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Table of Contents



 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 

 

 

 

For the Quarterly Period ended June 30, 2020

 

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, indicated by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

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

 

There were 36,521,286 shares of the Registrant’s Common Stock outstanding as of August 3, 2020.

 

 

 

 

TABLE OF CONTENTS

 

 

Page

PART I  FINANCIAL INFORMATION

  

Item 1. Financial Statements (Unaudited)

 

Condensed Consolidated Balance Sheets

3

Condensed Consolidated Statements of Comprehensive 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

37

Item 4. Controls and Procedures

38

PART II  OTHER INFORMATION

  

Item 1. Legal Proceedings

39

Item 1A. Risk Factors

39

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

40

Item 3. Defaults Upon Senior Securities

40

Item 4. Mine Safety Disclosures

40

Item 5. Other Information

40

Item 6. Exhibits

40

SIGNATURES

41

INDEX TO EXHIBITS

40

 

 

 

PART I — FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

 

PDF SOLUTIONS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)

(in thousands, except par value)

 

  

June 30,

  

December 31,

 
  

2020

  

2019

 

ASSETS

        

Current assets:

        

Cash and cash equivalents

 $103,441  $97,605 

Accounts receivable, net of allowance for doubtful accounts of $190 in 2020 and $213 in 2019

  28,666   40,651 

Prepaid expenses and other current assets

  8,627   9,320 

Total current assets

  140,734   147,576 

Property and equipment, net

  40,412   40,798 

Operating lease right-of-use assets, net

  7,056   7,609 

Goodwill

  2,293   2,293 

Intangible assets, net

  5,586   6,221 

Deferred tax assets, net

  29,522   25,327 

Other non-current assets

  8,093   9,720 

Total assets

 $233,696  $239,544 

LIABILITIES AND STOCKHOLDERS’ EQUITY

        

Current liabilities:

        

Accounts payable

 $2,763  $7,636 

Accrued compensation and related benefits

  5,285   5,072 

Accrued and other current liabilities

  1,368   1,665 

Operating lease liabilities – current portion

  1,880   1,867 

Deferred revenues – current portion

  10,087   10,639 

Billings in excess of recognized revenues

  497   1,117 

Total current liabilities

  21,880   27,996 

Long-term income taxes payable

  5,264   5,368 

Non-current operating lease liabilities

  7,033   7,677 

Other non-current liabilities

  1,814   2,346 

Total liabilities

  35,991   43,387 

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 42,421 and 41,797, respectively; shares outstanding 32,982 and 32,503, respectively

  5   5 

Additional paid-in-capital

  333,157   325,197 

Treasury stock at cost, 9,439 and 9,294 shares, respectively

  (93,968)  (91,695)

Accumulated deficit

  (40,050)  (35,870)

Accumulated other comprehensive loss

  (1,439)  (1,480)

Total stockholders’ equity

  197,705   196,157 

Total liabilities and stockholders’ equity

 $233,696  $239,544 

 

See accompanying Notes to Condensed Consolidated Financial Statements (unaudited)

 

 

 

PDF SOLUTIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(unaudited)

(in thousands, except per share amounts)

 

  

Three Months Ended June 30,

  

For the Six Months Ended June 30,

 
  

2020

  

2019

  

2020

  

2019

 

Revenues:

                

Analytics

 $15,172  $11,974  $28,420  $23,408 

Integrated Yield Ramp

  6,237   8,594   14,147   17,701 

Total revenues

  21,409   20,568   42,567   41,109 
                 

Costs and Expenses:

                

Costs of revenues

  8,946   7,832   17,433   15,700 

Research and development

  7,754   7,312   16,344   15,558 

Selling, general and administrative

  7,737   6,940   15,632   13,950 

Amortization of other acquired intangible assets

  174   154   347   262 

Restructuring charges

           92 

Interest and other expense (income), net

  150   (111)  170   (105)

Loss before income taxes

  (3,352)  (1,559)  (7,359)  (4,348)

Income tax expense (benefit)

  300   (849)  (3,179)  (947)

Net loss

 $(3,652) $(710) $(4,180) $(3,401)
                 

Other comprehensive income (loss):

                

Foreign currency translation adjustments, net of tax

  207   36   41   (16)

Comprehensive loss

 $(3,445) $(674) $(4,139) $(3,417)
                 

Net loss per share:

                

Basic

 $(0.11) $(0.02) $(0.13) $(0.10)

Diluted

 $(0.11) $(0.02) $(0.13) $(0.10)
                 

Weighted average common shares:

                

Basic

  32,886   32,339   32,795   32,412 

Diluted

  32,886   32,339   32,795   32,412 

 

 See accompanying Notes to Condensed Consolidated Financial Statements (unaudited)

  

 

 

PDF SOLUTIONS, INC.

CONDENDSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(unaudited)

(in thousands)

  

   

Six Months Ended June 30, 2020

 
                                                   

Accumulated

         
                   

Additional

                           

Other

   

Total

 
   

Common Stock

   

Paid-In

   

Treasury Stock

   

Accumulated

   

Comprehensive

   

Stockholders’

 
   

Shares

   

Amount

   

Capital

   

Shares

   

Amount

   

Deficit

   

Loss

   

Equity

 

Balances, December 31, 2019

    32,503     $ 5     $ 325,197       9,294     $ (91,695 )   $ (35,870 )   $ (1,480 )   $ 196,157  

Issuance of common stock in connection with employee stock purchase plan

    89       -       810       -       -       -       -       810  

Issuance of common stock in connection with exercise of options

    21       -       161       -       -       -       -       161  

Vesting of restricted stock units

    182       -       -       -       -       -       -       -  

Purchases of treasury stock in connection with tax withholdings on restricted stock grants

    -       -       -       93       (1,478 )     -       -       (1,478 )

Stock-based compensation expense

    -       -       3,513       -       -       -       -       3,513  

Comprehensive loss

    -       -       -       -       -       (528 )     (166 )     (694 )

Balances, March 31, 2020

    32,795       5       329,681       9,387       (93,173 )     (36,398 )     (1,646 )     198,469  

Issuance of common stock in connection with exercise of options

    56       -       463       -       -       -       -       463  

Vesting of restricted stock units

    131       -       -       -       -       -       -       -  

Purchases of treasury stock in connection with tax withholdings on restricted stock grants

    -       -       -       52       (795 )     -       -       (795 )

Stock-based compensation expense

    -       -       3,013       -       -       -       -       3,013  

Comprehensive income (loss)

    -       -       -       -       -       (3,652 )     207       (3,445 )

Balances, June 30, 2020

    32,982     $ 5     $ 333,157       9,439     $ (93,968 )   $ (40,050 )   $ (1,439 )   $ 197,705  

 

 See accompanying Notes to Condensed Consolidated Financial Statements (unaudited)

  

 

 

PDF SOLUTIONS, INC.

CONDENDSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(unaudited)

(in thousands)

 

   

Six Months Ended June 30, 2019

 
                                                   

Accumulated

         
                   

Additional

                           

Other

   

Total

 
   

Common Stock

   

Paid-In

   

Treasury Stock

   

Accumulated

   

Comprehensive

   

Stockholders’

 
   

Shares

   

Amount

   

Capital

   

Shares

   

Amount

   

Deficit

   

Loss

   

Equity

 

Balances, December 31, 2018

    32,382     $ 5     $ 310,660       8,295     $ (79,142 )   $ (30,452 )   $ (1,276 )   $ 199,795  

Issuance of common stock in connection with employee stock purchase plan

    87       -       782       -       -       -       -       782  

Issuance of common stock in connection with exercise of options

    87       -       518       -       -       -       -       518  

Vesting of restricted stock units

    104       -       -       -       -       -       -       -  

Purchases of treasury stock in connection with tax withholdings on restricted stock grants

    -       -       -       54       (557 )     -       -       (557 )

Repurchases of common stock

    (314 )     -       -       314       (3,917 )     -       -       (3,917 )

Stock-based compensation expense

    -       -       3,469       -       -       -       -       3,469  

Comprehensive loss

    -       -       -       -       -       (2,691 )     (52 )     (2,743 )

Balances, March 31, 2019

    32,346       5       315,429       8,663       (83,616 )     (33,143 )     (1,328 )     197,347  

Issuance of common stock in connection with exercise of options

    69       -       326       -       -       -       -       326  

Vesting of restricted stock units

    176       -       -       -       -       -       -       -  

Purchases of treasury stock in connection with tax withholdings on restricted stock grants

    -       -       -       72       (918 )     -       -       (918 )

Repurchases of common stock

    (300 )                 300       (3,790 )                 (3,790 )

Stock-based compensation expense

    -       -       2,601       -       -       -       -       2,601  

Comprehensive income (loss)

    -       -       -       -       -       (710 )     36       (674 )

Balances, June 30, 2019

    32,291     $ 5     $ 318,356       9,035     $ (88,324 )   $ (33,853 )   $ (1,292 )   $ 194,892  

