of net tangible and identifiable intangible assets acquired was recorded as goodwill. The goodwill recorded from this acquisition represents business benefits the Company anticipates from the acquired workforce and expectation for expanded sales opportunities to foster further business growth. Due to the nature of the transaction, the goodwill associated with the acquisition is not deductible for tax purposes. As of September 30, 2023, payment made for this acquisition, net of cash acquired, amounted to $1.8 million and was funded from available cash of the Company.

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The allocation of the purchase price for this acquisition, as of the date of the acquisition, is as follows (in thousands, except amortization period):

			Amortization
	Amount		Period (Years)
Allocation of Purchase Price:
Assets
Fair value of tangible assets (including cash of $265)	$	450
Fair value of intangible assets:
Developed technology		1,010	8
Customer relationships		100	6
Goodwill		895	N/A
Total assets acquired	$	2,455
Liabilities
Deferred tax liabilities	$	294
Accounts payable and accrued expenses		73
Total liabilities assumed		367
Total purchase price allocation	$	2,088

Pro forma results of operations have not been presented because the effect of the acquisition was not material to the Company’s financial results.

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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,” “projected,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “target” or “continue,” the negative effect of terms like these or other similar expressions. These statements include, but are not limited to, statements concerning: expectations about the effectiveness of our business and technology strategies; expectations regarding global economic trends; the impact of rising global inflation and interest rates, expectations regarding recent and future acquisitions; current semiconductor industry trends; expectations of continued adoption of our solutions by new and existing customers; project milestones or delays and performance criteria achieved; cost and schedule of new product development; the provision of technology and services prior to the execution of a final contract; the continuing impact of macroeconomic conditions on the semiconductor industry and our operations or supply and demand for our products; supply chain disruptions; the success of the Company’s strategic growth opportunities and partnerships; the Company’s ability to successfully integrate acquired businesses and technologies; whether the Company can successfully convert backlog into revenue; customers’ production volumes under contracts that provide Gainshare; possible impacts from the evolving trade regulatory environment and geopolitical tensions and our ability to obtain additional financing if needed. 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 publicly 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, 2022, filed with the Securities and Exchange Commission (“SEC”) on March 1, 2023. All references to “we,” “us,” “our,” “PDF,” “PDF Solutions” or “the Company” refer to PDF Solutions, Inc.

Cimetrix, CV, DFI, Exensio, PDF Solutions, and the PDF Solutions, Exensio, and Cimetrix logos are trademarks or registered trademarks of PDF Solutions, Inc. or its subsidiaries.

Overview

We offer products and services designed to empower organizations across the semiconductor and electronics ecosystems to connect, collect, manage, and analyze data about design, equipment, manufacturing, and test to improve the yield and quality of their products. We derive revenues from two sources: Analytics and Integrated Yield Ramp. Our offerings combine proprietary software, professional services using proven methodologies and third-party cloud-hosting platforms for software-as-a-service (“SaaS”), electrical measurement hardware tools, and physical intellectual property (“IP”) for integrated circuit (“IC”) designs. We primarily monetize our offerings through license fees and contract fees for professional services and SaaS. In some cases, especially on our historical IYR engagements, we also receive a value-based variable fee or royalty, which we call Gainshare. Our products, services, and solutions have been sold to integrated device manufacturers (“IDMs”), fabless semiconductor companies, foundries, out-sourced semiconductor assembly and test (“OSATs”), capital equipment manufacturers and system houses.

We are headquartered in Santa Clara, California and also operate worldwide with offices in Canada, China, France, Germany, Italy, Japan, Korea, and Taiwan.

Industry Trends

Certain trends may affect our Analytics revenue specifically. In particular, the confluence of Industry 4.0 (i.e. the fourth industrial revolution, or the automation and data exchange in manufacturing technologies and processes) and cloud computing (i.e. the on-demand availability of computing resources and data storage without direct active management by the user) is

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driving increased innovation in semiconductor and electronics manufacturing and analytics, as well as in the organization of information technology (“IT”) networks and computing at semiconductor and electronics companies across the ecosystem. First, the ubiquity of wireless connectivity and sensor technology enables any manufacturing company to augment its factories and visualize its entire production line. In parallel, the cost per terabyte of data storage has continually decreased year to year. The combination of these two trends means that more data is collected and stored than ever before. Further, semiconductor companies are striving to analyze these very large data sets in real-time to make rapid decisions that measurably improve manufacturing efficiency and quality. In parallel, the traditional practice of on-site data storage, even for highly sensitive data, is changing. The ability to cost-effectively and securely store, analyze, and retrieve massive quantities of data from the cloud versus on-premise enables data to be utilized across a much broader population of users, frequently resulting in greater demands on analytics programs. The combination of these latter two trends means that cloud-based, analytic programs that effectively manage identity management, physical security, and data protection are increasingly in demand for insights and efficiencies across the organizations of these companies. We believe that all these trends will continue for the next few years, and the challenges involved in adopting Industry 4.0 and secure cloud computing will create opportunities for our combination of advanced analytics capabilities, proven and established supporting infrastructure, and professional services to configure our products to meet customers’ specialized needs.

Other trends may continue to affect our characterization services business and Integrated Yield Ramp revenue specifically. Semiconductor manufacturers have been experiencing lower wafer shipments, which has negatively impacted our Integrated Yield Ramp gainshare revenue. The logic foundry market at the leading-edge nodes, such as 7nm, 5nm, and smaller, underwent significant change over the past few years. The leading foundry continues to dominate market share. This trend will likely continue to impact our characterization services business on these nodes. We expect most logic foundries to invest in derivatives of older process nodes, such as 28nm and 14nm, to extract additional value as many of their customers will not move to advanced nodes due to either technological barriers or restrictive economics. Foundries that participate at leading edge nodes are expected to continue to invest in new technologies such as memory, packaging, and multi-patterned and extreme ultraviolet lithography, as well as new innovations in process control and variability management. We expect China’s investment in semiconductors to continue. Compliance with changing U.S. export restrictions limit our possible business with Chinese semiconductor manufacturers on advanced nodes. As a result of these market developments, we have chosen to focus our resources and investments in products, services, and solutions for analytics.

There are other global or business trends that may affect our business opportunities generally as follows:

● Macroeconomy, inventories, and demand. The worldwide economy has not recovered as strongly or quickly post-COVID as expected, and recession fears are growing in some locations. As a result of the slow recovery, inventories of semiconductor devices remain elevated in many instances. The strength of demand for semiconductor products has varied by region and product segment. For example, demand for GPU products is strong, while demand for smart phones is weak. With high inventories and soft demand, semiconductor fab utilization rates are also low and semiconductor capital equipment orders have been impacted. As a result of these trends, customers are being cautious with their spend and some purchase cycles are lengthening and other purchase decisions are being delayed, particularly with respect to larger deals.  

● Changing export controls and sanctions. The U.S. government continues to expand and intensify export controls and sanctions, with a major focus on the destinations of People’s Republic of China (“P.R.C.”), Russian Federation, and Belarus. After an internal evaluation, we determined that a large percentage of our software products are not of U.S. origin and are, thus, not subject to the U.S. Export Administration Regulations (“EAR”). Our standard operations include development, distribution processes, software download sites, and professional service centers and processes located in various geographies around the world to better serve our customers. Some customers in the P.R.C., in particular, have nonetheless expressed concerns to us that continued action by the U.S. government could potentially interrupt their ability to make use of our products or services, which has in some cases, and could in the future, negatively impact the demand for our products and services by these customers. In October 2022 and October 2023, the U.S. government issued interim final rules with additional export control restrictions. Other countries and jurisdictions with important roles in our industry are updating some of their export control regulations to further align with those of the U.S. government and, in some cases, to counter U.S. regulations. For example, the P.R.C. has imposed restrictions on imports of certain memory ICs offered by U.S. companies and has been developing its legal authorities to counter foreign sanctions. The U.S. government is renewing and amplifying its caution that visitors to

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the P.R.C. are subject to arbitrary enforcement of local laws and wrongful detention, a risk that could deter or hinder certain business activities. Based on our current assessments, we expect the near-term impact of these expanded trade restrictions on our business to be limited, but clarifications and proposals that are still in government development and open questions of interpretation leave much unknown. We will continue to monitor for any further trade restrictions, other regulatory or policy changes by the U.S. or foreign governments and any actions in response.  The uncertainty caused by these recent regulations and the potential for additional future restrictions could negatively affect our future sales in the P.R.C. market.

● Investments in semiconductor manufacturing. In 2022, the U.S. Congress passed into law funding programs from the bipartisan Creating Helpful Incentives to Produce Semiconductors Act (the “CHIPS Act of 2022”), authorizing the Department of Commerce, Department of Defense, and Department of State to develop onshore domestic manufacturing of semiconductors considered critical to U.S. competitiveness and national security. It is expected that U.S. semiconductor companies, especially manufacturers, will increase spending as a result of receiving funds under these programs. Recipients of funding under such programs may be required to agree to separate restrictions on certain commercial activity in the P.R.C., where we have current business. If our customers engage us for projects funded by these programs, we will evaluate all restrictions, and their impact on our existing business, before entering into any contracts associated with these programs.

● Geopolitical tensions/conflicts. Geopolitical tensions and conflicts in various locations around the world continue to increase, including on the issue of Taiwan in Asia, Ukraine and Russia, and most recently between Israel and Hamas. These current situations have created volatility in the global financial markets and may have further global economic consequences, including potential disruptions of the global supply chain and heightened volatility of commodity and raw material prices. This has increased fears of a general recession. We have contractors located in the West Bank and in Israel, who are providing software development and customer technical support services, and have developed contingency plans to use alternative resources to continue serving customers, if needed. Any escalations could lead to disruptions or reductions in international trade, deter or prevent purchasing activity of customers, and negatively impact our development timelines and customer support (with respect to the Israel-Hamas conflict) or China sales (with respect to U.S.-P.R.C. tensions) and financial results in general (with respect to global tensions).  

Financial Highlights

Financial highlights for the three months ended September 30, 2023, are as follows:

● Total revenues were $42.4 million, an increase of $2.5 million, or 6%, compared to the three months ended September 30, 2022. Analytics revenue was $39.5 million, an increase of $6.6 million, or 20%, compared to the three months ended September 30, 2022. The increase in Analytics revenue was driven by increases in revenue from DFI and CV systems, including a sales-type lease of a DFI asset, and an increase in revenue from Exensio software licenses, partially offset by a decrease in revenues from Cimetrix software licenses due to a decrease in orders for runtime licenses. Integrated Yield Ramp revenue decreased $4.1 million, or 59%, compared to the three months ended September 30, 2022, primarily due to a decrease in Gainshare from decreased customer wafer shipments at non-leading-edge nodes and a decrease in hours worked on fixed fees engagements.

● Costs of revenues increased $1.7 million, compared to the three months ended September 30, 2022, primarily due to an increase in hardware costs, software licenses and maintenance costs. These increases were partially offset by decreases in personnel-related costs and third-party cloud-delivery costs.

● Net loss was $5.0 million, compared to a net income of $1.4 million for the three months ended September 30, 2022. The decrease in net income was primarily attributable to increases in (i) income tax expense, (ii) costs of revenues, (iii) sales and marketing activities, and general and administrative expenses, which were primarily related to increases in personnel-related costs, travel expenses, partially offset by a decrease in legal fees related to the arbitration proceeding over a disputed customer contract, and (iv) foreign currency transaction exchange losses, partially offset by (a) an increase in total revenues, (b) an increase in interest income and (c) a decrease in research and development expenses.

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Financial highlights for the nine months ended September 30, 2023, are as follows:

● Total revenues were $124.7 million, an increase of $16.7 million, or 15%, compared to the nine months ended September 30, 2022. Analytics revenue was $113.0 million, an increase of $18.5 million, or 20%, compared to the nine months ended September 30, 2022. The increase in Analytics revenue was driven by increases in revenue from DFI and CV systems, including a sales-type lease of a DFI asset, and an increase in revenue from Exensio software licenses, partially offset by a decrease in revenues from Cimetrix software licenses due to a decrease in orders for runtime licenses. Integrated Yield Ramp revenue decreased $1.9 million, or 14%, compared to the nine months ended September 30, 2022, primarily due to a decrease in Gainshare from decreased customer wafer shipments at non-leading-edge nodes and a decrease in hours worked on fixed fees engagements.

● Costs of revenues increased $2.4 million, compared to the nine months ended September 30, 2022, primarily due to an increase in hardware costs, increases in travel expenses, third-party cloud-delivery costs, software licenses and maintenance costs and subcontractor fees. These increases were partially offset by decreases in personnel-related costs and facilities and IT-related costs.

● Net income was $2.2 million, compared to a net loss of $3.9 million for the nine months ended September 30, 2022. The increase in net income was primarily attributable to (i) an increase in total revenues, (ii) an increase in interest income, (iii) a decrease in research and development expenses and (iv) a decrease in income tax expenses, partially offset by increases in (a) costs of revenues, (b) sales and marketing activities, and general and administrative expenses, which were primarily related to increases in personnel-related costs, legal fees related to the arbitration proceeding over a disputed customer contract, travel expenses, third-party cloud-services related costs, business acquisition costs, software licenses and maintenance costs, facilities and IT-related costs, and (c) foreign currency transaction exchange losses.

● Cash, cash equivalents, and short-term investments at September 30, 2023, were $135.4 million, compared to $139.2 million as of December 31, 2022, a decrease of $3.8 million, primarily due to payments of accrued bonuses, payments to vendors and for income taxes, purchases of and prepayments for property and equipment, payments for business acquisition, repurchases of common stock, and payments of taxes related to net share settlement of equity awards, partially offset by cash collection from customers, proceeds from purchases under our employee stock purchase plan and exercise of stock options, and interest income from cash, cash equivalents and short-term investments.

Critical Accounting Estimates

See Note 1, Basis of Presentation and Summary of Significant Accounting Policies, to our unaudited condensed consolidated financial statements in this Quarterly Report on Form 10-Q, for a description of recent accounting pronouncements and accounting changes, including the expected dates of adoption and estimated effects, if any, on our condensed consolidated financial statements, and to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on March 1, 2023.

There were no material changes during the three and nine months ended September 30, 2023, 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 Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2022.

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 condensed consolidated financial statements, which have been prepared in conformity with accounting principles generally accepted in the United States of America. Our preparation of these condensed 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

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liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. We base 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, valuation of long-lived assets including goodwill and intangible assets, stock-based compensation and the realization of deferred tax assets (“DTAs”). Actual amounts may differ from such estimates under different assumptions or conditions.

Revenue Recognition

We derive revenue from two sources: Analytics and Integrated Yield Ramp.

Analytics Revenue

Analytics revenue is derived from the following primary offerings: licenses and services for standalone Software (which consists primarily of Exensio and Cimetrix products), SaaS (which consists primarily of Exensio products), and DFI and CV systems (including Characterization services) that do not include performance incentives based on customers’ yield achievement.

Revenue from standalone software is recognized depending on whether the license is perpetual or time-based. Perpetual (one-time charge) license software is recognized at the time of the inception of the arrangement when control transfers to the customers, if the software license is distinct from the services offered by us. Revenue from post-contract support is recognized over the contract term on a straight-line basis, because we are providing (i) support and (ii) unspecified software updates on a when-and-if available basis over the contract term. Revenue from time-based-licensed software is allocated to each performance obligation and is recognized either at a point in time or over time as follows. The license component is recognized at the time when control transfers to customers, with the post-contract support component recognized ratably over the committed term of the contract. For contracts with any combination of licenses, support, and other services, distinct performance obligations are accounted for separately. For contracts with multiple performance obligations, we allocate the transaction price of the contract to each performance obligation on a relative basis using the standalone selling price (“SSP”) attributed to each performance obligation.

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

Revenue from DFI systems and CV systems (including Characterization services) that do not include performance incentives based on customers’ yield achievement is recognized primarily as services are performed. Where there are distinct performance obligations, we allocate revenue to all deliverables based on their SSPs. For these contracts with multiple performance obligations, we allocate the transaction price of the contract to each performance obligation on a relative basis using SSP attributed to each performance obligation. Where there are not discrete performance obligations, historically, revenue is primarily recognized as services are performed using a percentage of completion method based on costs or labor-hours inputs, whichever is the most appropriate measure of the progress towards completion of the contract. The estimation of percentage of completion method is complex and subject to many variables that require significant judgment.

Integrated Yield Ramp Revenue

Integrated Yield Ramp revenue is derived from our yield ramp engagements that include Gainshare or other performance incentives based on customers’ yield achievement.

Revenue under these project–based contracts, which are delivered over a specific period of time typically for a fixed fee component paid on a set schedule, is recognized as services are performed using a percentage of completion method based on costs or labor-hours inputs, whichever is the most appropriate measure of the progress towards completion of the contract. Where there are distinct performance obligations, we allocate revenue to all deliverables based on their SSPs and allocate the transaction price of the contract to each performance obligation on a relative basis using SSP. Similar to the services provided in connection with DFI systems and CV systems that are contributing to Analytics revenue, due to the nature of the work

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performed in these arrangements, the estimation of percentage of completion method is complex and subject to many variables that require significant judgment.

The Gainshare contained in the yield ramp contracts is a variable fee related to continued usage of our IP after the fixed-fee service period ends, based on the customers’ yield achievement. Revenue derived from Gainshare is contingent upon our customers reaching certain defined production yield levels. Gainshare periods are generally subsequent to the delivery of all contractual services and performance obligations. We record Gainshare as a usage-based royalty derived from customers’ usage of intellectual property and record it in the same period in which the usage occurs.

Income Taxes

We are required to assess whether it is “more-likely-than-not” that we will realize our DTAs. If we believe that they are not likely to be fully realizable before the expiration dates applicable to such assets, then to the extent we believe that recovery is not likely, we must establish a valuation allowance. Based on all available evidence, both positive and negative, we determined a full valuation allowance was still appropriate for our U.S. federal and state net DTAs, primarily driven by a cumulative loss incurred over the 12-quarter period ended September 30, 2023, and the likelihood that we may not utilize tax attributes before they expire. The valuation allowance was approximately $59.2 million as of September 30, 2023, and December 31, 2022. We will continue to evaluate the need for a valuation allowance and may change our conclusion in a future period based on changes in facts (e.g., 12-quarter cumulative profit, significant new revenue, etc.). If we conclude that we are more-likely-than-not to utilize some or all of our U.S. DTAs, we will release some or all of our valuation allowance and our tax provision will decrease in the period in which we make such determination.

We evaluate our DTAs for realizability considering both positive and negative evidence, including our historical financial performance, projections of future taxable income, future reversals of existing taxable temporary differences, tax planning strategies and any carryback availability. In evaluating the need for a valuation allowance, we estimate future taxable income based on management approved business plans. This process involves significant management judgment about assumptions that are subject to change from period to period based on changes in tax laws or variances between future projected operating performance and actual results. Changes in the net DTAs, less offsetting valuation allowance, in a period are recorded through the income tax provision and could have a material impact on the condensed consolidated statements of comprehensive income (loss).

Our income tax calculations are based on the application of applicable U.S. federal, state, and/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 income tax expense or benefit in the condensed consolidated statements of comprehensive income (loss). As of September 30, 2023, no deferred taxes have been provided on undistributed earnings from our international subsidiaries. We intend to reinvest the earnings of our non-U.S. subsidiaries in those operations indefinitely. As such, we have not provided for any foreign withholding taxes on the earnings of foreign subsidiaries as of September 30, 2023. The earnings of our foreign subsidiaries are taxable in the U.S. in the year earned under the Global Intangible Low-Taxed Income rules implemented under 2017 Tax Cuts and Jobs Act.

The CHIPS Act was signed into U.S. law on August 9, 2022. The CHIPS Act is intended to increase domestic competitiveness in semiconductor manufacturing capacity, increase research and development in computing, artificial intelligence, clean energy, and nanotechnology through federal government programs and incentives over the next ten years. The CHIPS Act includes an advanced manufacturing tax credit equal to 25% of qualified investments in property purchased for an advanced manufacturing facility. We are evaluating the potential benefits of CHIPS Act to our business.

Stock-Based Compensation

We account for stock-based compensation using the fair value method, which requires us to measure stock-based compensation based on the grant-date fair value of the awards and recognize the compensation expense over the requisite service period. As stock-based compensation expense recognized is based on awards ultimately expected to vest, it has been

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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.

The fair value of our restricted stock units is equal to the market value of our common stock on the date of the grant. These awards are subject to time-based vesting which generally occurs over a period of four years.

The fair value of our stock options is estimated using the Black-Scholes-Merton option-pricing model, which incorporates various assumptions including volatility, expected life and interest rates. The expected volatility is based on the historical volatility of our common stock over the most recent period commensurate with the estimated expected life of our stock options. The expected life is based on historical experience and on the terms and conditions of the stock options granted. The interest rate assumption is based upon observed Treasury yield curve rates appropriate for the expected life of our stock options.

Valuation of Long-lived Assets including Goodwill and Intangible Assets

We record goodwill when the purchase consideration of an acquisition exceeds the fair value of the net tangible and identified intangible assets as of the date of acquisition. We have one operating segment and one operating unit. We perform an annual impairment assessment of goodwill during the fourth quarter of each calendar year or more frequently, if required to determine if any events or circumstances exist, such as an adverse change in business climate or a decline in the overall industry demand, that would indicate that it would more likely than not reduce the fair value of a reporting unit below its carrying amount, including goodwill. If events or circumstances do not indicate that the fair value of a reporting unit is below its carrying amount, then goodwill is not considered to be impaired and no further testing is required. If the carrying amount exceeds its fair value, an impairment loss would be recognized equal to the amount of excess, limited to the amount of total goodwill. There was no impairment of goodwill for the three and nine months ended September 30, 2023.

Our long-lived assets, excluding goodwill, consist of property, equipment, and intangible assets. We periodically review our long-lived assets for impairment. For assets to be held and used, we initiate our review whenever events or changes in circumstances indicate that the carrying amount of a long-lived asset group may not be recoverable. Recoverability of an asset group is measured by comparison of its carrying amount to the expected future undiscounted cash flows that the asset group is expected to generate. If it is determined that an asset group is not recoverable, an impairment loss is recorded in the amount by which the carrying amount of the asset group exceeds its fair value. There was no impairment of long-lived assets for the three and nine months ended September 30, 2023.

Recent Accounting Pronouncements and Accounting Changes

See Note 1, Basis of Presentation and Summary of Significant Accounting Policies, to our unaudited condensed consolidated financial statements in this Quarterly Report on Form 10-Q, for a description of recent accounting pronouncements and accounting changes, including the expected dates of adoption and estimated effects, if any, on our condensed consolidated financial statements.

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Results of Operations

Discussion of Financial Data for the Three and Nine Months ended September 30, 2023 and 2022

Revenues, Costs of Revenues, and Gross Margin

	Three Months Ended										Nine Months Ended
	September 30,						Change				September 30,						Change
(Dollars in thousands)	2023			2022			$		%		2023			2022			$		%
Revenues:
Analytics	$	39,497		$	32,879		$	6,618	20	%	$	112,957		$	94,422		$	18,535	20	%
Integrated Yield Ramp		2,853			6,981			(4,128)	(59)	%		11,753			13,604			(1,851)	(14)	%
Total revenues		42,350			39,860			2,490	6	%		124,710			108,026			16,684	15	%
Costs of revenues		14,282			12,545			1,737	14	%		38,555			36,116			2,439	7	%
Gross profit	$	28,068		$	27,315		$	753	3	%	$	86,155		$	71,910		$	14,245	20	%
Gross margin		66	%		69	%						69	%		67	%
Analytics revenue as a percentage of total revenues		93	%		82	%						91	%		87	%
Integrated Yield Ramp revenue as a percentage of total revenues		7	%		18	%						9	%		13	%

Analytics Revenue

Analytics revenue increased $6.6 million for the three months ended September 30, 2023, compared to the three months ended September 30, 2022. The increase in Analytics revenue was driven by increases in revenue from DFI and CV systems, including a sales-type lease of a DFI asset, and an increase in revenue from Exensio software licenses, partially offset by a decrease in revenues from Cimetrix software licenses due to a decrease in orders for runtime licenses.

Analytics revenue increased $18.5 million for the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022. The increase in Analytics revenue was driven by increases in revenue from DFI and CV systems, including a sales-type lease of a DFI asset, and an increase in revenue from Exensio software licenses, partially offset by a decrease in revenues from Cimetrix software licenses due to a decrease in orders for runtime licenses.

Integrated Yield Ramp Revenue

Integrated Yield Ramp revenue decreased $4.1 million for the three months ended September 30, 2023, compared to the three months ended September 30, 2022, primarily due to a decrease in Gainshare from decreased customer wafer shipments at non-leading-edge nodes and a decrease in hours worked on fixed fees engagements.

Integrated Yield Ramp revenue decreased $1.9 million for the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022, primarily due to a decrease in Gainshare from decreased customer wafer shipments at non-leading-edge nodes and a decrease in hours worked on fixed fees engagements.

Our Integrated Yield Ramp revenue may continue to fluctuate from period to period primarily due to the contribution of Gainshare, which is dependent on many factors that are outside our control, including among others, continued production of ICs by our customers at facilities at which we generate Gainshare, sustained yield improvements by our customers, and whether we enter into new contracts containing Gainshare.

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

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penetrate new markets, supply chain challenges and further penetration of our current customer base. Fluctuations in future results may also occur if any of our significant customers renegotiate pre-existing contractual commitments, including due to adverse changes in their own business.

Costs of Revenues

Costs of revenues consist primarily of costs incurred to provide and support our services, costs recognized in connection with licensing our software, IT and facilities-related costs and amortization of acquired technology. Service costs include material costs, hardware costs (including cost of leased assets under sales-type lease), personnel-related costs (including compensation), employee benefits, bonus and stock-based compensation expense, subcontractor costs, overhead costs, travel expenses, and allocated facilities-related costs. Software license costs consist of costs associated with third-party cloud-delivery related expenses and licensing third-party software used by us in providing services to our customers in solution engagements or sold in conjunction with our software products.

The increase in costs of revenues of $1.7 million for the three months ended September 30, 2023, compared to the three months ended September 30, 2022, was primarily due to (i) a $2.0 million increase in hardware costs and (ii) a $0.1 million increase in software licenses and maintenance costs. These increases were partially offset by (i) a $0.2 million decrease in personnel-related costs due to lower compensation expense, partially offset by an increase in stock-based compensation expense, and (ii) a $0.1 million decrease in third-party cloud-delivery costs.

The increase in costs of revenues of $2.4 million for the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022, was primarily due to (i) a $2.3 million increase in hardware costs, (ii) a $0.3 million increase in travel expenses, (iii) a $0.2 million increase in third-party cloud-delivery costs, (iv) a $0.2 million increase in software licenses and maintenance costs, and (v) a $0.1 million increase in subcontractor fees. These increases were partially offset by (i) a $0.3 million decrease in personnel-related costs due to lower compensation expenses, partially offset by an increase in worldwide salaries and increases in headcount and stock-based compensation expense, and (ii) a $0.2 million decrease in facilities and IT-related costs, including depreciation expense.

Gross Margin

Gross margin decreased three percentage points for the three months ended September 30, 2023, to 66%, compared to 69% for the three months ended September 30, 2022. The lower gross margin during the three months ended September 30, 2023, was primarily due to lower Gainshare revenue for the three months ended September 30, 2023.

Gross margin increased two percentage points for the nine months ended September 30, 2023, to 69%, compared to 67% for the nine months ended September 30, 2022. The higher gross margin during the nine months ended September 30, 2023, was primarily due to higher total revenues when compared to the year-ago period.

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Operating Expenses:

Research and Development

	Three Months Ended										Nine Months Ended
	September 30,						Change				September 30,						Change
(Dollars in thousands)	2023			2022			$		%		2023			2022			$		%
Research and development	$	13,113		$	14,303		$	(1,190)	(8)	%	$	38,428		$	41,766		$	(3,338)	(8)	%
As a percentage of total revenues		31	%		36	%						31	%		39	%

Research and development expenses consist primarily of personnel-related costs including compensation, employee benefits, bonus, and stock-based compensation expense, outside development services, travel expenses, third-party cloud-services related costs, IT and facilities cost allocations to support product development activities.

Research and development expenses decreased $1.2 million for the three months ended September 30, 2023, compared to the three months ended September 30, 2022, primarily due (i) to a $1.1 million decrease in personnel-related costs mostly resulting from lower compensation expenses, partially offset by worldwide salary increases and increases in headcount, and (ii) a $0.2 million decrease in subcontractor fees primarily related to DFI systems. These were partially offset by a $0.1 million increase in travel expenses.

Research and development expenses decreased $3.3 million for the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022, primarily due to (i) a $4.2 million decrease in personnel-related costs mostly resulting from a lower stock-based and other compensation expenses, partially offset by worldwide salary increases and increases in headcount, and (ii) a $0.3 million decrease in facilities and IT-related costs including depreciation expense. These were partially offset by (i) a $0.6 million increase in subcontractor expenses primarily related to Cimetrix and Exensio software, (ii) a $0.3 million increase in third-party cloud-services related costs, and (iii) a $0.3 million increase in travel expenses.

We anticipate our expenses in research and development will fluctuate in absolute dollars from period to period as a result of the size and the timing of product development projects.

Selling, General, and Administrative

	Three Months Ended										Nine Months Ended
	September 30,						Change				September 30,						Change
(Dollars in thousands)	2023			2022			$		%		2023			2022			$		%
Selling, general, and administrative	$	15,611		$	12,005		$	3,606	30	%	$	46,022		$	32,614		$	13,408	41	%
As a percentage of total revenues		37	%		30	%						37	%		30	%

Selling, general, and administrative expenses consist primarily of personnel-related costs including compensation, employee benefits, bonus, commission and stock-based compensation expense for sales, marketing, and general and administrative personnel, legal, tax and accounting services, marketing communications expenses, third-party cloud-services related costs, travel, IT, and facilities cost allocations.

Selling, general, and administrative expenses increased $3.6 million for the three months ended September 30, 2023, compared to the three months ended September 30, 2022, primarily due to (i) a $3.7 million increase in personnel-related costs mainly resulting from increases in stock-based and other compensation expense, including commission, employee benefit costs, headcount and worldwide salary increases and (ii) a $0.2 million increase in travel expenses. These were partially offset by a $0.3 million decrease in legal fees related to the arbitration proceeding over a disputed customer contract.

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Selling, general, and administrative expenses increased $13.4 million for the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022, primarily due to (i) a $11.2 million increase in personnel-related costs mainly resulting from increases in stock-based and other compensation expense, including commission, employee benefit costs, headcount and worldwide salary increases, (ii) a $1.5 million increase in legal fees related to the arbitration proceeding over a disputed customer contract, (iii) a $0.6 million increase in travel expenses, (iv) a $0.3 million increase in facilities and IT-related costs including depreciation expense, (v) a $0.2 million increase in business acquisition costs, and (vi) a $0.1 million increase in third-party cloud-services related costs. These were partially offset by a $0.4 million decrease in subcontractor 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.

Amortization of Acquired Intangible Assets

	Three Months Ended								Nine Months Ended
	September 30,				Change				September 30,				Change
(Dollars in thousands)	2023		2022		$		%		2023		2022		$		%
Amortization of acquired intangible assets	$	328	$	318	$	10	3	%	$	979	$	946	$	33	3	%

Amortization of acquired intangible assets primarily consists of amortization of intangibles acquired as a result of certain business combinations and was consistent for the three and nine months ended September 30, 2023 compared to the three and nine months ended September 30, 2022.

Interest and Other Expense (Income), Net

	Three Months Ended								Nine Months Ended
	September 30,				Change				September 30,				Change
(Dollars in thousands)	2023		2022		$		%		2023		2022		$		%
Interest and other expense (income), net	$	(2,018)	$	(1,511)	$	507	34	%	$	(4,000)	$	(2,812)	$	1,188	42	%

Interest and other expense (income), net, primarily consists of interest income and foreign currency transaction exchange gains and losses.

Interest and other expense (income), net increased $0.5 million for the three months ended September 30, 2023, compared to the three months ended September 30, 2022, primarily due to a higher interest income resulting from higher interest rates, partially offset by net unfavorable fluctuations in foreign currency exchange rates which resulted in a lower net foreign currency exchange gain.

Interest and other expense (income), net increased $1.2 million for the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022, primarily due to a higher interest income resulting from higher interest rates, partially offset by net unfavorable fluctuations in foreign currency exchange rates.

Income Tax Expense

	Three Months Ended								Nine Months Ended
	September 30,				Change				September 30,				Change
(Dollars in thousands)	2023		2022		$		%		2023		2022		$		%
Income tax expense	$	(6,006)	$	(815)	$	5,191	637	%	$	(2,508)	$	(3,308)	$	(800)	(24)	%

Income tax expense increased for the three months and decreased for the nine months ended September 30, 2023, compared to the three and nine months ended September 30, 2022, respectively, primarily due to changes in the foreign and

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state taxes and year-to-date recognition of worldwide pre-tax income (loss) in relation to their forecasted amounts for full years.

Any significant change in our future effective tax rates could adversely impact our consolidated financial position, results of operations and cash flows. Our future tax rates may be adversely affected by a number of factors including increase in expenses not deductible for tax purposes, new or changing tax legislation in the United States and in foreign countries where we are subject to tax jurisdictions, the geographic composition of our pre-tax income, the amount of our pre-tax income as business activities fluctuate, our ability to use tax attributes such as research and development tax credits and net operation losses, the tax effects of employee stock activity, audit examinations with adverse outcomes, changes in accounting principles generally accepted in the United States of America and the effectiveness of our tax planning strategies.

Liquidity and Capital Resources

As of September 30, 2023, our working capital, defined as total current assets less total current liabilities, was $144.4 million, compared to $135.2 million as of December 31, 2022. Total cash, cash equivalents, and short-term investments were $135.4 million as of September 30, 2023, compared to cash, cash equivalents, and short-term investments of $139.2 million as of December 31, 2022. As of September 30, 2023, and December 31, 2022, cash and cash equivalents held by our foreign subsidiaries were $9.1 million and $8.8 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, other obligations for at least the next twelve months.

Cash Flow Data

The following table summarizes our cash flows for the periods presented:

	Nine Months Ended September 30,
(In thousands)	2023		2022		$ Change
Net cash flows provided by (used in):
Operating activities	$	12,571	$	8,023	$	4,548
Investing activities		(14,235)		83,354		(97,589)
Financing activities		(5,577)		(24,186)		18,609
Effect of exchange rate changes on cash and cash equivalents		(763)		(1,147)		384
Net change in cash and cash equivalents	$	(8,004)	$	66,044	$	(74,048)

Net Cash Flows Provided by Operating Activities

Cash flows provided by operating activities during the nine months ended September 30, 2023, consisted of net income, adjusted for certain non-cash items which primarily consisted of depreciation and amortization, stock-based compensation expense, amortization of acquired intangible expense, amortization of costs capitalized to obtain revenue contracts and net change in operating assets and liabilities.