 

See accompanying Notes to Condensed Consolidated Financial Statements (unaudited)

 

 

 

PDF SOLUTIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands)

   

   

For the Six Months Ended June 30,

 
   

2020

   

2019

 

Cash flows from operating activities:

               

Net loss

  $ (4,180 )   $ (3,401 )

Adjustments to reconcile net loss to net cash provided by operating activities:

               

Depreciation and amortization

    3,375       2,634  

Stock-based compensation expense

    6,346       5,910  

Amortization of acquired intangible assets

    635       549  

Amortization of costs capitalized to obtain revenue contracts

    234       227  

Reversal of allowance for doubtful accounts

    (23 )      

Loss on disposal and write-down in carrying value of property and equipment

    311       130  

Unrealized foreign currency (gain) loss

    (113 )     58  
Unrealized gain on foreign currency forward contract           (55 )

Deferred taxes

    (4,384 )     (2,423 )

Changes in operating assets and liabilities:

               

Accounts receivable

    12,008       (811 )

Prepaid expenses and other current assets

    544       532  

Operating lease right-of-use assets

    704       696  

Other non-current assets

    1,624       (485 )

Accounts payable

    (3,993 )     188  

Accrued compensation and related benefits

    198       433  

Accrued and other liabilities

    (133 )     (294 )

Deferred revenues

    (1,120 )     1,189  

Billings in excess of recognized revenues

    (620 )     453  

Operating lease liabilities

    (783 )     (564 )

Net cash provided by operating activities

    10,630       4,966  
                 

Cash flows from investing activities:

               

Purchases of property and equipment

    (3,940 )     (4,004 )

Payment for business acquisition

          (2,660 )

Cash used in investing activities

    (3,940 )     (6,664 )
                 

Cash flows from financing activities:

               

Proceeds from exercise of stock options

    624       844  

Proceeds from employee stock purchase plan

    810       782  

Payments for taxes related to net share settlement of equity awards

    (2,273 )     (1,475 )

Repurchases of common stock

          (7,707 )

Net cash used in financing activities

    (839 )     (7,556 )
                 

Effect of exchange rate changes on cash and cash equivalents

    (15 )     (18 )

Net change in cash and cash equivalents

    5,836       (9,272 )

Cash and cash equivalents, beginning of period

    97,605       96,089  

Cash and cash equivalents, end of period

  $ 103,441     $ 86,817  
                 

Supplemental disclosure of cash flow information:

               

Cash paid during the period for taxes

  $ 1,765     $ 887  

Cash paid for amounts included in the measurement of operating lease liabilities

  $ 922     $ 781  

Supplemental disclosure of noncash information:

               

Stock-based compensation capitalized as software development costs

  $ 190     $ 168  

Property and equipment received and accrued in accounts payable and accrued and other liabilities

  $ 280     $ 859  
Operating lease liabilities arising from obtaining right-of-use assets   $ 151     $  

  

See accompanying Notes to Condensed Consolidated Financial Statements (unaudited)

 

 

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, 2019.

 

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

 

The condensed consolidated balance sheet at December 31, 2019, has been derived from the audited consolidated financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America.

 

Reclassification of Prior Period Amounts

 

Certain prior period amounts have been reclassified to conform to the current year presentation of reporting unrealized foreign currency (gain) loss, operating lease right-of-use assets, and operating lease liabilities on the Condensed Consolidated Statements of Cash Flows. This reclassification had no effect on the Company’s reported net loss or net cash used in operating activities.

 

Change in Presentation

 

In the fourth quarter of 2019, in order to enhance the transparency of our revenue reporting, the Company updated its Condensed Consolidated Statements of Comprehensive Loss to change its historical presentation of revenue categories. Previously, the Company presented revenue on two lines: Solutions and Gainshare performance incentives.  Included within Solutions, was revenue from software and related revenue, SaaS solutions, Design-for-Inspection (DFI™) licenses, and fixed-price project-based solution implementation services. The previous Gainshare performance incentive category included only revenue from performance incentive programs. The Company now presents revenue in the following categories: Analytics and Integrated Yield Ramp.  Integrated Yield Ramp revenue is comprised of all revenue from the Company’s Integrated Yield Ramp services engagements that include performance incentives based on customers’ yield achievement, i.e. both fixed-fees and Gainshare royalty from such engagements. Analytics comprises all other revenue, including from the Company’s licenses and services for Exensio® Software, Exensio SaaS, DFI and Characterization Vehicle (CV®) systems that do not include performance incentives based on customers’ yield achievement.