Net cash flows provided by operating activities was $12.6 million for the nine months ended September 30, 2023, compared to net cash flows provided by operating activities of $8.0 million for the nine months ended September 30, 2022. The $4.6 million increase in cash flows from operating activities between the periods was driven primarily by (i) collections from customers and (ii) a significant increase in net income compared to the same period in 2022, partially offset by payments

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made to vendors and under the Company’s bonus plan. Net income was $2.2 million for the nine months ended September 30, 2023, compared to a net loss of $3.9 million for the nine months ended September 30, 2022.

The major contributors to the net change in operating assets and liabilities for the nine months ended September 30, 2023, were as follows:

● Accounts receivable decreased by $1.2 million, primarily due to collections from customers, partially offset by contractual invoicing activity and an increase in unbilled accounts receivables due to the timing of billing and revenue recognition;

● Prepaid expense and other current assets increased by $7.0 million, primarily due to increases in contract assets, lease receivables, income tax receivable and deferred commission;

● Accounts payable decreased by $2.7 million primarily due to the timing of payments of vendor invoices;

● Accrued compensation and related benefits decreased by $5.3 million primarily due to the payments of accrued bonuses net of new bonus accruals, a decrease in accrued commissions, and exercise of purchase rights under employee stock purchase plans;

● Deferred revenue increased by $3.7 million primarily due to the timing of billing and revenue recognition; and

● Billings in excess of recognized revenues decreased by $1.6 million primarily due to the timing of billing and revenue recognition.

Net Cash Flows Provided by (Used in) Investing Activities

Net cash used in investing activities was $14.2 million for the nine months ended September 30, 2023, compared to net cash provided by investing activities of $83.4 million for the nine months ended September 30, 2022.

For the nine months ended September 30, 2023, cash used in investing activities primarily related to purchases of short-term investments of $32.3 million, purchases of and prepayments for property and equipment of $8.9 million primarily related to our DFI and CV systems, payment for business acquisition, net of cash acquired, of $1.8 million, partially offset by proceeds from maturities and sales of short-term investments of $28.8 million.

For the nine months ended September 30, 2022, cash provided by investing activities primarily related to proceeds from maturities and sales of short-term investments of $136.0 million, partially offset by purchases of short-term investments of $45.8 million, and purchases of and prepayments for property and equipment of $6.7 million primarily related to our DFI systems and CV systems.

Net Cash Flows Used in Financing Activities

Net cash used in financing activities was $5.6 million for the nine months ended September 30, 2023, compared to $24.2 million for the nine months ended September 30, 2022.

For the nine months ended September 30, 2023, net cash used in financing activities primarily consisted of $9.1 million in cash payments for taxes related to net share settlement of equity awards, repurchases of common stock of $0.8 million, partially offset by $4.3 million of proceeds from our employee stock purchase plans and exercise of stock options.

For the nine months ended September 30, 2022, net cash used in financing activities primarily consisted of $22.5 million for the repurchase of shares of our common stock and $5.8 million in cash payments for taxes related to net share settlement of equity awards, partially offset by $4.1 million of proceeds from our employee stock purchase plans and exercise of stock options.

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Related Party Transactions

Refer to Note 12, Strategic Partnership Agreement with Advantest and Related Party Transactions, to our unaudited condensed consolidated financial statements in this Quarterly Report on Form 10-Q, for the discussion about related party transactions between the Company and Advantest (as defined therein).

Off-Balance Sheet Agreements

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

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 September 30, 2023, we had cash, cash equivalents and short-term investments of $135.4 million. Cash and cash equivalents consisted of cash and highly liquid money market instruments and short-term investments consisted of U.S. Government securities. 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 as of September 30, 2023, 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.

As of September 30, 2023, and periodically throughout the year, we have maintained cash balances in various operating accounts in excess of federally insured limits. We limit the amount of credit exposure to any financial institution by evaluating the creditworthiness of the financial institutions with which we invest and investing through more than one financial institution.

Foreign Currency and Exchange Risk. Certain of our receivables and payables for our international offices are denominated in the local currency, including the Euro, Yen and RMB. Therefore, a portion of our revenues and operating expenditures are subject to foreign currency risks. From time to time, 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 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 in earnings as a component of other income (expense), net and offsets the change in fair value of foreign currency denominated monetary assets and liabilities, which is also recorded in other income (expense), net. As of September 30, 2023, we had no outstanding forward contracts.

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 September 30, 2023, in connection with the filing of this Quarterly Report on Form 10-Q. Based on that evaluation as of September 30, 2023, our principal executive officer and principal financial and accounting officer concluded that our disclosure controls and procedures were effective to ensure that 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 the rules and forms of the SEC and is accumulated and communicated to our management as appropriate to allow timely decisions regarding required disclosure.

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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 September 30, 2023, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

Refer to Note 11, Commitments and Contingencies to our condensed consolidated financial statements in this Quarterly Report on Form 10-Q, for information regarding our legal proceedings.

Item 1A. Risk Factors

As of the date of this Quarterly Report on Form 10-Q, there have been no material changes from the risk factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on March 1, 2023. Any of such factors could result in a significant or material adverse effect on our result of operations or financial conditions. Additional risk factors not presently known to us or that we currently deem immaterial may also impair our business or results of operations. We may disclose changes to such factors or disclose additional factors from time to time in our future filings with the SEC.

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

Repurchase of Shares of Company Equity Securities

On April 11, 2022, the Board of Directors adopted a stock repurchase program (the “2022 Program”) to repurchase up to $35.0 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.

The table below sets forth the information with respect to purchases made under the 2022 Program 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 three months ended September 30, 2023.

					Approximate
				Total Number	Dollar
				of Shares	Value of
				Purchased	Shares that
	Total			as Part of	May Yet Be
	Number of			Publicly	Purchased
	Shares	Average		Announced	Under
	Purchased	Price Paid		Programs	Programs
Period	(in thousands)	Per Share		(in thousands)	(in thousands)
July 1, 2023 through July 31, 2023	—	$	—	—	$	18,307
August 1, 2023 through August 31, 2023	21	$	34.81	—	$	17,564
September 1, 2023 through September 30, 2023	—	$	—	—	$	17,564
Total	21	$	—	—

See Note 5, Stock Repurchase Program, to our unaudited condensed consolidated financial statements in this Quarterly Report on Form 10 Q for more information on the 2022 Program.

40

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

None.

Item 5. Other Information

Insider Adoption or Termination of Trading Arrangements

During the quarter ended September 30, 2023, none of our directors or officers informed us of the adoption or termination of a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as those terms are defined in Regulation S-K, Item 408.

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	The following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2023, formatted in Inline XBRL: (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Comprehensive Income (Loss), (iii) Condensed Consolidated Statements of Stockholders’ Equity, (iv) Condensed Consolidated Statements of Cash Flows and (v) Notes to Condensed Consolidated Financial Statements, tagged as blocks of text and including detailed tags.†
104	Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).†

* Furnished, and not filed.

† Filed herewith.

41

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: November 8, 2023	By:	/s/ JOHN K. KIBARIAN
		John K. Kibarian
		President and Chief Executive Officer
		(principal executive officer)
Date: November 8, 2023	By:	/s/ ADNAN RAZA
		Adnan Raza
		Executive Vice President, Finance and Chief
		Financial Officer
		(principal financial and accounting officer)

42

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: November 8, 2023

EX-31.02

Exhibit 31.02

CERTIFICATIONS

I, Adnan Raza, 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/ Adnan Raza
		Adnan Raza
		Executive Vice President, Finance
		and Chief Financial Officer
		(principal financial and accounting
		officer)
Date: November 8, 2023

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 September 30, 2023, as filed with the Securities and Exchange Commission on November 8, 2023 (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: November 8, 2023

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 September 30, 2023, as filed with the Securities and Exchange Commission on November 8, 2023 (the “Report”), I, Adnan Raza, Executive Vice President, Finance and Chief Financial 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.

10
	By:	/s/ Adnan Raza
		Adnan Raza
		Executive Vice President, Finance
		and Chief Financial Officer
		(principal financial and accounting
		officer)
Date: November 8, 2023

XML

Document And Entity Information - shares	9 Months Ended
	Sep. 30, 2023	Nov. 03, 2023
Document and Entity Information
Document Type	10-Q
Document Quarterly Report	true
Document Period End Date	Sep. 30, 2023
Document Transition Report	false
Entity File Number	000-31311
Entity Registrant Name	PDF SOLUTIONS, INC.
Entity Incorporation, State or Country Code	DE
Entity Tax Identification Number	25-1701361
Entity Address, Address Line One	2858 De La Cruz Blvd.
Entity Address, City or Town	Santa Clara
Entity Address, State or Province	CA
Entity Address, Postal Zip Code	95050
City Area Code	408
Local Phone Number	280-7900
Title of 12(b) Security	Common Stock, $0.00015 par value
Trading Symbol	PDFS
Security Exchange Name	NASDAQ
Entity Current Reporting Status	Yes
Entity Interactive Data Current	Yes
Entity Filer Category	Accelerated Filer
Entity Small Business	false
Entity Emerging Growth Company	false
Entity Shell Company	false
Entity Common Stock, Shares Outstanding		38,261,403
Entity Central Index Key	0001120914
Amendment Flag	false
Current Fiscal Year End Date	--12-31
Document Fiscal Period Focus	Q3
Document Fiscal Year Focus	2023

XML

CONDENSED CONSOLIDATED BALANCE SHEETS - USD ($) $ in Thousands	Sep. 30, 2023	Dec. 31, 2022
Current assets:
Cash and cash equivalents	$ 111,620	$ 119,624
Short-term investments	23,744	19,557
Accounts receivable, net of allowance for credit losses of $890 as of September 30, 2023 and December 31, 2022	40,959	42,164
Prepaid expenses and other current assets	18,001	12,063
Total current assets	194,324	193,408
Property and equipment, net	37,833	40,174
Operating lease right-of-use assets, net	5,069	6,002
Goodwill	15,008	14,123
Intangible assets, net	16,486	18,055
Deferred tax assets, net	32	64
Other non-current assets	13,701	6,845
Total assets	282,453	278,671
Current liabilities:
Accounts payable	2,633	6,388
Accrued compensation and related benefits	11,502	16,948
Accrued and other current liabilities	4,772	5,581
Operating lease liabilities - current portion	1,504	1,412
Deferred revenues - current portion	29,267	26,019
Billings in excess of recognized revenues	240	1,852
Total current liabilities	49,918	58,200
Long-term income taxes payable	2,820	2,622
Non-current portion of operating lease liabilities	4,922	5,932
Other non-current liabilities	3,229	1,905
Total liabilities	60,889	68,659
Commitments and contingencies (Note 12)
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 49,694 and 48,613, respectively; shares outstanding 38,245 and 37,431, respectively	6	6
Additional paid-in-capital	467,304	447,415
Treasury stock at cost, 11,449 and 11,182 shares, respectively	(143,587)	(133,709)
Accumulated deficit	(98,932)	(101,150)
Accumulated other comprehensive loss	(3,227)	(2,550)
Total stockholders' equity	221,564	210,012
Total liabilities and stockholders' equity	$ 282,453	$ 278,671

XML

CONDENSED CONSOLIDATED BALANCE SHEETS (Parentheticals) - USD ($) shares in Thousands, $ in Thousands	Sep. 30, 2023	Dec. 31, 2022
CONDENSED CONSOLIDATED BALANCE SHEETS
Accounts receivable, net of allowance for credit losses	$ 890
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)	49,694	48,613
Common stock, shares outstanding (in shares)	38,245	37,431
Treasury stock, shares (in shares)	11,449	11,182

XML

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS - USD ($) shares in Thousands, $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2023	Sep. 30, 2022	Sep. 30, 2023	Sep. 30, 2022
Revenues:
Revenues	$ 42,350	$ 39,860	$ 124,710	$ 108,026
Costs and Expenses:
Costs of revenues	14,282	12,545	38,555	36,116
Research and development	13,113	14,303	38,428	41,766
Selling, general and administrative	15,611	12,005	46,022	32,614
Amortization of acquired intangible assets	328	318	979	946
Interest and other expense (income), net	(2,018)	(1,511)	(4,000)	(2,812)
Income (loss) before income tax expense (benefit)	1,034	2,200	4,726	(604)
Income tax expense	(6,006)	(815)	(2,508)	(3,308)
Net income (loss)	(4,972)	1,385	2,218	(3,912)
Other comprehensive income (loss):
Foreign currency translation adjustments, net of tax	(552)	(1,394)	(679)	(2,828)
Change in unrealized gain (loss) related to available-for-sale debt securities, net of tax	(5)	17	2	(17)
Total other comprehensive (loss)	(557)	(1,377)	(677)	(2,845)
Comprehensive income (loss)	$ (5,529)	$ 8	$ 1,541	$ (6,757)
Net income (loss) per share:
Basic	$ (0.13)	$ 0.04	$ 0.06	$ (0.10)
Diluted	$ (0.13)	$ 0.04	$ 0.06	$ (0.10)
Weighted average common shares used to calculate net income (loss) per share:
Basic	38,187	37,226	37,930	37,285
Diluted	38,187	38,054	38,977	37,285
Analytics
Revenues:
Revenues	$ 39,497	$ 32,879	$ 112,957	$ 94,422
Integrated Yield Ramp
Revenues:
Revenues	$ 2,853	$ 6,981	$ 11,753	$ 13,604

XML

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY - USD ($) shares in Thousands, $ in Thousands	Common Stock Outstanding	Additional Paid-in Capital	Treasury Stock	Accumulated Deficit	Accumulated Other Comprehensive Loss	Total
Balances (in shares) at Dec. 31, 2021	37,411		10,003
Balances at Dec. 31, 2021	$ 6	$ 423,069	$ (104,705)	$ (97,721)	$ (1,064)	$ 219,585
Issuance of common stock in connection with employee stock purchase plan (in shares)	95
Issuance of common stock in connection with employee stock purchase plan		1,502				1,502
Issuance of common stock in connection with exercise of options (in shares)	75
Issuance of common stock in connection with exercise of options		675				675
Vesting of restricted stock units (in shares)	232
Purchases of treasury stock in connection with tax withholdings on restricted stock grants (in shares)			113
Purchases of treasury stock in connection with tax withholdings on restricted stock grants			$ (3,389)			(3,389)
Repurchase of common stock			$ (5,778)			(5,778)
Repurchase of common stock (in shares)	(219)		219
Stock-based compensation expense		5,553				5,553
Comprehensive income (loss)				(4,150)	(431)	(4,581)
Balances (in shares) at Mar. 31, 2022	37,594		10,335
Balances at Mar. 31, 2022	$ 6	430,799	$ (113,872)	(101,871)	(1,495)	213,567
Balances (in shares) at Dec. 31, 2021	37,411		10,003
Balances at Dec. 31, 2021	$ 6	423,069	$ (104,705)	(97,721)	(1,064)	219,585
Comprehensive income (loss)						(6,757)
Balances (in shares) at Sep. 30, 2022	37,295		11,153
Balances at Sep. 30, 2022	$ 6	441,705	$ (132,966)	(101,633)	(3,909)	203,203
Balances (in shares) at Mar. 31, 2022	37,594		10,335
Balances at Mar. 31, 2022	$ 6	430,799	$ (113,872)	(101,871)	(1,495)	213,567
Issuance of common stock in connection with exercise of options (in shares)	12
Issuance of common stock in connection with exercise of options		113				113
Vesting of restricted stock units (in shares)	84
Purchases of treasury stock in connection with tax withholdings on restricted stock grants (in shares)			33
Purchases of treasury stock in connection with tax withholdings on restricted stock grants			$ (800)			(800)
Repurchase of common stock	$ (715)		$ (16,693)			(16,693)
Repurchase of common stock (in shares)			715
Stock-based compensation expense		3,872				3,872
Comprehensive income (loss)				(1,147)	(1,037)	(2,184)
Balances (in shares) at Jun. 30, 2022	36,975		11,083
Balances at Jun. 30, 2022	$ 6	434,784	$ (131,365)	(103,018)	(2,532)	197,875
Issuance of common stock in connection with employee stock purchase plan (in shares)	92
Issuance of common stock in connection with employee stock purchase plan		1,509				1,509
Issuance of common stock in connection with exercise of options (in shares)	22
Issuance of common stock in connection with exercise of options		276				276
Vesting of restricted stock units (in shares)	206
Purchases of treasury stock in connection with tax withholdings on restricted stock grants (in shares)			70
Purchases of treasury stock in connection with tax withholdings on restricted stock grants			$ (1,601)			(1,601)
Stock-based compensation expense		5,136				5,136
Comprehensive income (loss)				1,385	(1,377)	8
Balances (in shares) at Sep. 30, 2022	37,295		11,153
Balances at Sep. 30, 2022	$ 6	441,705	$ (132,966)	(101,633)	(3,909)	203,203
Balances (in shares) at Dec. 31, 2022	37,431		11,182
Balances at Dec. 31, 2022	$ 6	447,415	$ (133,709)	(101,150)	(2,550)	210,012
Issuance of common stock in connection with employee stock purchase plan (in shares)	98
Issuance of common stock in connection with employee stock purchase plan		1,663				1,663
Issuance of common stock in connection with exercise of options (in shares)	21
Issuance of common stock in connection with exercise of options		345				345
Vesting of restricted stock units (in shares)	286
Purchases of treasury stock in connection with tax withholdings on restricted stock grants (in shares)			133
Purchases of treasury stock in connection with tax withholdings on restricted stock grants			$ (4,101)			(4,101)
Stock-based compensation expense		4,884				4,884
Comprehensive income (loss)				355	267	622
Balances (in shares) at Mar. 31, 2023	37,836		11,315
Balances at Mar. 31, 2023	$ 6	454,307	$ (137,810)	(100,795)	(2,283)	213,425
Balances (in shares) at Dec. 31, 2022	37,431		11,182
Balances at Dec. 31, 2022	$ 6	447,415	$ (133,709)	(101,150)	(2,550)	210,012
Comprehensive income (loss)						1,541
Balances (in shares) at Sep. 30, 2023	38,245		11,449
Balances at Sep. 30, 2023	$ 6	467,304	$ (143,587)	(98,932)	(3,227)	221,564
Balances (in shares) at Mar. 31, 2023	37,836		11,315
Balances at Mar. 31, 2023	$ 6	454,307	$ (137,810)	(100,795)	(2,283)	213,425
Issuance of common stock in connection with exercise of options (in shares)	6
Issuance of common stock in connection with exercise of options		87				87
Vesting of restricted stock units (in shares)	37
Purchases of treasury stock in connection with tax withholdings on restricted stock grants (in shares)			11
Purchases of treasury stock in connection with tax withholdings on restricted stock grants			$ (468)			(468)
Stock-based compensation expense		4,678				4,678
Comprehensive income (loss)				6,835	(387)	6,448
Balances (in shares) at Jun. 30, 2023	37,879		11,326
Balances at Jun. 30, 2023	$ 6	459,072	$ (138,278)	(93,960)	(2,670)	224,170
Issuance of common stock in connection with employee stock purchase plan (in shares)	125
Issuance of common stock in connection with employee stock purchase plan		2,169				2,169
Issuance of common stock in connection with exercise of options (in shares)	2
Issuance of common stock in connection with exercise of options		37				37
Vesting of restricted stock units (in shares)	260
Purchases of treasury stock in connection with tax withholdings on restricted stock grants (in shares)			102
Purchases of treasury stock in connection with tax withholdings on restricted stock grants			$ (4,566)			(4,566)
Repurchase of common stock	$ (21)		$ (743)			(743)
Repurchase of common stock (in shares)			21
Stock-based compensation expense		6,026				6,026
Comprehensive income (loss)				(4,972)	(557)	(5,529)
Balances (in shares) at Sep. 30, 2023	38,245		11,449
Balances at Sep. 30, 2023	$ 6	$ 467,304	$ (143,587)	$ (98,932)	$ (3,227)	$ 221,564

XML

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - USD ($) $ in Thousands	9 Months Ended
	Sep. 30, 2023	Sep. 30, 2022
Cash flows from operating activities:
Net income (loss)	$ 2,218	$ (3,912)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization	3,778	4,173
Stock-based compensation expense	15,561	14,561
Amortization of acquired intangible assets	2,659	2,605
Amortization of costs capitalized to obtain revenue contracts	1,494	1,127
Net (accretion of discounts) and amortization of premiums on short-term investments	(734)	(41)
Deferred taxes	43	46
Other	(106)
Changes in operating assets and liabilities:
Accounts receivable	1,185	(14,999)
Prepaid expenses and other current assets	(7,038)	(2,750)
Operating lease right-of-use assets	904	1,510
Other non-current assets	(928)	1,479
Accounts payable	(2,697)	(2,852)
Accrued compensation and related benefits	(5,342)	3,624
Accrued and other liabilities	393	2,560
Deferred revenues	3,681	2,322
Billings in excess of recognized revenues	(1,612)	183
Operating lease liabilities	(888)	(1,613)
Net cash provided by (used in) operating activities	12,571	8,023
Cash flows from investing activities:
Proceeds from maturities and sales of short-term investments	28,800	136,000
Purchases of property and equipment	(8,574)	(6,651)
Prepayment for the purchase of property and equipment	(343)	(54)
Purchase of intangible assets	(150)	(150)
Payment for business acquisition, net of cash acquired	(1,823)
Net cash provided by (used in) investing activities	(14,235)	83,354
Cash flows from financing activities:
Proceeds from exercise of stock options	469	1,064
Proceeds from employee stock purchase plan	3,832	3,011
Payments for taxes related to net share settlement of equity awards	(9,135)	(5,790)
Repurchases of common stock	(743)	(22,471)
Net cash used in financing activities	(5,577)	(24,186)
Effect of exchange rate changes on cash and cash equivalents	(763)	(1,147)
Net change in cash and cash equivalents	(8,004)	66,044
Cash and cash equivalents at beginning of period	119,624	27,684
Cash and cash equivalents at end of period	111,620	93,728
Supplemental disclosure of cash flow information:
Cash paid during the period for taxes	3,568	2,001
Cash paid for amounts included in the measurement of operating lease liabilities	1,160	1,219
Supplemental disclosure of noncash information:
Property and equipment received and accrued in accounts payable and accrued and other liabilities	697	2,200
Property and equipment transferred to sales-type lease	6,002
Advances for purchase of fixed assets transferred from prepaid assets to property and equipment	$ 66	336
Operating lease liabilities arising from obtaining right-of-use assets		$ 2,268

XML

DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

9 Months Ended

Sep. 30, 2023

BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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, 2022, filed with the SEC on March 1, 2023.

The interim unaudited 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 accompanying interim unaudited condensed consolidated balance sheet as of December 31, 2022 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 accounting principles generally accepted in the United States of America 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 condensed consolidated financial statements include revenue recognition, the estimated useful lives of property and equipment and intangible assets, assumptions made in analysis of allowance for credit losses, impairment of goodwill and long-lived assets, valuation for deferred tax assets (“DTAs”), and accounting for lease obligations, stock-based compensation expense, and income tax uncertainties and contingencies. Actual results could differ from those estimates and may result in material effects on the Company’s operating results and financial position.

Recent Accounting Standards

Accounting Standards Adopted

In June 2016, the Financial Accounting Standards Board (“FASB’) issued Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU No. 2016-13”), which requires measurement and recognition of expected credit losses for financial assets held at the reporting date based on internal information, external information, or a combination of both relating to past events, current conditions, and reasonable and supportable forecasts. ASU No. 2016-13 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, ASU No. 2019-10 Financial Instruments-Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842), and ASU No. 2019-11 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.

The Company adopted this standard on January 1, 2023, using a modified retrospective approach, which requires a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption with prior periods not restated. The adoption of ASU No. 2016-13 did not have a material impact on the Company’s condensed consolidated financial statements.

Accounting Standards Not Yet Adopted

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

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REVENUE FROM CONTRACT WITH CUSTOMERS

9 Months Ended

Sep. 30, 2023

REVENUE FROM CONTRACT WITH CUSTOMERS

REVENUE FROM CONTRACT WITH CUSTOMERS

2. REVENUE FROM CONTRACTS WITH CUSTOMERS

The Company derives revenue from two sources: Analytics revenue and Integrated Yield Ramp revenue.

The Company recognizes revenue in accordance with FASB Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers, and its related amendments (collectively known as “ASC 606”). ASC 606 outlines a single comprehensive model to use in accounting for revenue arising from contracts with customers. 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 collectibility of consideration is probable.

Contracts with multiple performance obligations

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 on a relative basis using the standalone selling price (“SSP”).

Analytics Revenue

Analytics revenue is derived from the following primary offerings: licenses and services for standalone software (which is primarily Exensio^® and Cimetrix^® products), software-as-a-service (“SaaS”) (which is primarily Exensio^® products), and Design-for-Inspection™ (“DFI™”) systems and Characterization Vehicle^® (“CV^®”) systems that do not include performance incentives based on customers’ yield achievement.

Revenue from standalone software is recognized depending on whether the license is perpetual or time-based. Perpetual (one-time charge) license software is recognized at the time of the inception of the arrangement when control transfers to the customers if the software license is considered as a separate performance obligation from the services offered by the Company.

Revenue from post-contract support is recognized over the contract term on a straight-line basis, because the Company is providing (i) support and (ii) unspecified software updates on a when-and-if available basis over the contract term. Revenue from time-based-licensed software is allocated to each performance obligation and is recognized either at a point in time or over time as follows. The license component is recognized at the time when control transfers to customers, with the post-contract support component recognized ratably over the committed term of the contract. For contracts with any combination of licenses, support, and other services, distinct performance obligations are accounted for separately. For contracts with multiple performance obligations, the Company allocates the transaction price of the contract to each performance obligation on a relative basis using the SSP attributed to each performance obligation.

Revenue from SaaS arrangements, which allow for the use of a cloud-based software product or service over a contractually determined period of time without the customer having to take possession of software, is accounted for as a subscription and is recognized as revenue ratably, on a straight-line basis, over the subscription period beginning on the date the service is first made available to customers. For contracts with any combination of SaaS and related services, distinct performance obligations are accounted for separately. For contracts with multiple performance obligations, the Company allocates the transaction price of the contract to each performance obligation on a relative basis using the SSP attributed to each performance obligation.

Revenue from DFI systems and CV systems (including Characterization services) that do not include performance incentives based on customers’ yield achievement is recognized primarily as services are performed. Where there are distinct performance obligations, the Company allocates revenue to all deliverables based on their SSPs. For those contracts with multiple performance obligations, the Company allocates the transaction price of the contract to each performance obligation on a relative basis using the SSP attributed to each performance obligation. Where there are not discrete performance obligations, historically, revenue is primarily recognized as services are performed using a percentage of completion method based on costs or labor-hours inputs, whichever is the most appropriate measure of the progress towards completion of the contract. The estimation of percentage of completion method is complex and subject to many variables that require significant judgment. Please refer to the “Significant Judgments” section of this Note for further discussion.

Integrated Yield Ramp Revenue

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

Revenue under these project-based contracts, which are delivered over a specific period of time, typically for a fixed fee component paid on a set schedule, is recognized as services are performed using a percentage of completion method based on costs or labor-hours inputs, whichever is the most appropriate measure of the progress towards completion of the contract. Where there are distinct performance obligations, the Company allocates revenue to all deliverables based on their SSPs and allocates the transaction price of the contract to each performance obligation on a relative basis using SSP. Similar to the services provided in connection with DFI systems and CV systems that are contributing to Analytics revenue, due to the nature of the work performed in these arrangements, the estimation of percentage of completion method is complex and subject to many variables that require significant judgment. Please refer to the “Significant Judgments” section of this Note for further discussion.

The Gainshare contained in Integrated Yield Ramp contracts is a variable fee related to continued usage of the Company’s intellectual property after the fixed-fee service period ends, based on a customer’s yield achievement. Revenue derived from Gainshare is contingent upon the Company’s customers reaching certain defined production yield levels. Gainshare periods are generally subsequent to the delivery of all contractual services and performance obligations. The Company records Gainshare as a usage-based royalty derived from customers’ usage of intellectual property and records it in the same period in which the usage occurs.

Disaggregation of Revenue

The Company disaggregates revenue from contracts with customers into the timing of the transfer of goods and services and the geographical regions. 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 Company’s performance obligations are satisfied either over time or at a point-in-time. The following table represents a disaggregation of revenue percentage by timing of revenue:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Over time	68	%	68	%	74	%	70	%
Point-in-time	32	%	32	%	26	%	30	%
Total	100	%	100	%	100	%	100	%

International revenues accounted for approximately 42% and 54% of the Company’s total revenues during the three months ended September 30, 2023 and 2022, respectively. International revenues accounted for approximately 44% and 51% of the Company’s total revenues during the nine months ended September 30, 2023 and 2022, respectively. See Note 9, Customer and Geographic Information.

Significant Judgments

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

For revenue under project-based contracts for fixed-price 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, software licenses and provide services, including professional services, technical support services, and rights to unspecified updates to a customer. Determining whether licenses and services are distinct performance obligations that should be accounted for separately, or not distinct and thus accounted for together, requires significant judgment. The Company rarely licenses software on a standalone basis, so the Company is required to estimate the range of SSPs for each performance obligation. In instances where SSP is not directly observable because the Company does not license the software or sell the service separately, the Company determines the SSP using information that may include market conditions and other observable inputs.

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

Contract Balances

The Company performs its obligations under a contract with a customer by licensing software or providing 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 software or services transferred to a customer 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 service contracts when the revenue recognized exceeds the amount billed to the customer. The contract assets are generally classified as current and are recorded on a net basis with deferred revenue (i.e., contract liabilities) at the contract level. As of September 30, 2023 and December 31, 2022, the total contract assets included in prepaid expenses and other current assets in the accompanying condensed consolidated balance sheets were $8.1 million and $3.3 million, respectively. The Company did not record any asset impairment charges related to contract assets for the periods presented.

Deferred revenues and billings in excess of recognized revenues consist substantially of amounts invoiced in advance of revenue recognition and are recognized as the revenue recognition criteria are met. Deferred revenues that will be recognized during the succeeding twelve-month period are recorded as current deferred revenues and the remaining portion is recorded in other non-current liabilities in the accompanying condensed consolidated balance sheets. As of September 30, 2023, and December 31, 2022, the non-current portion of deferred revenues included in non-current liabilities was $2.3 million and $1.9 million, respectively. Revenue recognized that was included in the deferred revenues and billings in excess of recognized revenues balances at the beginning of each reporting period was $13.1 million and $10.6 million during the three months ended September 30, 2023 and 2022, respectively, and $23.8 million and $16.3 million during the nine months ended September 30, 2023 and 2022, respectively.

As of September 30, 2023, 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 $218.3 million. Given the applicable contract terms with customers, more than half of this amount is expected to be recognized as revenue over the next two years with the remainder to be recognized thereafter. This amount does not include insignificant contracts to which the customer is not committed, nor significant contracts for which the Company recognizes revenue equal to the amount the Company has the right to invoice for services performed, or future sales-based or usage-based royalty payments in exchange for a license of intellectual property. This amount is subject to change due to future revaluations of variable consideration, terminations, other contract modifications, or currency adjustments. The estimated timing of the recognition of remaining unsatisfied performance obligations is subject to change and is affected by changes to the scope, change in timing of delivery of products and services, or contract modifications.

The adjustment to revenue recognized from performance obligations satisfied (or partially satisfied) in previous periods was a decrease of $0.6 million and an increase of $1.9 million during the three months ended September 30, 2023 and 2022, respectively, and an increase of $4.3 million and an increase of $0.4 million during the nine months ended September 30, 2023 and 2022, respectively. These amounts primarily represent changes in estimated percentage-of-completion based contracts and changes in actual versus estimated Gainshare.

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. Amortization expense related to these capitalized costs is recognized over the period associated with the revenue from which the cost was incurred. Total capitalized direct sales commission costs included in prepaid expenses and other current assets in the accompanying condensed consolidated balance sheets as of September 30, 2023, and December 31, 2022, were $2.0 million and $1.7 million, respectively. Total capitalized direct sales commission costs included in other non-current assets in the accompanying condensed consolidated balance sheets as of September 30, 2023, and December 31, 2022, were $2.5 million and $2.1 million, respectively. Amortization of these assets was $0.5 million and $0.4 million during the three months ended September 30, 2023 and 2022, respectively, and $1.5 million and $1.1 million during the nine months ended September 30, 2023 and 2022. There was no impairment loss in relation to the costs capitalized for the periods presented.

Practical expedient

The Company does not adjust the transaction price for the effects of a significant financing component when the period between the transfers of the promised good or service to the customer and payment for that good or service by the customer is expected to be one year or less. The Company assessed each of its revenue generating arrangements in order to determine whether a significant financing component exists, and determined its contracts did not include a significant financing component during the three and nine months ended September 30, 2023 and 2022.

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BALANCE SHEET COMPONENTS

9 Months Ended

Sep. 30, 2023

BALANCE SHEET COMPONENTS

BALANCE SHEET COMPONENTS

3. BALANCE SHEET COMPONENTS

Accounts receivable

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 $14.3 million and $13.5 million as of September 30, 2023, and December 31, 2022, 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 $0.8 million and $0.8 million as of September 30, 2023, and December 31, 2022, respectively.

The Company performs ongoing credit evaluations of its customers’ financial condition. An allowance for credit losses is maintained for probable credit losses based upon the Company’s assessment of the expected collectability of the accounts receivable. The allowance for credit losses is reviewed on a quarterly basis to assess the adequacy of the allowance.

Property and equipment

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

	September 30,		December 31,
	2023		2022
Computer equipment	$	12,076	$	11,853
Software		5,575		5,395
Furniture, fixtures, and equipment		2,491		2,484
Leasehold improvements		6,456		6,467
Laboratory and other equipment		4,770		4,431
Test equipment		27,866		28,403
Property and equipment in progress:
DFI™ system assets		21,123		22,231
CV® system and other assets		6,963		5,105
		87,320		86,369
Less: Accumulated depreciation and amortization		(49,487)		(46,195)
Total	$	37,833	$	40,174

Test equipment mainly includes DFI™ system and CV^® system assets at customer sites that are contributing to revenue. Property and equipment in progress represent the development or construction of property and equipment that have not yet been placed in service for the Company’s intended use and are not depreciated. 

Depreciation and amortization expense was $1.2 million and $1.4 million during the three months ended September 30, 2023 and 2022, respectively, and $3.8 million and $4.2 million during the nine months ended September 30, 2023 and 2022, respectively.

Goodwill and Intangible Assets, Net

As of September 30, 2023, and December 31, 2022, the carrying amount of goodwill was $15.0 million and $14.1 million, respectively. Refer to Note 13, Business Combination, for the discussion about additional goodwill recognized during the three and nine months ended September 30, 2023.