 

 

8

 

The change in presentation of revenue does not change the Company’s net revenues or total cost of net revenues. The following table shows reclassified amounts to conform to the current period’s presentation (in thousands):

 

  

For the Three Months Ended June 30, 2019

  

For the Six Months Ended June 30, 2019

 
      

Change in

          

Change in

     
  

Previously

  

Presentation

  

Current

  

Previously

  

Presentation

  

Current

 
  

Reported

  

Reclassification

  

Presentation

  

Reported

  

Reclassification

  

Presentation

 

Revenues:

                        

Solutions

 $13,429  $(13,429)  N/A  $30,090  $(30,090)  N/A 

Gainshare performance incentives

  7,139   (7,139)  N/A   11,019   (11,019)  N/A 

Analytics

  N/A   11,974  $11,974   N/A   23,408  $23,408 

Integrated Yield Ramp

  N/A   8,594   8,594   N/A   17,701   17,701 

Total revenues

 $20,568  $  $20,568  $41,109  $  $41,109 

 

Since certain costs of revenues are attributed to both Analytics and Integrated Yield Ramp revenue categories, the Company believes it is more appropriate and meaningful to present the Condensed Consolidated Statements of Comprehensive Loss under a one-step presentation format that excludes any measure of gross margin. In the fourth quarter of 2019, the Company elected to change its Condensed Consolidated Statements of Comprehensive Loss presentation from a two-step presentation, where total costs of revenues was deducted from total revenues to report a gross profit line, to a one-step presentation, where total costs and expenses are deducted from total revenues. The change in presentation does not change previously presented amounts for costs of revenues, operating expenses and other expenses (income), or loss before income taxes.

 

Use of Estimates 

 

The preparation of financial statements in conformity with generally accepted accounting principles in the United States (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates in these financial statements include revenue recognition, assumptions made in analysis of allowance for doubtful accounts, impairment of goodwill and long-lived assets, realization of deferred tax assets, and accounting for lease obligations, stock-based compensation expense, and income taxes. Actual results could differ from those estimates.

 

The global COVID-19 pandemic has impacted the operations and purchasing decisions of companies worldwide. It also has created and may continue to create significant uncertainty in the global economy. The Company has undertaken measures to protect its employees, partners, customers, and vendors. In addition, the Company’s personnel worldwide are subject to various travel restrictions, which limit the ability of the Company to provide services to customers and affiliates. This impacts the Company's normal operations. To date, the Company has been able to provide uninterrupted access to its products and services due to its globally distributed workforce, many of whom are working remotely, and its pre-existing infrastructure that supports secure access to the Company’s internal systems. If, however, the COVID-19 pandemic has a substantial impact on the productivity of the Company’s employees or its partners’ or customers’ decision to use the Company’s products and services, the results of the Company’s operations and overall financial performance may be adversely impacted. The duration and extent of the impact from the COVID-19 pandemic depends on future developments that cannot be accurately predicted at this time. As of the date of issuance of the financial statements, the Company is not aware of any specific event or circumstance that would require updates to the Company’s estimates and judgments or revisions to the carrying value of its assets or liabilities. These estimates may change, as new events occur and additional information is obtained, and are recognized in the condensed consolidated financial statements as soon as they become known. Actual results could differ from those estimates and any such differences may be material to the financial statements.

 

Recently Adopted Accounting Standards

 

Intangibles – Goodwill and Other

 

In January 2017, the Financial Accounting Standards Board (or FASB) issued Accounting Standards Update (ASU) No. 2017-04, Intangibles – Goodwill and Other (Topic 350). This standard eliminates step 2 from the annual goodwill impairment test. This update was effective for the Company beginning in the first quarter of 2020. The Company adopted this standard on January 1, 2020, and it did not have a material impact on its condensed consolidated financial statements and footnote disclosures.