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

		September 30, 2023						December 31, 2022
	Amortization	Gross				Net		Gross				Net
	Period	Carrying		Accumulated		Carrying		Carrying		Accumulated		Carrying
	(Years)	Amount		Amortization		Amount		Amount		Amortization		Amount
Acquired identifiable intangibles:
Customer relationships	1-10	$	9,505	$	(7,170)	$	2,335	$	9,407	$	(6,684)	$	2,723
Developed technology	4-9		34,627		(21,463)		13,164		33,635		(19,647)		13,988
Tradename and trademarks	2-10		1,598		(999)		599		1,598		(918)		680
Patent	6-10		2,100		(1,760)		340		2,100		(1,696)		404
Noncompetition agreements	3		848		(800)		48		848		(588)		260
Total		$	48,678	$	(32,192)	$	16,486	$	47,588	$	(29,533)	$	18,055

The weighted average amortization period for acquired identifiable intangible assets was 5.5 years as of September 30, 2023. The following table summarizes intangible assets amortization expense in the accompanying condensed consolidated statements of comprehensive income (loss) (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Amortization of acquired technology included under costs of revenues	$	574	$	553	$	1,680	$	1,659
Amortization of acquired intangible assets presented separately under costs and expenses		328		318		979		946
Total amortization of acquired intangible assets	$	902	$	871	$	2,659	$	2,605

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

Year Ending December 31,	Amount
2023 (remaining three months)	$	890
2024		3,233
2025		3,069
2026		2,899
2027		2,747
2028 and thereafter		3,648
Total future amortization expense	$	16,486

There were no impairment charges for goodwill and intangible assets during the three and nine months ended September 30, 2023 and 2022.

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LEASES

9 Months Ended

Sep. 30, 2023

LEASES

LEASES

4. LEASES

The Company leases administrative and sales offices and certain equipment under non-cancellable operating leases, which contain various renewal options and, in some cases, require payment of common area costs, taxes and utilities. These operating leases expire at various dates through 2028. The Company had no leases that were classified as a financing lease as of September 30, 2023, and December 31, 2022.

In the first quarter of 2022, the Company early terminated an office lease contract. The termination of this lease reduced the Company’s operating lease right-of-use assets and lease liabilities by approximately $0.5 million and $0.6 million, respectively. The gain from the lease termination of approximately $0.1 million was recorded under selling, general, and administrative expense in the accompanying condensed consolidated statement of comprehensive income (loss) for the nine months ended September 30, 2022.

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

	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Operating lease expense (1)	$	382	$	375	$	1,153	$	1,073
Short-term lease and variable lease expense (2)		239		244		673		801
Total lease expense	$	621	$	619	$	1,826	$	1,874

(1) Net of gain recognized upon lease termination of $0.1 million in the nine months ended September 30, 2022.

(2) Leases with an initial term of 12 months or less are not recorded on the accompanying condensed consolidated balance sheets, and the Company recognizes lease expense for these leases on a straight-line basis over the lease term. Variable lease expense for the periods presented primarily included common area maintenance charges.

Supplemental condensed consolidated balance sheets information related to operating leases was as follows:

	September 30,			December 31,
	2023			2022
Weighted average remaining lease term under operating leases (in years)		4.7			5.3
Weighted average discount rate for operating lease liabilities		4.89	%		4.87	%

Maturities of operating lease liabilities as of September 30, 2023, were as follows (in thousands):

Year Ending December 31,	Amount (1)
2023 (remaining three months)	$	422
2024		1,619
2025		1,539
2026		1,354
2027		1,294
2028 and thereafter		992
Total future minimum lease payments		7,220
Less: Interest (2)		(794)
Present value of future minimum lease payments under operating lease liabilities (3)	$	6,426

(1) As of September 30, 2023, the total operating lease liability includes approximately $0.9 million related to an option to extend a lease term that is reasonably certain to be exercised.

(2) Calculated using incremental borrowing interest rate for each lease.

(3) Includes the current portion of operating lease liabilities of $1.5 million as of September 30, 2023.

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STOCKHOLDERS' EQUITY

9 Months Ended

Sep. 30, 2023

STOCKHOLDERS EQUITY

STOCKHOLDERS' EQUITY

5. STOCKHOLDERS’ EQUITY

Stock Repurchase Program

On June 4, 2020, the Company’s Board of Directors adopted a stock repurchase program (the “2020 Program”) to repurchase up to $25.0 million of the Company’s common stock both on the open market and in privately negotiated transactions, including through Rule 10b5-1 plans, over the next two years. During the nine months ended September 30, 2022, 218,858 shares were repurchased by the Company under the 2020 Program at an average price of $26.40 per share for an aggregate total price of $5.8 million. In total, 470,070 shares were repurchased under the 2020 Program at an average price of $21.91 per share, for an aggregate total price of $10.3 million.

On April 11, 2022, the Board of Directors terminated the 2020 Program, and adopted a new program (the “2022 Program”) to repurchase up to $35.0 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 nine months ended September 30, 2022, 714,600 shares were repurchased by the Company under the 2022 Program at an average price of $23.36 per share for an aggregate total price of $16.7 million. During the nine months ended September 30, 2023, 21,340 shares were repurchased by the Company under the 2022 Program at an average price of $34.81 per share for an aggregate total price of $0.7 million. In total, the Company has repurchased 735,940 shares under the 2022 Program at an average price of $23.69 per share for an aggregate total price of $17.4 million.

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EMPLOYEE BENEFIT PLANS

9 Months Ended

Sep. 30, 2023

EMPLOYEE BENEFIT PLANS

EMPLOYEE BENEFIT PLANS

6. EMPLOYEE BENEFIT PLANS

On September 30, 2023, the Company had the following stock-based compensation plans:

Employee Stock Purchase Plan

In July 2001, the Company’s stockholders initially approved the 2001 Employee Stock Purchase Plan, which was subsequently amended and restated in 2010 (as amended, the “2010 Purchase Plan”) to extend the term of the plan through May 17, 2020. Under the 2010 Purchase Plan, eligible employees could contribute up to 10% of their compensation, as defined in the 2010 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 2010 Purchase Plan provided for twenty-four-month offering periods with four six-month purchase periods in each offering period. The 2010 Purchase Plan expired on May 17, 2020. Existing offering periods under the 2010 Plan continued through the applicable expiration date and the final offering period expired on January 31, 2022. On June 15, 2021, the Company’s stockholders approved the 2021 Employee Stock Purchase Plan, which has a ten-year term (the “2021 Purchase Plan” and, together with the 2010 Purchase Plan, the “Employee Purchase Plans”). The terms of the 2021 Purchase Plan are substantially similar to those of the 2010 Purchase Plan. A twenty-four-month offering period under the 2021 Purchase Plan commenced on August 1, 2021.

The Company estimated the fair value of purchase rights granted under the 2021 Purchase Plan during the period using the Black-Scholes-Merton option-pricing model with the following weighted average assumptions, resulting in the following weighted average fair values:

	Nine Months Ended September 30,
	2023			2022
Expected life (in years)		1.25			1.25
Volatility		43.66	%		48.73	%
Risk-free interest rate		5.15	%		2.75	%
Expected dividend		—			—
Weighted average fair value of purchase rights granted during the period	$	15.71		$	10.00

During the three months ended September 30, 2023, a total of 125,392 shares were issued under the 2021 Purchase Plan, at a weighted average purchase price of $17.30 per share. During the three months ended September 30, 2022, a total of 92,043 shares were issued under the 2021 Purchase Plan, at a weighted-average purchase price of $16.40 per share. During the nine months ended September 30, 2023, a total of 223,608 shares were issued under the 2021 Purchase Plan, at a weighted average purchase price of $17.14 per share. During the nine months ended September 30, 2022, a total of 182,083 shares were issued under the 2021 Purchase Plan, at a weighted average purchase price of $16.15 per share. During the nine months ended September 30, 2022, a total of 5,203 shares were issued under the 2010 Purchase Plan, at a weighted average purchase price of $13.40 per share. As of September 30, 2023, unrecognized compensation cost related to the 2021 Purchase Plan was $3.9 million. This estimated unrecognized cost is expected to be recognized over a weighted average period of 1.7 years.

As of September 30, 2023, 594,309 shares were available for future issuance under the 2021 Purchase Plan.

Stock Incentive Plans

On 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 approved by the stockholders through the date of this report, the “2011 Plan”) and currently expires in 2033. Under the 2011 Plan, the Company may award stock options, stock appreciation rights (“SARs”), 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 the 2011 Plan is 13.8 million shares, plus up to 3.5 million shares previously issued under the 2001 Stock Plan adopted by the Company in 2001, which expired in 2011 (the “2001 Plan”) that are either (i) forfeited or (ii) repurchased by the Company or are 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 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 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.

As of September 30, 2023, 14.3 million shares of common stock were reserved to cover stock-based awards under the 2011 Plan, of which 3.7 million shares were available for future grant. The number of shares reserved and available under the 2011 Plan includes 0.5 million shares that were subject to awards previously made under the 2001 Plan and were forfeited, expired or repurchased by the Company after the adoption of the 2011 Plan through September 30, 2023. As of September 30, 2023, there were no outstanding awards that had been granted outside of the 2011 or 2001 Plans (collectively, the “Stock Plans”).

The Company estimated the fair value of share-based awards granted under the 2011 Stock Plan during the period using the Black-Scholes-Merton option-pricing model. There were no stock options granted during the three and nine months ended September 30, 2023 and 2022.

Stock-Based Compensation

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

	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Costs of revenues	$	1,120	$	854	$	3,022	$	2,237
Research and development		2,196		2,180		5,609		7,158
Selling, general, and administrative		2,683		2,102		6,930		5,166
Stock-based compensation expense	$	5,999	$	5,136	$	15,561	$	14,561

Stock-based compensation capitalized in the capitalized software development costs included in property and equipment, net, was immaterial for the three and nine months ended September 30, 2023.

Additional information with respect to options under the Stock Plans during the nine months ended September 30, 2023, is as follows:

	Outstanding Options
				Weighted
		Weighted		Average
		Average		Remaining	Aggregate
	Number of	Exercise		Contractual	Intrinsic
	Options	Price		Term	Value
	(in thousands)	per Share		(Years)	(in thousands)
Outstanding, December 31, 2022	68	$	16.11
Granted	—		—
Exercised	(29)		16.39
Canceled	—		—
Expired	—		—
Outstanding, September 30, 2023	39	$	15.91	4.40	$	654
Vested and expected to vest, September 30, 2023	39	$	15.91	4.40	$	653
Exercisable, September 30, 2023	36	$	15.80	4.21	$	604

The aggregate intrinsic value in the table above represents the total intrinsic value based on the Company’s closing stock price of $32.40 per share as of September 30, 2023. The total intrinsic value of options exercised was $0.6 million during the nine months ended September 30, 2023.

Total remaining unrecognized compensation cost related to unvested stock options as of September 30, 2023, which is expected to be fully recognized in 2023, and total fair value of shares vested during the nine months ended September 30, 2023, were immaterial.

Nonvested restricted stock unit activity during the nine months ended September 30, 2023, was as follows:

		Weighted
		Average Grant
	Shares	Date Fair Value
	(in thousands)	Per Share
Nonvested, December 31, 2022	2,124	$	21.29
Granted	753	$	43.92
Vested	(829)	$	20.46
Forfeited	(18)	$	25.87
Nonvested, September 30, 2023	2,030	$	29.98

As of September 30, 2023, there was $48.6 million of total unrecognized compensation cost related to restricted stock units. That cost is expected to be recognized over a weighted average period of 2.7 years. Restricted stock units do not have rights to dividends prior to vesting.

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INCOME TAXES

9 Months Ended

Sep. 30, 2023

INCOME TAXES

INCOME TAXES

7. INCOME TAXES

Income tax expense decreased by $0.8 million for the nine months ended September 30, 2023, to a $2.5 million income tax expense as compared to a $3.3 million income tax expense for the nine months ended September 30, 2022. The Company’s effective tax rate was 53.1% and (547.7%) for the nine months ended September 30, 2023 and 2022, respectively. The Company’s effective tax rate increased in the nine months ended September 30, 2023, as compared to the same period in 2022, primarily due to changes in the foreign and state taxes and year-to-date recognition of worldwide pre-tax income (loss) in relation to their forecasted amounts for full years. Our provision for income taxes for the nine months ended September 30, 2023, was primarily attributable to foreign and state taxes.

The Company’s total amount of unrecognized tax benefits, excluding interest and penalties, as of September 30, 2023, was $15.9 million, of which $2.0 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, 2022, was $15.1 million, of which $2.0 million, if recognized, would affect the Company’s effective tax rate. As of September 30, 2023, the Company has recorded unrecognized tax benefits of $2.5 million, including interest and penalties of $0.6 million, as long-term taxes payable in the accompanying condensed consolidated balance sheet. The remaining $14.0 million has been recorded within the Company’s DTAs, which is subject to a full valuation allowance.

The valuation allowance was approximately $59.2 million as of September 30, 2023, and December 31, 2022, which was related to U.S. net federal and state DTAs. The worldwide net DTAs balance as of September 30, 2023, and December 31, 2022, were not significant.

The Company conducts business globally and, as a result, files numerous consolidated and separate income tax returns in the U.S. federal and various state and foreign jurisdictions. For U.S. federal and California income tax purposes, the statute of limitations currently remains open for the tax years ended 2019 to present and 2018 to present, respectively. In addition, due to net operating loss carryback claims, the tax years 2013 through 2015 may be subject to federal examination and all of the net operating loss and research and development credit carryforwards that may be utilized in future years may be subject to federal and state examination. The Company is not subject to income tax examinations in any other of its major foreign subsidiaries’ jurisdictions.

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NET INCOME (LOSS) PER SHARE

9 Months Ended

Sep. 30, 2023

NET INCOME (LOSS) PER SHARE

NET INCOME (LOSS) PER SHARE

8. NET INCOME (LOSS) PER SHARE

Basic net income (loss) per share is computed by dividing net income (loss) by weighted average number of common shares outstanding for the period (excluding outstanding stock options and shares subject to repurchase). Diluted net income (loss) per share is computed using the weighted average number of common shares outstanding for the period plus the potential effect of dilutive securities which are convertible into common shares (using the treasury stock method), except in cases in which the effect would be anti-dilutive. The following is a reconciliation of the numerators and denominators used in computing basic and diluted net income (loss) per share (in thousands except per share amount):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Numerator:
Net income (loss)	$	(4,972)	$	1,385	$	2,218	$	(3,912)
Denominator:
Basic weighted average shares outstanding		38,187		37,226		37,930		37,285
Effect of dilutive stock options, unvested restricted stock units, and shares of common stock expected to be issued under employee stock purchase plan(s)		—		828		1,047		—
Diluted weighted average shares outstanding		38,187		38,054		38,977		37,285
Net income (loss) per share:
Basic	$	(0.13)	$	0.04	$	0.06	$	(0.10)
Diluted	$	(0.13)	$	0.04	$	0.06	$	(0.10)

For the three months ended September 30, 2023 and for the nine months ended September 30, 2022, because the Company was in a loss position, diluted net loss per share is the same as basic net loss per share as the inclusion of the potential common shares would have been anti-dilutive.

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

	Three Months Ended September 30,		Nine Months Ended September 30,
	2023	2022	2023	2022
Outstanding options	23	—	—	63
Non-vested restricted stock units	1,391	62	223	784
Employee Stock Purchase Plan	38	—	—	75
Total	1,452	62	223	922

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CUSTOMER AND GEOGRAPHIC INFORMATION

9 Months Ended

Sep. 30, 2023

CUSTOMER AND GEOGRAPHIC INFORMATION

CUSTOMER AND GEOGRAPHIC INFORMATION

9. 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, allocation of resources, and assessing financial performance. Accordingly, the Company considers itself to be in one operating and reporting segment, specifically the provision of services for differentiated data and analytics solutions to the semiconductor and electronics industries.

Revenues from an individual customer that are approximately 10% or more of the Company’s consolidated total revenues are as follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
Customer	2023		2022		2023		2022
A	38	%	28	%	36	%	30	%
B	*	%	16	%	10	%	11	%

Gross accounts receivable balances (including amounts that are unbilled) from individual customers that are approximately 10% or more of the Company’s gross accounts receivable balance are as follows:

	September 30,		December 31,
Customer	2023		2022
A	44	%	29	%
B	*	%	12	%
C	*	%	12	%

* represents less than 10%

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

	Three Months Ended September 30,
	2023				2022
			Percentage				Percentage
	Revenues		of Revenues		Revenues		of Revenues
United States	$	24,477	58	%	$	18,292	46	%
China		7,549	18			9,555	24
Rest of the world		10,324	24			12,013	30
Total revenue	$	42,350	100	%	$	39,860	100	%

	Nine Months Ended September 30,
	2023				2022
			Percentage				Percentage
	Revenues		of Revenues		Revenues		of Revenues
United States	$	70,090	56	%	$	52,869	49	%
China		21,927	18			18,214	17
Rest of the world		32,693	26			36,943	34
Total revenue	$	124,710	100	%	$	108,026	100	%

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

	September 30,		December 31,
	2023		2022
United States (1)	$	45,419	$	44,730
Rest of the world		1,207		1,446
Total long-lived assets, net	$	46,626	$	46,176

(1) Includes assets deployed at customer sites which could be outside the U.S.

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FAIR VALUE MEASUREMENTS

9 Months Ended

Sep. 30, 2023

FAIR VALUE MEASUREMENTS

FAIR VALUE MEASUREMENTS

10. 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 September 30, 2023, and December 31, 2022, and the basis for those measurements (in thousands):

	Fair Value Measurements Using
			Quoted
			Prices in
			Active		Significant
			Markets for		Other
			Identical		Observable		Significant
	September 30,		Assets		Inputs		Unobservable
Assets	2023		(Level 1)		(Level 2)		Inputs (Level 3)
Cash equivalents
Money market mutual funds	$	92,113	$	92,113	$	—	$	—
Short-term investments (available-for-sale debt securities)
U.S. Government securities (1)		23,744		23,744		—		—
Total	$	115,857	$	115,857	$	—	$	—

	Fair Value Measurements Using
			Quoted
			Prices in
			Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
	December 31,		Assets		Inputs		Inputs
Assets	2022		(Level 1)		(Level 2)		(Level 3)
Cash equivalents
Money market mutual funds	$	75,738	$	75,738	$	—	$	—
U.S. Government securities (1)		1,990		1,990		—		—
Short-term investments (available-for-sale debt securities)
U.S. Government securities (1)		19,557		19,557		—		—
Total	$	97,285	$	97,285	$	—	$	—

(1) As of September 30, 2023, and December 31, 2022, the amortized cost of the Company’s investments in U.S Government securities approximated their fair value due to their short-term maturities, and there have been no events or changes in circumstances that would have had a significant effect on the fair value of these securities in the periods presented. For the three and nine months ended September 30, 2023, there were no material realized or unrealized gains or losses, either individually or in the aggregate.

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COMMITMENTS AND CONTINGENCIES

9 Months Ended

Sep. 30, 2023

COMMITMENTS AND CONTINGENCIES

COMMITMENTS AND CONTINGENCIES

11. COMMITMENTS AND CONTINGENCIES

Strategic Partnership with Advantest — See Note 12, Strategic Partnership Agreement with Advantest and Related Party Transactions, for the discussion about the Company’s commitments under the strategic partnership with Advantest.

Operating Leases — Refer to Note 4, Leases, for the discussion about the Company’s lease commitments.

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 into in the ordinary course of business. As of September 30, 2023, total outstanding purchase obligations were $24.6 million, the majority of which is due within the next 15 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.

Legal Proceedings — 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 September 30, 2023, the Company was not party to any material legal proceedings for which a loss was probable or an amount was accrued. From time to time, the Company may enter into contingent fee arrangements with external legal firms that may represent the Company in legal proceedings related to disputes. Contingent legal fees are accrued by the Company when they are probable and reasonably estimable.  

On May 6, 2020, the Company initiated an arbitration proceeding with the Hong Kong International Arbitration Center against SMIC New Technology Research & Development (Shanghai) Corporation (“SMIC”) due to SMIC’s failure to pay fees due to the Company under a series of contracts. The Company seeks to recover the unpaid fees, a declaration requiring SMIC to pay fees under the contracts in the future (or a lump sum payment to end the contract), and costs associated with

bringing the arbitration proceeding. SMIC denies liability and an arbitration hearing was held in February 2023. Final written submissions were submitted by the parties at the end of August. A decision is expected potentially within this calendar year.

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STRATEGIC PARTNERSHIP AGREEMENT WITH ADVANTEST AND RELATED PARTY TRANSACTIONS

9 Months Ended

Sep. 30, 2023

STRATEGIC PARTNERSHIP AGREEMENT WITH ADVANTEST AND RELATED PARTY TRANSACTIONS

STRATEGIC PARTNERSHIP AGREEMENT WITH ADVANTEST AND RELATED PARTY TRANSACTIONS

12. STRATEGIC PARTNERSHIP AGREEMENT WITH ADVANTEST AND RELATED PARTY TRANSACTIONS

In July 2020, the Company entered into a long-term strategic partnership with Advantest Corporation through its wholly-owned subsidiary, Advantest America, Inc. (collectively referred to herein as “Advantest”).

Analytics revenue recognized from Advantest was $2.6 million and $2.8 million during the three months ended September 30, 2023 and 2022, respectively, and $6.2 million and $8.1 million during the nine months ended September 30, 2023 and 2022, respectively. Accounts receivable from Advantest was not material as of September 30, 2023 and amounted to $0.3 million as of December 31, 2022. Deferred revenue amounted to $12.1 million and $7.1 million as of September 30, 2023, and December 31, 2022, respectively.

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BUSINESS COMBINATION

9 Months Ended

Sep. 30, 2023

BUSINESS COMBINATION

BUSINESS COMBINATION

13. BUSINESS COMBINATION

On July 5, 2023 (the “Acquisition Date”), the Company, through its wholly-owned subsidiary in Canada, PDF Solutions Canada, Ltd., acquired 100% of the equity interest in Lantern Machinery Analytics, Inc. headquartered in Canada, a privately-held provider of automated image analysis and feature extraction artificial intelligence/machine learning software for critical inspection and metrology steps at battery cell development and manufacturing processes for the electric vehicle industry. This software will enhance the Company’s Exensio analytics platform and product offerings to new and existing battery manufacturer customers. The total cash consideration for this acquisition was $1.8 million, net of cash acquired, for all of the outstanding equity of Lantern Machinery Analytics, Inc.

The Company accounted for this acquisition as a business combination in accordance with FASB ASC Topic 805, Business Combinations. This method requires that assets acquired and liabilities assumed in a business combination be recognized at their respective estimated fair values as of the Acquisition Date. The excess of purchase consideration over the fair value of net tangible and identifiable intangible assets acquired was recorded as goodwill. The goodwill recorded from this acquisition represents business benefits the Company anticipates from the acquired workforce and expectation for expanded sales opportunities to foster further business growth. Due to the nature of the transaction, the goodwill associated with the acquisition is not deductible for tax purposes. As of September 30, 2023, payment made for this acquisition, net of cash acquired, amounted to $1.8 million and was funded from available cash of the Company.

The allocation of the purchase price for this acquisition, as of the date of the acquisition, is as follows (in thousands, except amortization period):

			Amortization
	Amount		Period (Years)
Allocation of Purchase Price:
Assets
Fair value of tangible assets (including cash of $265)	$	450
Fair value of intangible assets:
Developed technology		1,010	8
Customer relationships		100	6
Goodwill		895	N/A
Total assets acquired	$	2,455
Liabilities
Deferred tax liabilities	$	294
Accounts payable and accrued expenses		73
Total liabilities assumed		367
Total purchase price allocation	$	2,088

Pro forma results of operations have not been presented because the effect of the acquisition was not material to the Company’s financial results.

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SIGNIFICANT ACCOUNTING POLICIES (Policies)

9 Months Ended

Sep. 30, 2023

BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation, Policy

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, 2022, filed with the SEC on March 1, 2023.

The interim unaudited 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 accompanying interim unaudited condensed consolidated balance sheet as of December 31, 2022 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

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 condensed consolidated financial statements include revenue recognition, the estimated useful lives of property and equipment and intangible assets, assumptions made in analysis of allowance for credit losses, impairment of goodwill and long-lived assets, valuation for deferred tax assets (“DTAs”), and accounting for lease obligations, stock-based compensation expense, and income tax uncertainties and contingencies. Actual results could differ from those estimates and may result in material effects on the Company’s operating results and financial position.

Revenue from Contracts with Customers, Policy

The Company derives revenue from two sources: Analytics revenue and Integrated Yield Ramp revenue.

The Company recognizes revenue in accordance with FASB Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers, and its related amendments (collectively known as “ASC 606”). ASC 606 outlines a single comprehensive model to use in accounting for revenue arising from contracts with customers. 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 collectibility of consideration is probable.

Contracts with multiple performance obligations

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 on a relative basis using the standalone selling price (“SSP”).

Analytics Revenue

Analytics revenue is derived from the following primary offerings: licenses and services for standalone software (which is primarily Exensio^® and Cimetrix^® products), software-as-a-service (“SaaS”) (which is primarily Exensio^® products), and Design-for-Inspection™ (“DFI™”) systems and Characterization Vehicle^® (“CV^®”) systems that do not include performance incentives based on customers’ yield achievement.

Revenue from standalone software is recognized depending on whether the license is perpetual or time-based. Perpetual (one-time charge) license software is recognized at the time of the inception of the arrangement when control transfers to the customers if the software license is considered as a separate performance obligation from the services offered by the Company.

Revenue from post-contract support is recognized over the contract term on a straight-line basis, because the Company is providing (i) support and (ii) unspecified software updates on a when-and-if available basis over the contract term. Revenue from time-based-licensed software is allocated to each performance obligation and is recognized either at a point in time or over time as follows. The license component is recognized at the time when control transfers to customers, with the post-contract support component recognized ratably over the committed term of the contract. For contracts with any combination of licenses, support, and other services, distinct performance obligations are accounted for separately. For contracts with multiple performance obligations, the Company allocates the transaction price of the contract to each performance obligation on a relative basis using the SSP attributed to each performance obligation.

Revenue from SaaS arrangements, which allow for the use of a cloud-based software product or service over a contractually determined period of time without the customer having to take possession of software, is accounted for as a subscription and is recognized as revenue ratably, on a straight-line basis, over the subscription period beginning on the date the service is first made available to customers. For contracts with any combination of SaaS and related services, distinct performance obligations are accounted for separately. For contracts with multiple performance obligations, the Company allocates the transaction price of the contract to each performance obligation on a relative basis using the SSP attributed to each performance obligation.

Revenue from DFI systems and CV systems (including Characterization services) that do not include performance incentives based on customers’ yield achievement is recognized primarily as services are performed. Where there are distinct performance obligations, the Company allocates revenue to all deliverables based on their SSPs. For those contracts with multiple performance obligations, the Company allocates the transaction price of the contract to each performance obligation on a relative basis using the SSP attributed to each performance obligation. Where there are not discrete performance obligations, historically, revenue is primarily recognized as services are performed using a percentage of completion method based on costs or labor-hours inputs, whichever is the most appropriate measure of the progress towards completion of the contract. The estimation of percentage of completion method is complex and subject to many variables that require significant judgment. Please refer to the “Significant Judgments” section of this Note for further discussion.

Integrated Yield Ramp Revenue

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

Revenue under these project-based contracts, which are delivered over a specific period of time, typically for a fixed fee component paid on a set schedule, is recognized as services are performed using a percentage of completion method based on costs or labor-hours inputs, whichever is the most appropriate measure of the progress towards completion of the contract. Where there are distinct performance obligations, the Company allocates revenue to all deliverables based on their SSPs and allocates the transaction price of the contract to each performance obligation on a relative basis using SSP. Similar to the services provided in connection with DFI systems and CV systems that are contributing to Analytics revenue, due to the nature of the work performed in these arrangements, the estimation of percentage of completion method is complex and subject to many variables that require significant judgment. Please refer to the “Significant Judgments” section of this Note for further discussion.

The Gainshare contained in Integrated Yield Ramp contracts is a variable fee related to continued usage of the Company’s intellectual property after the fixed-fee service period ends, based on a customer’s yield achievement. Revenue derived from Gainshare is contingent upon the Company’s customers reaching certain defined production yield levels. Gainshare periods are generally subsequent to the delivery of all contractual services and performance obligations. The Company records Gainshare as a usage-based royalty derived from customers’ usage of intellectual property and records it in the same period in which the usage occurs.

Contract Balances

Contract Balances

The Company performs its obligations under a contract with a customer by licensing software or providing 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 software or services transferred to a customer 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 service contracts when the revenue recognized exceeds the amount billed to the customer. The contract assets are generally classified as current and are recorded on a net basis with deferred revenue (i.e., contract liabilities) at the contract level. As of September 30, 2023 and December 31, 2022, the total contract assets included in prepaid expenses and other current assets in the accompanying condensed consolidated balance sheets were $8.1 million and $3.3 million, respectively. The Company did not record any asset impairment charges related to contract assets for the periods presented.

Deferred revenues and billings in excess of recognized revenues consist substantially of amounts invoiced in advance of revenue recognition and are recognized as the revenue recognition criteria are met. Deferred revenues that will be recognized during the succeeding twelve-month period are recorded as current deferred revenues and the remaining portion is recorded in other non-current liabilities in the accompanying condensed consolidated balance sheets. As of September 30, 2023, and December 31, 2022, the non-current portion of deferred revenues included in non-current liabilities was $2.3 million and $1.9 million, respectively. Revenue recognized that was included in the deferred revenues and billings in excess of recognized revenues balances at the beginning of each reporting period was $13.1 million and $10.6 million during the three months ended September 30, 2023 and 2022, respectively, and $23.8 million and $16.3 million during the nine months ended September 30, 2023 and 2022, respectively.

As of September 30, 2023, 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 $218.3 million. Given the applicable contract terms with customers, more than half of this amount is expected to be recognized as revenue over the next two years with the remainder to be recognized thereafter. This amount does not include insignificant contracts to which the customer is not committed, nor significant contracts for which the Company recognizes revenue equal to the amount the Company has the right to invoice for services performed, or future sales-based or usage-based royalty payments in exchange for a license of intellectual property. This amount is subject to change due to future revaluations of variable consideration, terminations, other contract modifications, or currency adjustments. The estimated timing of the recognition of remaining unsatisfied performance obligations is subject to change and is affected by changes to the scope, change in timing of delivery of products and services, or contract modifications.

The adjustment to revenue recognized from performance obligations satisfied (or partially satisfied) in previous periods was a decrease of $0.6 million and an increase of $1.9 million during the three months ended September 30, 2023 and 2022, respectively, and an increase of $4.3 million and an increase of $0.4 million during the nine months ended September 30, 2023 and 2022, respectively. These amounts primarily represent changes in estimated percentage-of-completion based contracts and changes in actual versus estimated Gainshare.

Significant Judgements, Policy

Significant Judgments

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

For revenue under project-based contracts for fixed-price 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, software licenses and provide services, including professional services, technical support services, and rights to unspecified updates to a customer. Determining whether licenses and services are distinct performance obligations that should be accounted for separately, or not distinct and thus accounted for together, requires significant judgment. The Company rarely licenses software on a standalone basis, so the Company is required to estimate the range of SSPs for each performance obligation. In instances where SSP is not directly observable because the Company does not license the software or sell the service separately, the Company determines the SSP using information that may include market conditions and other observable inputs.

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

Practical Expedient, Policy

Practical expedient

The Company does not adjust the transaction price for the effects of a significant financing component when the period between the transfers of the promised good or service to the customer and payment for that good or service by the customer is expected to be one year or less. The Company assessed each of its revenue generating arrangements in order to determine whether a significant financing component exists, and determined its contracts did not include a significant financing component during the three and nine months ended September 30, 2023 and 2022.

Accounts Receivable, Policy

Accounts receivable

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 $14.3 million and $13.5 million as of September 30, 2023, and December 31, 2022, 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 $0.8 million and $0.8 million as of September 30, 2023, and December 31, 2022, respectively.

Costs to obtain or fulfill a contract

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. Amortization expense related to these capitalized costs is recognized over the period associated with the revenue from which the cost was incurred. Total capitalized direct sales commission costs included in prepaid expenses and other current assets in the accompanying condensed consolidated balance sheets as of September 30, 2023, and December 31, 2022, were $2.0 million and $1.7 million, respectively. Total capitalized direct sales commission costs included in other non-current assets in the accompanying condensed consolidated balance sheets as of September 30, 2023, and December 31, 2022, were $2.5 million and $2.1 million, respectively. Amortization of these assets was $0.5 million and $0.4 million during the three months ended September 30, 2023 and 2022, respectively, and $1.5 million and $1.1 million during the nine months ended September 30, 2023 and 2022. There was no impairment loss in relation to the costs capitalized for the periods presented.

Stock-Based Compensation, Policy

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 plans was allocated as follows (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Costs of revenues	$	1,120	$	854	$	3,022	$	2,237
Research and development		2,196		2,180		5,609		7,158
Selling, general, and administrative		2,683		2,102		6,930		5,166
Stock-based compensation expense	$	5,999	$	5,136	$	15,561	$	14,561

Stock Incentive Plan, Policy

The Company estimated the fair value of share-based awards granted under the 2011 Stock Plan during the period using the Black-Scholes-Merton option-pricing model. There were no stock options granted during the three and nine months ended September 30, 2023 and 2022.

Employee Stock Purchase Plan, Policy

The Company estimated the fair value of purchase rights granted under the 2021 Purchase Plan during the period using the Black-Scholes-Merton option-pricing model with the following weighted average assumptions, resulting in the following weighted average fair values:

	Nine Months Ended September 30,
	2023			2022
Expected life (in years)		1.25			1.25
Volatility		43.66	%		48.73	%
Risk-free interest rate		5.15	%		2.75	%
Expected dividend		—			—
Weighted average fair value of purchase rights granted during the period	$	15.71		$	10.00

Net Income (Loss) Per Share, Policy

Basic net income (loss) per share is computed by dividing net income (loss) by weighted average number of common shares outstanding for the period (excluding outstanding stock options and shares subject to repurchase). Diluted net income (loss) per share is computed using the weighted average number of common shares outstanding for the period plus the potential effect of dilutive securities which are convertible into common shares (using the treasury stock method), except in cases in which the effect would be anti-dilutive.

Fair Value Measurement, Policy

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.

Business Combinations, Policy

The Company accounted for this acquisition as a business combination in accordance with FASB ASC Topic 805, Business Combinations. This method requires that assets acquired and liabilities assumed in a business combination be recognized at their respective estimated fair values as of the Acquisition Date. The excess of purchase consideration over the fair value of net tangible and identifiable intangible assets acquired was recorded as goodwill. The goodwill recorded from this acquisition represents business benefits the Company anticipates from the acquired workforce and expectation for expanded sales opportunities to foster further business growth. Due to the nature of the transaction, the goodwill associated with the acquisition is not deductible for tax purposes.

Accounting Standards, Policy

Recent Accounting Standards

Accounting Standards Adopted

In June 2016, the Financial Accounting Standards Board (“FASB’) issued Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU No. 2016-13”), which requires measurement and recognition of expected credit losses for financial assets held at the reporting date based on internal information, external information, or a combination of both relating to past events, current conditions, and reasonable and supportable forecasts. ASU No. 2016-13 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, ASU No. 2019-10 Financial Instruments-Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842), and ASU No. 2019-11 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.

The Company adopted this standard on January 1, 2023, using a modified retrospective approach, which requires a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption with prior periods not restated. The adoption of ASU No. 2016-13 did not have a material impact on the Company’s condensed consolidated financial statements.