 

9

 

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

 

In August 2018, the FASB issued ASU No. 2018-15, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The new guidance clarifies the accounting for implementation costs incurred to develop or obtain internal-use software in cloud computing arrangements. Further, the standard also requires entities to expense the capitalized implementation costs of a hosting arrangement over the term of the hosting arrangement. This standard was effective for the Company beginning in the first quarter of 2020. ASU No. 2018-15 should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The Company adopted ASU No. 2018-15 on January 1, 2020 on a prospective basis. There was no material impact on the Company’s condensed consolidated financial statements as a result of adoption of ASU No. 2018-15. As of June 30, 2020, the implementation costs capitalized by the Company pertaining to a cloud computing arrangement related to sales order and customer relation management amounted to $0.2 million. The capitalized implementation costs were included in “Other noncurrent assets” on the Condensed Consolidated Balance sheet and within the operating activities section of the Company’s Condensed Consolidated Statement of Cash Flows for the six months ended June 30, 2020.  When the module or component of the hosting arrangement is ready for its intended use, the Company expects to amortize the capitalized implementation costs over the respective noncancellable period of the arrangement plus the period covered by an option to extend the arrangement that is reasonably certain of being exercised. There has been no amortization expense related these assets for the three and six months ended June 30, 2020. 

 

Management has reviewed other recently issued accounting pronouncements and has determined there are not any that would have a material impact on the condensed consolidated financial statements.

 

Accounting Standards Not Yet Effective

 

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASU 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.

 

Additionally, ASU No. 2019-10 defers the effective date for the adoption of the new standard on credit losses for public filers that are considered small reporting companies (“SRC”) as defined by the SEC to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, which will be fiscal 2023 for the Company if it continues to be classified as a SRC. In February 2020, the FASB issued ASU 2020-02, which provides guidance regarding methodologies, documentation, and internal controls related to expected credit losses. The subsequent amendments will have the same effective date and transition requirements as ASU No. 2016-13. Early adoption is permitted. Topic 326 requires a modified retrospective approach by recording a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. While the Company is currently evaluating the impact of Topic 326, the Company does not expect the adoption of this ASU to have a material impact on its condensed consolidated financial statements and the related disclosure.

  

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740) related to simplifying the accounting for income taxes. The guidance is effective for the Company beginning in the first quarter of 2021 on a prospective basis. Early adoption is permitted.  The Company is currently evaluating the impact of this ASU, and does not anticipate that the adoption of this ASU will have a significant impact on its condensed consolidated financial statements or the related disclosures.

 

In January 2020, the FASB issued ASU No. 2020-01-Investments-Equity Securities (Topic 321), Investments-Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815)-Clarifying the Interactions between Topic 321, Topic 323, and Topic 815. This ASU clarifies the interaction between accounting standards related to equity securities (ASC 321), equity method investments (ASC 323), and certain derivatives (ASC 815). The amendments in this ASU are effective for fiscal years beginning after December 15, 2020. The Company does not anticipate that the adoption of this ASU will have a significant impact on its condensed consolidated financial statements or the related disclosures.

 

10

 
 

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 Financial Accounting Standards Board (“FASB”) Accounting Standard 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 collectability 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 standalone selling price.

 

Analytics Revenue

 

Analytics revenue is derived from the following primary offerings: licenses and services for Exensio Software, Exensio SaaS, DFI and CV systems that do not include performance incentives based on customers’ yield achievement.

 

Revenue from standalone Exensio 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 the customer, 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 standalone selling price (or SSP) attributed to each performance obligation.

 

Revenue from Exensio 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 and CV systems 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 these contracts with multiple performance obligations, the Company 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.

 

11

 

Integrated Yield Ramp Revenue

 

The Integrated Yield Ramp revenue is derived from the Company’s fixed-fee engagements that include performance incentives based on customers’ yield achievement and Gainshare royalties, typically based on customer’s wafer shipments, pertaining to these fixed-price contracts.

 

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. Similar to the services provided in connection with 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 judgement. Please refer to “Significant Judgments” section of this Note for further discussion.

 

The Gainshare royalty contained in IYR contracts is a variable fee related to continued usage of the Company’s intellectual property after the fixed-fee service period ends, based on the customers’ yield achievement. Revenue derived from Gainshare is contingent upon the Company’s customers reaching certain defined production yield levels. Gainshare royalty 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 by timing of revenue:

  

  

Three Months Ended June 30,

  

Six Months Ended June 30,

 
  

2020

  

2019

  

2020

  

2019

 

Over time

  64%  58%  61%  66%

Point-in-time

  36%  42%  39%  34%

Total

  100%  100%  100%  100%

 

International revenues accounted for approximately 54% and 56% of our total revenues for the three and six months ended June 30, 2020, respectively, compared to 58% and 56% of our total revenues for the three and six months ended June 30, 2019, respectively. See Note 10. 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.

 

12

 

 

The Company’s contracts with customers often include promises to transfer products, licenses software 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, in some cases, has more than one SSP for individual performance obligations. In these instances, the Company may use information such as the size of the customer and geographic region of the customer in determining the SSP.