Accounting Standards Not Yet Adopted

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

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REVENUE FROM CONTRACT WITH CUSTOMERS (Tables)

9 Months Ended

Sep. 30, 2023

REVENUE FROM CONTRACT WITH CUSTOMERS

Schedule of Disaggregation of Revenue

	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Over time	68	%	68	%	74	%	70	%
Point-in-time	32	%	32	%	26	%	30	%
Total	100	%	100	%	100	%	100	%

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BALANCE SHEET COMPONENTS (Tables)

9 Months Ended

Sep. 30, 2023

BALANCE SHEET COMPONENTS

Schedule of Property, Plant and Equipment

	September 30,		December 31,
	2023		2022
Computer equipment	$	12,076	$	11,853
Software		5,575		5,395
Furniture, fixtures, and equipment		2,491		2,484
Leasehold improvements		6,456		6,467
Laboratory and other equipment		4,770		4,431
Test equipment		27,866		28,403
Property and equipment in progress:
DFI™ system assets		21,123		22,231
CV® system and other assets		6,963		5,105
		87,320		86,369
Less: Accumulated depreciation and amortization		(49,487)		(46,195)
Total	$	37,833	$	40,174

Schedule of Finite-Lived Intangible Assets, Net

		September 30, 2023						December 31, 2022
	Amortization	Gross				Net		Gross				Net
	Period	Carrying		Accumulated		Carrying		Carrying		Accumulated		Carrying
	(Years)	Amount		Amortization		Amount		Amount		Amortization		Amount
Acquired identifiable intangibles:
Customer relationships	1-10	$	9,505	$	(7,170)	$	2,335	$	9,407	$	(6,684)	$	2,723
Developed technology	4-9		34,627		(21,463)		13,164		33,635		(19,647)		13,988
Tradename and trademarks	2-10		1,598		(999)		599		1,598		(918)		680
Patent	6-10		2,100		(1,760)		340		2,100		(1,696)		404
Noncompetition agreements	3		848		(800)		48		848		(588)		260
Total		$	48,678	$	(32,192)	$	16,486	$	47,588	$	(29,533)	$	18,055

Schedule of Finite-lived Intangible Assets Amortization Expense

	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Amortization of acquired technology included under costs of revenues	$	574	$	553	$	1,680	$	1,659
Amortization of acquired intangible assets presented separately under costs and expenses		328		318		979		946
Total amortization of acquired intangible assets	$	902	$	871	$	2,659	$	2,605

Schedule of Finite-Lived Intangible Assets, Future Amortization Expense

Year Ending December 31,	Amount
2023 (remaining three months)	$	890
2024		3,233
2025		3,069
2026		2,899
2027		2,747
2028 and thereafter		3,648
Total future amortization expense	$	16,486

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LEASES (Tables)

9 Months Ended

Sep. 30, 2023

LEASES

Schedule of Lease Expenses

	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Operating lease expense (1)	$	382	$	375	$	1,153	$	1,073
Short-term lease and variable lease expense (2)		239		244		673		801
Total lease expense	$	621	$	619	$	1,826	$	1,874

(1) Net of gain recognized upon lease termination of $0.1 million in the nine months ended September 30, 2022.

(2) Leases with an initial term of 12 months or less are not recorded on the accompanying condensed consolidated balance sheets, and the Company recognizes lease expense for these leases on a straight-line basis over the lease term. Variable lease expense for the periods presented primarily included common area maintenance charges.

Schedule of Supplemental Operating Lease Information

	September 30,			December 31,
	2023			2022
Weighted average remaining lease term under operating leases (in years)		4.7			5.3
Weighted average discount rate for operating lease liabilities		4.89	%		4.87	%

Schedule of Operating Lease Liabilities and Maturities

Year Ending December 31,	Amount (1)
2023 (remaining three months)	$	422
2024		1,619
2025		1,539
2026		1,354
2027		1,294
2028 and thereafter		992
Total future minimum lease payments		7,220
Less: Interest (2)		(794)
Present value of future minimum lease payments under operating lease liabilities (3)	$	6,426

(1) As of September 30, 2023, the total operating lease liability includes approximately $0.9 million related to an option to extend a lease term that is reasonably certain to be exercised.

(2) Calculated using incremental borrowing interest rate for each lease.

(3) Includes the current portion of operating lease liabilities of $1.5 million as of September 30, 2023.

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EMPLOYEE BENEFIT PLANS (Tables)

9 Months Ended

Sep. 30, 2023

EMPLOYEE BENEFIT PLANS

Schedule of Share-based Payment Awards, Stock Options, Valuation Assumptions

	Nine Months Ended September 30,
	2023			2022
Expected life (in years)		1.25			1.25
Volatility		43.66	%		48.73	%
Risk-free interest rate		5.15	%		2.75	%
Expected dividend		—			—
Weighted average fair value of purchase rights granted during the period	$	15.71		$	10.00

Schedule of Share-based Payment Arrangement, Expensed and Capitalized Amounts

	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Costs of revenues	$	1,120	$	854	$	3,022	$	2,237
Research and development		2,196		2,180		5,609		7,158
Selling, general, and administrative		2,683		2,102		6,930		5,166
Stock-based compensation expense	$	5,999	$	5,136	$	15,561	$	14,561

Schedule of Share-based Payment Arrangement, Options Activity - Additional Information

	Outstanding Options
				Weighted
		Weighted		Average
		Average		Remaining	Aggregate
	Number of	Exercise		Contractual	Intrinsic
	Options	Price		Term	Value
	(in thousands)	per Share		(Years)	(in thousands)
Outstanding, December 31, 2022	68	$	16.11
Granted	—		—
Exercised	(29)		16.39
Canceled	—		—
Expired	—		—
Outstanding, September 30, 2023	39	$	15.91	4.40	$	654
Vested and expected to vest, September 30, 2023	39	$	15.91	4.40	$	653
Exercisable, September 30, 2023	36	$	15.80	4.21	$	604

The aggregate intrinsic value in the table above represents the total intrinsic value based on the Company’s closing stock price of $32.40 per share as of September 30, 2023. The total intrinsic value of options exercised was $0.6 million during the nine months ended September 30, 2023.

Schedule of Share-based Payment Arrangement, Restricted Stock Unit Activity

		Weighted
		Average Grant
	Shares	Date Fair Value
	(in thousands)	Per Share
Nonvested, December 31, 2022	2,124	$	21.29
Granted	753	$	43.92
Vested	(829)	$	20.46
Forfeited	(18)	$	25.87
Nonvested, September 30, 2023	2,030	$	29.98

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NET INCOME (LOSS) PER SHARE (Tables)

9 Months Ended

Sep. 30, 2023

NET INCOME (LOSS) PER SHARE

Schedule of Earnings Per Share, Basic and Diluted

	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Numerator:
Net income (loss)	$	(4,972)	$	1,385	$	2,218	$	(3,912)
Denominator:
Basic weighted average shares outstanding		38,187		37,226		37,930		37,285
Effect of dilutive stock options, unvested restricted stock units, and shares of common stock expected to be issued under employee stock purchase plan(s)		—		828		1,047		—
Diluted weighted average shares outstanding		38,187		38,054		38,977		37,285
Net income (loss) per share:
Basic	$	(0.13)	$	0.04	$	0.06	$	(0.10)
Diluted	$	(0.13)	$	0.04	$	0.06	$	(0.10)

Schedule of Antidilutive Securities Excluded from Computation of Earnings Per Share

	Three Months Ended September 30,		Nine Months Ended September 30,
	2023	2022	2023	2022
Outstanding options	23	—	—	63
Non-vested restricted stock units	1,391	62	223	784
Employee Stock Purchase Plan	38	—	—	75
Total	1,452	62	223	922

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CUSTOMER AND GEOGRAPHIC INFORMATION (Tables)

9 Months Ended

Sep. 30, 2023

CUSTOMER AND GEOGRAPHIC INFORMATION

Schedule of Revenue by Major Customers by Reporting Segments

	Three Months Ended September 30,				Nine Months Ended September 30,
Customer	2023		2022		2023		2022
A	38	%	28	%	36	%	30	%
B	*	%	16	%	10	%	11	%

Gross accounts receivable balances (including amounts that are unbilled) from individual customers that are approximately 10% or more of the Company’s gross accounts receivable balance are as follows:

	September 30,		December 31,
Customer	2023		2022
A	44	%	29	%
B	*	%	12	%
C	*	%	12	%

* represents less than 10%

Schedule of Revenue from External Customers Attributed to Foreign Countries by Geographic Area

	Three Months Ended September 30,
	2023				2022
			Percentage				Percentage
	Revenues		of Revenues		Revenues		of Revenues
United States	$	24,477	58	%	$	18,292	46	%
China		7,549	18			9,555	24
Rest of the world		10,324	24			12,013	30
Total revenue	$	42,350	100	%	$	39,860	100	%

	Nine Months Ended September 30,
	2023				2022
			Percentage				Percentage
	Revenues		of Revenues		Revenues		of Revenues
United States	$	70,090	56	%	$	52,869	49	%
China		21,927	18			18,214	17
Rest of the world		32,693	26			36,943	34
Total revenue	$	124,710	100	%	$	108,026	100	%

Schedule of Disclosure on Geographic Areas, Long-Lived Assets in Individual Foreign Countries by Country

	September 30,		December 31,
	2023		2022
United States (1)	$	45,419	$	44,730
Rest of the world		1,207		1,446
Total long-lived assets, net	$	46,626	$	46,176

(1) Includes assets deployed at customer sites which could be outside the U.S.

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BUSINESS COMBINATION (Tables)

9 Months Ended

Sep. 30, 2023

Notes Tables

Schedule of allocated purchase price for business acquisition

			Amortization
	Amount		Period (Years)
Allocation of Purchase Price:
Assets
Fair value of tangible assets (including cash of $265)	$	450
Fair value of intangible assets:
Developed technology		1,010	8
Customer relationships		100	6
Goodwill		895	N/A
Total assets acquired	$	2,455
Liabilities
Deferred tax liabilities	$	294
Accounts payable and accrued expenses		73
Total liabilities assumed		367
Total purchase price allocation	$	2,088

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REVENUE FROM CONTRACT WITH CUSTOMERS (Details) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2023 USD ($)	Sep. 30, 2022 USD ($)	Sep. 30, 2023 USD ($) item	Sep. 30, 2022 USD ($)	Dec. 31, 2022 USD ($)
Number of revenue sources | item			2
Contract with Customer, Asset, after Allowance for Credit Loss, Current, Total	$ 8,100		$ 8,100		$ 3,300
Capitalized Contract Cost, Impairment Loss			$ 0	$ 0
Short-term deferred revenue			12 months
Revenue, Remaining Performance Obligation, Amount	218,300		$ 218,300
Contract with Customer, Performance Obligation Satisfied in Previous Period	600	$ 1,900	4,300	400
Amortization of Capitalized Contract Costs	500	400	1,500	1,100
Prepaid Expenses and Other Current Assets
Capitalized Contract Cost, Net, Total	2,000		2,000		1,700
Other Non-current Assets
Capitalized Contract Cost, Net, Total	2,500		2,500		2,100
Non-current Liabilities
Contract with Customer, Liability, Noncurrent Revenue Deferred	2,300		2,300		$ 1,900
Deferred Revenue and Billings in Excess of Recognized Revenue
Contract with Customer, Liability, Revenue Recognized	$ 13,100	$ 10,600	$ 23,800	$ 16,300
Geographic Concentration Risk | Revenue Benchmark
Percentage of Revenues	100.00%	100.00%	100.00%	100.00%
Geographic Concentration Risk | Revenue Benchmark | Non-US [Member]
Percentage of Revenues	42.00%	54.00%	44.00%	51.00%

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REVENUE FROM CONTRACT WITH CUSTOMERS - Disaggregation of Revenue (Details)	3 Months Ended		9 Months Ended
	Sep. 30, 2023	Sep. 30, 2022	Sep. 30, 2023	Sep. 30, 2022
Percent of revenues	100.00%	100.00%	100.00%	100.00%
Transferred over Time [Member]
Percent of revenues	68.00%	68.00%	74.00%	70.00%
Transferred at Point in Time [Member]
Percent of revenues	32.00%	32.00%	26.00%	30.00%

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REVENUE FROM CONTRACT WITH CUSTOMERS - Additional information (Details)	Sep. 30, 2023
Software License and Related Services Agreement [Member] | Advantest America, Inc. [Member] | Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction, Start Date [Axis]: 2022-04-01
Revenue recognition, expected period to recognize more than half of remaining performance obligations	2 years

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BALANCE SHEET COMPONENTS (Details) - USD ($)	3 Months Ended		9 Months Ended
	Sep. 30, 2023	Sep. 30, 2022	Sep. 30, 2023	Sep. 30, 2022	Dec. 31, 2022
Period over which current unbilled receivables are billed and collected			12 months
Depreciation, Depletion and Amortization, Nonproduction, Total	$ 1,200,000	$ 1,400,000	$ 3,800,000	$ 4,200,000
Impairment of Intangible Assets, Finite-lived			0	0
Goodwill	15,008,000		15,008,000		$ 14,123,000
Impairment of goodwill			0	0
Amortization of acquired intangible assets presented separately under Costs and Expenses	328,000	318,000	979,000	946,000
Total amortization of acquired intangible assets	902,000	871,000	$ 2,659,000	2,605,000
Weighted-average amortization period intangible assets			5 years 6 months
Accounts Receivable
Unbilled Receivables, Current	14,300,000		$ 14,300,000		13,500,000
Other Non-current Assets
Unbilled Receivables, Not Expected to be Billed and Collected in Next Twelve Months	800,000		800,000		$ 800,000
Costs of Revenues
Amortization of acquired technology included under Costs of revenues	574,000	553,000	1,680,000	1,659,000
Costs and Expenses
Amortization of acquired intangible assets presented separately under Costs and Expenses	$ 328,000	$ 318,000	$ 979,000	$ 946,000

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BALANCE SHEET COMPONENTS - Property and Equipment (Details) - USD ($) $ in Thousands	Sep. 30, 2023	Dec. 31, 2022
Property and equipment, gross	$ 87,320	$ 86,369
Less: accumulated depreciation and amortization	(49,487)	(46,195)
Total	37,833	40,174
Computer Equipment
Property and equipment, gross	12,076	11,853
Software
Property and equipment, gross	5,575	5,395
Furniture, Fixtures and Equipment
Property and equipment, gross	2,491	2,484
Leasehold Improvements
Property and equipment, gross	6,456	6,467
Laboratory and Other Equipment
Property and equipment, gross	4,770	4,431
Test Equipment
Property and equipment, gross	27,866	28,403
In-Progress DFI System Assets
Property and equipment, gross	21,123	22,231
In-Progress CV System and Other Assets
Property and equipment, gross	$ 6,963	$ 5,105

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BALANCE SHEET COMPONENTS - Intangible Assets (Details) - USD ($) $ in Thousands	9 Months Ended
	Sep. 30, 2023	Dec. 31, 2022
Weighted-average amortization period intangible assets	5 years 6 months
Gross Carrying Amount	$ 48,678	$ 47,588
Accumulated Amortization	(32,192)	(29,533)
Total future amortization expense	16,486
Net Carrying Amount, Total	16,486	18,055
Customer Relationships
Gross Carrying Amount	9,505	9,407
Accumulated Amortization	(7,170)	(6,684)
Total future amortization expense	$ 2,335	2,723
Customer Relationships | Minimum
Amortization Period (Year)	1 year
Customer Relationships | Maximum
Amortization Period (Year)	10 years
Developed Technology Rights
Gross Carrying Amount	$ 34,627	33,635
Accumulated Amortization	(21,463)	(19,647)
Total future amortization expense	$ 13,164	13,988
Developed Technology Rights | Minimum
Amortization Period (Year)	4 years
Developed Technology Rights | Maximum
Amortization Period (Year)	9 years
Tradename and Trademarks
Gross Carrying Amount	$ 1,598	1,598
Accumulated Amortization	(999)	(918)
Total future amortization expense	$ 599	680
Tradename and Trademarks | Minimum
Amortization Period (Year)	2 years
Tradename and Trademarks | Maximum
Amortization Period (Year)	10 years
Patents
Gross Carrying Amount	$ 2,100	2,100
Accumulated Amortization	(1,760)	(1,696)
Total future amortization expense	$ 340	404
Patents | Minimum
Amortization Period (Year)	6 years
Patents | Maximum
Amortization Period (Year)	10 years
Noncompete Agreements
Amortization Period (Year)	3 years
Gross Carrying Amount	$ 848	848
Accumulated Amortization	(800)	(588)
Total future amortization expense	$ 48	$ 260

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BALANCE SHEET COMPONENTS - Annual Amortization of Identifiable Intangible Assets (Details) $ in Thousands	Sep. 30, 2023 USD ($)
BALANCE SHEET COMPONENTS
2023 (remaining six months)	$ 890
2024	3,233
2025	3,069
2026	2,899
2027	2,747
2028 and thereafter	3,648
Total future amortization expense	$ 16,486

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LEASES - Other (Details) $ in Thousands	3 Months Ended	9 Months Ended
	Mar. 31, 2022 USD ($)	Sep. 30, 2023 USD ($) lease	Sep. 30, 2022 USD ($)	Dec. 31, 2022 USD ($) lease
Number of finance leases | lease		0		0
Operating Lease, Liability, Amount Related to Extension of Lease Term		$ 900
Operating Lease, Liability, Current		1,504		$ 1,412
Operating lease right of use assets decrease from early lease termination			$ 500
Operating lease liability decrease from early lease termination			$ 600
Selling, General, and Administrative
Lease termination gain	$ 100	$ 100

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LEASES - Lease Cost (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2023	Sep. 30, 2022	Sep. 30, 2023	Sep. 30, 2022	Dec. 31, 2022
LEASES
Operating lease expense	$ 382	$ 375	$ 1,153	$ 1,073
Short-term lease and variable lease expense	239	244	673	801
Total lease expense	$ 621	$ 619	$ 1,826	1,874
Weighted average remaining lease term under operating ROU leases (in years) (Year)	4 years 8 months 12 days		4 years 8 months 12 days		5 years 3 months 18 days
Weighted average discount rate for operating lease liabilities	4.89%		4.89%		4.87%
Operating lease ROU assets obtained (in thousands)				$ 2,268

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LEASES - Maturity of Operating Lease Liabilities (Details) $ in Thousands	Sep. 30, 2023 USD ($)
LEASES
2023 (remaining six months)	$ 422
2024	1,619
2025	1,539
2026	1,354
2027	1,294
2028 and thereafter	992
Total future minimum lease payments	7,220
Less: Interest (2)	(794)
Present value of future minimum lease payments under operating lease liabilities (3)	$ 6,426

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STOCKHOLDERS EQUITY (Details) - USD ($) $ / shares in Units, $ in Thousands			3 Months Ended						9 Months Ended		18 Months Ended	40 Months Ended
	Apr. 11, 2022	Jun. 04, 2020	Sep. 30, 2023	Jun. 30, 2023	Mar. 31, 2023	Sep. 30, 2022	Jun. 30, 2022	Mar. 31, 2022	Sep. 30, 2023	Sep. 30, 2022	Sep. 30, 2023	Sep. 30, 2023
Purchases of treasury stock in connection with tax withholdings on restricted stock grants			$ 4,566	$ 468	$ 4,101	$ 1,601	$ 800	$ 3,389
2020 Stock Repurchase Program
Stock Repurchase Program, Authorized Amount		$ 25,000
Stock Repurchase Program, Period in Force (Year)		2 years
Common stock repurchased										218,858		470,070
Repurchase of common stock, weighted-average price per share										$ 26.40		$ 21.91
Repurchases of common stock, cost										$ 5,800		$ 10,300
2022 Stock Repurchase Program
Stock Repurchase Program, Authorized Amount	$ 35,000
Stock Repurchase Program, Period in Force (Year)	2 years
Common stock repurchased									21,340	714,600	735,940
Repurchase of common stock, weighted-average price per share									$ 34.81	$ 23.36	$ 23.69
Repurchases of common stock, cost									$ 700	$ 16,700	$ 17,400

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EMPLOYEE BENEFIT PLANS - Other (Details) - USD ($) $ / shares in Units, $ in Millions				3 Months Ended		9 Months Ended		140 Months Ended	227 Months Ended
	Aug. 01, 2021	Jun. 15, 2021	Nov. 16, 2011	Sep. 30, 2023	Sep. 30, 2022	Sep. 30, 2023	Sep. 30, 2022	Jun. 30, 2023	May 17, 2020	Dec. 31, 2022
Stock Option Vesting Period						4 years
Common Stock, Closing Share Price				$ 32.40		$ 32.40
Options Exercised in Period, Intrinsic Value						$ 0.6
Restricted Stock Units (RSUs)
Unrecognized Compensation				$ 48.6		$ 48.6
Unrecognized Compensation Recognition Period						2 years 8 months 12 days
Employee Stock Plans
Stock Incentive Plans, Stock Option Awards Outstanding				39,000		39,000				68,000
Shares Previously Issued Under the 2001 Stock Plan
Stock Incentive Plans, Cumulative Share Forfeitures, Expirations and Repurchases								500,000
Shares Previously Issued Under the 2001 Stock Plan | Maximum
Stock Incentive Plans, Common Shares Reserved for Future Issuance			3,500,000
Shares Outside of the 2001, 2011 or IDS Plans
Stock Incentive Plans, Stock Option Awards Outstanding				0		0
2010 Stock Purchase Plan
ESPP, Employee Contribution Rate (Percentage of Compensation)									10.00%
ESPP, Share Purchase Price (Percentage of Fair Market Value)									85.00%
ESPP, Share Offering Period Duration									24 months
ESPP, Share Purchase Periods Within Each Offering Period									4
ESPP, Share Purchase Period Duration									6 months
ESPP, Shares Issued During Period							5,203
ESPP, Weighted Average Purchase Price							$ 13.40
2011 Stock Incentive Plan
Stock Incentive Plans, Common Shares Reserved for Future Issuance			13,800,000	14,300,000		14,300,000
Stock Incentive Plans, Shares Available for Future Grant				3,700,000		3,700,000
Stock Incentive Plans, Stock Options and Awards Granted						0	0
2011 Stock Incentive Plan | Stock Options
Stock Incentive Plans, Decrease in Share Reservation Rate			1.33
Stock Option Expiration Period			10 years
Stock Option Vesting Period			4 years
2021 Stock Purchase Plan
ESPP, Employee Contribution Rate (Percentage of Compensation)	10.00%
ESPP, Share Purchase Price (Percentage of Fair Market Value)	85.00%
ESPP, Share Offering Period Duration	24 months
ESPP, Share Purchase Periods Within Each Offering Period	4
ESPP, Share Purchase Period Duration	6 months
ESPP, Purchase Plan Term		10 years
ESPP, Shares Issued During Period				125,392	92,043	223,608	182,083
ESPP, Weighted Average Purchase Price				$ 17.30	$ 16.40	$ 17.14	$ 16.15
ESPP, Common Shares Reserved for Future Issuance				594,309		594,309
Unrecognized Compensation				$ 3.9		$ 3.9
Unrecognized Compensation Recognition Period						1 year 8 months 12 days

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EMPLOYEE BENEFIT PLANS - Valuation Assumptions for ESPP (Details) - 2021 Stock Purchase Plan - $ / shares	9 Months Ended
	Sep. 30, 2023	Sep. 30, 2022
Expected life (in years)	1 year 3 months	1 year 3 months
Volatility	43.66%	48.73%
Risk-free interest rate	5.15%	2.75%
Expected dividend	0.00%
Weighted average fair value of purchase rights granted during the period	$ 15.71	$ 10.00

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EMPLOYEE BENEFIT PLANS - Allocation of Recognized Period Costs (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2023	Sep. 30, 2022	Sep. 30, 2023	Sep. 30, 2022
Stock-based compensation expenses	$ 5,999	$ 5,136	$ 15,561	$ 14,561
Costs of Revenues
Stock-based compensation expenses	1,120	854	3,022	2,237
Research and Development
Stock-based compensation expenses	2,196	2,180	5,609	7,158
Selling, General, and Administrative
Stock-based compensation expenses	$ 2,683	$ 2,102	$ 6,930	$ 5,166

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EMPLOYEE BENEFIT PLANS - Stock Options Activity (Details) - Employee Stock Plans - USD ($) $ / shares in Units, shares in Thousands, $ in Thousands	9 Months Ended
	Sep. 30, 2023
Options Outstanding, Beginning Balance	68
Options Exercised	(29)
Options Expired	(1)
Options Outstanding, Ending Balance	39
Options Vested and Expected to Vest	39
Options Exercisable	36
Options Outstanding, Weighted Average Exercise Price, Beginning Balance	$ 16.11
Options Exercised, Weighted Average Exercise Price	16.39
Options Outstanding, Weighted Average Exercise Price, Ending Balance	15.91
Options Vested and Expected to Vest, Weighted Average Exercise Price	15.91
Options Exercisable, Weighted Average Exercise Price	$ 15.80
Options Outstanding, Weighted Average Remaining Contractual Term	4 years 4 months 24 days
Options Vested and Expected to Vest, Weighted Average Remaining Contractual Term	4 years 4 months 24 days
Options Exercisable, Weighted Average Remaining Contractual Term	4 years 2 months 15 days
Options Outstanding, Aggregate Intrinsic Value	$ 654
Options Vested and Expected to Vest, Aggregate Intrinsic Value	653
Options Exercisable, Aggregate Intrinsic Value	$ 604

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EMPLOYEE BENEFIT PLANS - Nonvested Restricted Stock Units Activity (Details) - Restricted Stock Units (RSUs) shares in Thousands	9 Months Ended
	Sep. 30, 2023 $ / shares shares
Non-vested RSUs, Opening Balance | shares	2,124
RSUs Granted | shares	753
RSUs Vested | shares	(829)
RSUs Forfeited | shares	(18)
Non-vested RSUs, Ending Balance | shares	2,030
Non-vested RSUs, Weighted Average Grant Date Fair Value | $ / shares	$ 21.29
RSUs Granted, Weighted Average Grant Date Fair Value | $ / shares	43.92
RSUs Vested, Weighted Average Grant Date Fair Value | $ / shares	20.46
RSUs Forfeited, Weighted Average Grant Date Fair Value | $ / shares	25.87
Non-vested RSUs, Weighted Average Grant Date Fair Value | $ / shares	$ 29.98

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INCOME TAXES (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2023	Sep. 30, 2022	Sep. 30, 2023	Sep. 30, 2022	Dec. 31, 2022
INCOME TAXES
Increase (Decrease) in Income Taxes			$ (800)
Income Tax Expense (Benefit), Total	$ 6,006	$ 815	$ 2,508	$ 3,308
Effective Income Tax Rate Reconciliation, Percent, Total			53.10%	(547.70%)
Unrecognized Tax Benefits, Ending Balance	15,900		$ 15,900		$ 15,100
Unrecognized Tax Benefits that Would Impact Effective Tax Rate	2,000		2,000		2,000
Unrecognized tax benefits including income tax penalties and interest accrued in long term liabilities	2,500		2,500
Unrecognized tax benefits related to income tax penalties and interest accrued in long-term liabilities	600		600
Unrecognized Tax Benefits In Deferred Tax Assets	14,000		14,000
Deferred Tax Assets, Valuation Allowance, Total	$ 59,200		$ 59,200		$ 59,200

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NET INCOME (LOSS) PER SHARE - Calculation of Earnings Per Share (Details) - USD ($) $ / shares in Units, shares in Thousands, $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2023	Sep. 30, 2022	Sep. 30, 2023	Sep. 30, 2022
NET INCOME (LOSS) PER SHARE
Net loss	$ (4,972)	$ 1,385	$ 2,218	$ (3,912)
Basic weighted-average shares outstanding (in shares)	38,187	37,226	37,930	37,285
Effect of dilutive stock options, unvested restricted stock units, and shares of common stock expected to be issued under Employee Purchase Plan		828	1,047
Diluted weighted-average shares outstanding (in shares)	38,187	38,054	38,977	37,285
Basic (in dollars per share)	$ (0.13)	$ 0.04	$ 0.06	$ (0.10)
Diluted (in dollars per share)	$ (0.13)	$ 0.04	$ 0.06	$ (0.10)

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NET INCOME (LOSS) PER SHARE - Anti-dilutive Securities (Details) - shares shares in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2023	Sep. 30, 2022	Sep. 30, 2023	Sep. 30, 2022
Anti-dilutive securities (in shares)	1,452	62	223	922
Stock Options
Anti-dilutive securities (in shares)	23			63
Restricted Stock Units (RSUs)
Anti-dilutive securities (in shares)	1,391	62	223	784
Employee Stock Purchase Plans
Anti-dilutive securities (in shares)	38			75

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CUSTOMER AND GEOGRAPHIC INFORMATION - Other (Details)	9 Months Ended
	Sep. 30, 2023
CUSTOMER AND GEOGRAPHIC INFORMATION
Number of Operating Segments	1
Number of Reportable Segments	1

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CUSTOMER AND GEOGRAPHIC INFORMATION - Revenue Percentage by Major Customers (Details) - Customer Concentration Risk	3 Months Ended		9 Months Ended		12 Months Ended	21 Months Ended
	Sep. 30, 2023	Sep. 30, 2022	Sep. 30, 2023	Sep. 30, 2022	Dec. 31, 2022	Sep. 30, 2023
Revenue Benchmark | Benchmark Percentage of Gross Revenues and Receivables
Revenues from External Customers and Long-Lived Assets [Line Items]
Concentration risk						10.00%
Revenue Benchmark | Customer A
Revenues from External Customers and Long-Lived Assets [Line Items]
Concentration risk	38.00%	28.00%	36.00%	30.00%
Revenue Benchmark | Customer B
Revenues from External Customers and Long-Lived Assets [Line Items]
Concentration risk		16.00%	10.00%	11.00%
Accounts Receivable | Benchmark Percentage of Gross Revenues and Receivables
Revenues from External Customers and Long-Lived Assets [Line Items]
Concentration risk						10.00%
Accounts Receivable | Customer A
Revenues from External Customers and Long-Lived Assets [Line Items]
Concentration risk			44.00%		29.00%
Accounts Receivable | Customer B
Revenues from External Customers and Long-Lived Assets [Line Items]
Concentration risk					12.00%
Accounts Receivable | Customer C
Revenues from External Customers and Long-Lived Assets [Line Items]
Concentration risk					12.00%

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CUSTOMER AND GEOGRAPHIC INFORMATION - Revenues by Geographic Area (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2023	Sep. 30, 2022	Sep. 30, 2023	Sep. 30, 2022
Revenues from External Customers and Long-Lived Assets [Line Items]
Revenues	$ 42,350	$ 39,860	$ 124,710	$ 108,026
Geographic Concentration Risk | Revenue Benchmark
Revenues from External Customers and Long-Lived Assets [Line Items]
Revenues	$ 42,350	$ 39,860	$ 124,710	$ 108,026
Percentage of Revenues	100.00%	100.00%	100.00%	100.00%
Geographic Concentration Risk | Revenue Benchmark | UNITED STATES
Revenues from External Customers and Long-Lived Assets [Line Items]
Revenues	$ 24,477	$ 18,292	$ 70,090	$ 52,869
Percentage of Revenues	58.00%	46.00%	56.00%	49.00%
Geographic Concentration Risk | Revenue Benchmark | CHINA
Revenues from External Customers and Long-Lived Assets [Line Items]
Revenues	$ 7,549	$ 9,555	$ 21,927	$ 18,214
Percentage of Revenues	18.00%	24.00%	18.00%	17.00%
Geographic Concentration Risk | Revenue Benchmark | Rest of the World
Revenues from External Customers and Long-Lived Assets [Line Items]
Revenues	$ 10,324	$ 12,013	$ 32,693	$ 36,943
Percentage of Revenues	24.00%	30.00%	26.00%	34.00%

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CUSTOMER AND GEOGRAPHIC INFORMATION - Long-lived Assets by Geographic Area (Details) - USD ($) $ in Thousands	Sep. 30, 2023	Dec. 31, 2022
Revenues from External Customers and Long-Lived Assets [Line Items]
Long-lived assets, net	$ 46,626	$ 46,176
UNITED STATES
Revenues from External Customers and Long-Lived Assets [Line Items]
Long-lived assets, net	45,419	44,730
Rest of the World
Revenues from External Customers and Long-Lived Assets [Line Items]
Long-lived assets, net	$ 1,207	$ 1,446

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FAIR VALUE MEASUREMENTS - Fair Value, Assets Measured on a Recurring Basis (Details) - USD ($) $ in Thousands	Sep. 30, 2023	Dec. 31, 2022
Total	$ 115,857	$ 97,285
Quoted Prices in Active Markets for Identical Assets (level 1)
Total	115,857	97,285
Money Market Mutual Funds
Cash equivalents	92,113	75,738
Money Market Mutual Funds | Quoted Prices in Active Markets for Identical Assets (level 1)
Cash equivalents	92,113	75,738
US Government Securities
Cash equivalents		1,990
Short-term investments (available-for-sale debt securities)	23,744	19,557
US Government Securities | Quoted Prices in Active Markets for Identical Assets (level 1)
Cash equivalents		1,990
Short-term investments (available-for-sale debt securities)	$ 23,744	$ 19,557

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COMMITMENTS AND CONTINGENCIES (Details) $ in Thousands	9 Months Ended
	Sep. 30, 2023 USD ($)
Future Lease payments	$ 7,220
Indemnifications
Term of Product Warranty	90 days
Purchase Obligations
Purchase Obligation, Total	$ 24,600
Period over which the majority of purchase obligations become due	15 months

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STRATEGIC PARTNERSHIP AGREEMENT WITH ADVANTEST AND RELATED PARTY TRANSACTIONS (Details) - Commercial Agreement With Advantest - USD ($) $ in Millions	3 Months Ended		9 Months Ended
	Sep. 30, 2023	Sep. 30, 2022	Sep. 30, 2023	Sep. 30, 2022	Dec. 31, 2022
Related party receivables					$ 0.3
Analytics
Advantest analytics revenue	$ 2.6	$ 2.8	$ 6.2	$ 8.1
Deferred revenue	$ 12.1		$ 12.1		$ 7.1

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BUSINESS COMBINATION - Other (Details) - Lantern Machinery Analytics, Inc. $ in Millions	Jul. 05, 2023 USD ($)
Business Acquisition [Line Items]
Equity interest acquired in business combination	100.00%
Consideration to acquire business, net of cash acquired	$ 1.8

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BUSINESS COMBINATION - Fair Values of Assets Acquired and Liabilities Assumed (Details) - USD ($) $ in Thousands	Sep. 30, 2023	Jul. 05, 2023	Dec. 31, 2022
Assets
Goodwill	$ 15,008		$ 14,123
Lantern Machinery Analytics, Inc.
Assets
Cash assumed		$ 265
Fair value of tangible assets (including cash of $265)		450
Goodwill		895
Total assets acquired		2,455
Liabilities
Deferred tax liabilities		294
Accounts payable and accrued expenses		73
Total liabilities assumed		367
Total purchase price allocation		2,088
Lantern Machinery Analytics, Inc. | Developed Technology Rights
Assets
Fair value of intangible assets		$ 1,010
Intangible asset amortization period		8 years
Lantern Machinery Analytics, Inc. | Customer Relationships
Assets
Fair value of intangible assets		$ 100
Intangible asset amortization period		6 years