 

The Company is required to record Gainshare royalty revenue in the same period in which the usage occurs. Because the Company generally does not receive the acknowledgment reports 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. At June 30, 2020 and December 31, 2019, contract assets of $3.4 million and $3.6 million, respectively, are included in prepaid expenses and other current assets in the Condensed Consolidated Balance Sheets. The Company did not record any asset impairment charges related to contract assets for the periods presented.

 

Deferred 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 the other non-current liabilities in the Condensed Consolidated Balance Sheets. At June 30, 2020 and December 31, 2019, the non-current portion of deferred revenues included in non-current liabilities was $1.8 million and $2.3 million, respectively.  Revenue recognized for the three months ended  June 30, 2020 and 2019, that was included in deferred revenues and billings in excess of recognized revenues balances at the beginning of each reporting period was $5.9 million and $4.7 million, respectively. Revenue recognized for the six months ended  June 30, 2020, and 2019, that was included in deferred revenues and billings in excess of recognized revenues balances at the beginning of each reporting period was $7.7 million and $8.7 million, respectively.

 

At June 30, 2020, 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 $63.5 million. Given the applicable contract terms, the majority of this amount is expected to be recognized as revenue over the next two years, with the remainder in the following five years. This amount does not include contracts to which the customer is not committed, nor contracts for which we recognize revenue equal to the amount we have the right to invoice for services performed, or future sales-based or usage-based royalty payments in exchange for a license of intellectual property.  This amount is subject to change due to future revaluations of variable consideration, terminations, other contract modifications, or currency adjustments.  The estimated timing of the recognition of remaining unsatisfied performance obligations is subject to change and is affected by changes to the scope, change in timing of delivery of products and services, or contract modifications.

 

13

 

The adjustment to revenue recognized in the three months ended June 30, 2020 and 2019 from performance obligations satisfied (or partially satisfied) in previous periods was a decrease of $0.5 million and a decrease of $0.3 million, respectively. The adjustment to revenue recognized in the six months ended June 30, 2020 and 2019 from performance obligations satisfied (or partially satisfied) in previous periods was an increase of $0.6 million and an increase of $0.2 million, respectively. These amounts primarily represent changes in estimated percentage-of-completion based contracts and changes in estimated Gainshare royalty for those customers that reported actual Gainshare revenue with some time lag.

 

Costs to obtain or fulfill a contract

 

The Company capitalizes the incremental costs to obtain or fulfill a contract with a customer, including direct sales commissions and related fees, when it expects to recover those costs. 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  June 30, 2020 and December 31, 2019 were $0.5 million and $0.4 million, respectively. Total capitalized direct sales commission costs included in other non-current assets in the accompanying Condensed Consolidated Balance Sheets as of  June 30, 2020 and December 31, 2019 was $0.8 million and $0.4 million, respectively. Amortization of these assets during each of the three months ended June 30, 2020 and 2019 was $0.1 million. Amortization of these assets during each of the six months ended June 30, 2020 and 2019 was $0.2 million. There was no impairment loss in relation to the costs capitalized for the periods presented.

 

Certain eligible initial project costs are capitalized when the costs relate directly to the contract, the costs generate or enhance resources of the Company that will be used in satisfying the performance obligation in the future, and the costs are expected to be recovered. These costs primarily consist of transition and set-up costs related to the installation of systems and processes and other deferred fulfillment costs eligible for capitalization. Capitalized costs are amortized consistent with the transfer to the customer of the services to which the asset relates and recorded as a component of cost of revenues. The Company also incurs certain direct costs to provide services in relation to the specific anticipated contracts. The Company recognizes such costs as a component of costs of revenues, the timing of which is dependent upon identification of a contract arrangement. The Company also defers costs from arrangements that required it to defer the revenues, typically due to the pattern of transfer of the performance obligations in the contract. These costs are recognized in proportion to the related revenue. At the end of the reporting period, the Company evaluates its deferred costs for their probable recoverability. The Company recognizes impairment of deferred costs when it is determined that the costs no longer have future benefits and are no longer recoverable. There was no impairment loss in relation to the costs capitalized for the periods presented. Deferred costs balance included in prepaid expenses and other current assets in the accompanying Condensed Consolidated Balance Sheets as of June 30, 2020 and December 31, 2019 was $0.2 million and $0.3 million, respectively.  Deferred costs balance included in other non-current assets in the accompanying Condensed Consolidated Balance Sheets was immaterial as of June 30, 2020 and was $0.2 million as of  December 31, 2019.

 

Practical Expedients

 

The Company does not adjust 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 for the three and six months ended June 30, 2020 and 2019.

 

 

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 12-month period. Unbilled accounts receivable, included in accounts receivable, totaled $8.8 million and $7.4 million as of June 30, 2020, and December 31, 2019, 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 $2.6 million and $4.1 million as of June 30, 2020, and December 31, 2019, respectively.

 

14

 

Property and equipment

 

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

 

  

June 30,

  

December 31,

 
  

2020

  

2019

 

Computer equipment

 $10,997  $10,880 

Software

  5,018   4,690 

Furniture, fixtures and equipment

  2,423   2,395 

Leasehold improvements

  6,129   6,095 

Laboratory and other equipment

  5,000   4,933 

Test equipment

  24,103   22,980 

Construction-in-progress

  19,490   18,245 
   73,160   70,218 

Less: accumulated depreciation and amortization

  (32,748)  (29,420)

Total

 $40,412  $40,798 

 

Test equipment includes DFI assets at customer sites that are contributing to DFI revenues. The construction-in-progress balance related to construction of DFI assets totaled $18.1 million and $16.6 million as of  June 30, 2020 and December 31, 2019, respectively. Depreciation and amortization expense for the three months ended June 30, 2020 and 2019 was $1.7 million and $1.3 million, respectively. Depreciation and amortization expense for the six months ended June 30, 2020 and 2019 was $3.4 million and $2.6 million, respectively.

 

Goodwill and Intangible Assets

 

As of June 30, 2020, and December 31, 2019, the carrying amount of goodwill was $2.3 million.

 

Intangible assets balance was $5.6 million and $6.2 million as of June 30, 2020 and December 31, 2019, respectively. Intangible assets as of June 30, 2020 and December 31, 2019 consist of the following (in thousands):

 

     

June 30, 2020

  

December 31, 2019

 
  

Amortization

  

Gross

      

Net

  

Gross

      

Net

 
  

Period

  

Carrying

  

Accumulated

  

Carrying

  

Carrying

  

Accumulated

  

Carrying

 
  

(Years)

  

Amount

  

Amortization

  

Amount

  

Amount

  

Amortization

  

Amount

 

Acquired identifiable intangibles:

                           

Customer relationships

 19  $7,440  $(5,158) $2,282  $7,440  $(4,935) $2,505 

Developed technology

 49   17,460   (14,480)  2,980   17,460   (14,101)  3,359 

Tradename

 27   790   (686)  104   790   (673)  117 

Patent

 710   1,800   (1,580)  220   1,800   (1,560)  240 

Total

    $27,490  $(21,904) $5,586  $27,490  $(21,269) $6,221 

   

The weighted average amortization period for acquired identifiable intangible assets was 5.9 years as of June 30, 2020. Intangible asset amortization expense was $0.3 million during each of the three months ended June 30, 2020 and 2019. Intangible asset amortization expense for the six months ended June 30, 2020 and 2019 was $0.6 million and $0.5 million, respectively. The Company expects annual amortization of acquired identifiable intangible assets to be as follows (in thousands):

 

Year Ending December 31,

 

Amount

 

2020 (remaining six months)

 $634 

2021

  1,093 

2022

  886 

2023

  886 

2024

  747 

2025 and thereafter

  1,340 

Total future amortization expense

 $5,586 

  

 

15

 

Intangible assets are amortized over their useful lives unless these lives are determined to be indefinite. Intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. During the three and six months ended June 30, 2020, there were no indicators of impairment related to the Company’s intangible assets.

 

 

4. LEASES

 

The Company leases administrative and sales offices and certain equipment under noncancellable operating leases, which contain various renewal options and, in some cases, require payment of common area costs, taxes and utilities. These operating leases expire at various times through 2028. The Company had no leases that were classified as a financing lease as of June 30, 2020 and December 31, 2019.

 

Leases with an initial term of 12 months or less are not recorded on the balance sheets, and the Company recognizes lease expense for these leases on a straight-line basis over the lease term. Long-term operating leases are included in operating lease right-of-used (ROU) assets and operating lease liabilities in the Company’s Condensed Consolidated Balance Sheets.

 

ROU assets represent the Company’s right to use an underlying asset for the lease term and operating lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized based on the present value of remaining lease payments over the lease term. In determining the present value of lease payments, implicit rate must be used when readily determinable. As the Company’s leases do not provide implicit rates, at the date of the Company’s adoption of the new lease standard, the discount rate is calculated using the Company’s incremental borrowing rate determined based on the information available. The operating lease ROU asset also includes any lease payments made and excludes lease incentives or tenant improvement allowance. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Operating lease expense for lease payments is recognized on a straight-line basis over the lease term. Variable lease payment amounts that cannot be determined at the commencement of the lease such as increases in lease payments based on changes in index rates or usage, and common area maintenance costs are not included in the ROU assets or operating lease liabilities. These are expensed as incurred and recorded as variable lease expense. 

 

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

 

  

Three Months Ended June 30,

  

Six Months Ended June 30,

 
  

2020

  

2019

  

2020

  

2019

 

Operating lease expense

 $452  $470  $907  $939 

Short-term lease and variable lease expense

  127   92   274   203 

Total lease expense

 $579  $562  $1,181  $1,142 

 

Supplemental balance sheets information related to leases was as follows:

 

  

June 30,

  

December 31,

 
  

2020

  

2019

 

Weighted average remaining lease term under operating ROU leases (in years)

  6.8   7.2 

Weighted average discount rate for operating lease liabilities

  5.24%  5.25%

Operating lease ROU assets obtained (in thousands)

 $151  $333 

  

 

16

  

Maturity of operating lease liabilities as of June 30, 2020, are as follows (in thousands):

 

Year Ending December 31,

 

Amount(a)

 

2020 (remaining six months)

 $1,046 

2021

  1,852 

2022

  1,606 

2023

  1,355 

2024

  1,071 

2025 and thereafter

  3,789 

Total future minimum lease payments

 $10,719 

Less: Interest(b)

  (1,806)

Present value of future minimum lease payments operating lease liabilities(c)

 $8,913 

 

 

(a)

As of June 30, 2020, the total operating lease liability includes approximately $1.0 million related to an option to extend a lease term that is reasonably certain to be exercised.

 

(b)

Calculated using incremental borrowing interest rate for each lease.

 

(c)

Includes the current portion of operating lease liabilities of $1.9 million as of June 30, 2020.

 

 

5. STOCKHOLDERS’ EQUITY

 

Stock Repurchase Program 

 

On May 28, 2020, the Company’s 2018 stock repurchase program (the “2018 Program”) that was originally adopted on May 29, 2018, expired. On June 4, 2020, the Company’s Board of Directors adopted a new 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 three and six months ended June 30, 2020, no shares were repurchased under the 2020 and 2018 programs. During the three and six months ended June 30, 2019, the Company repurchased approximately 300,000 shares and 614,000 shares, respectively, under the 2018 Program. As of May 28, 2020, approximately 786,000 shares had been repurchased at an average price of $12.43 per share, for a total price of $9.8 million under the 2018 Program.

 

 

6. EMPLOYEE BENEFIT PLANS

 

On June 30, 2020, the Company had the following stock-based compensation plans:

 

Employee Stock Purchase Plan

 

In July 2001, the Company adopted a ten-year Employee Stock Purchase Plan (as amended, the “Purchase Plan”) under which eligible employees can contribute up to 10% of their compensation, as defined in the Purchase Plan, towards the purchase of shares of PDF common stock at a price of 85% of the lower of the fair market value at the beginning of the offering period or the end of the purchase period. The Purchase Plan consists of twenty-four-month offering periods with four six-month purchase periods in each offering period. Under the Purchase Plan, on January 1 of each year, starting with 2002, the number of shares reserved for issuance will automatically increase by the lesser of (1675,000 shares, (22% of the Company’s outstanding common stock on the last day of the immediately preceding year, or (3) the number of shares determined by the board of directors. At the annual meeting of stockholders on May 18, 2010, the Company’s stockholders approved an amendment to the Purchase Plan to extend it through  May 17, 2020. The Company’s proposal to extend the Purchase Plan through June 22, 2030 was not ratified by the Company’s stockholders and hence, the Purchase Plan expired on May 17, 2020. After the Purchase Plan expired, no new offering periods will commence under the Purchase Plan; however, existing offering periods will continue until they expire in accordance with their terms, and participation in such offering periods will continue through the applicable expiration date. The final offering period under the Purchase Plan is expected to expire on January 31, 2022.

 

 

17

 

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

 

  

Six Months Ended June 30,

 
  

2020

  

2019

 

Expected life (in years)

  1.25   1.25 

Volatility

  34.25%  45.19%

Risk-free interest rate

  1.43%  2.52%

Expected dividend

      

Weighted average fair value of purchase rights granted during the period

 $4.83  $3.67 

 

During the three months ended June 30, 2020 and 2019, no shares were issued under the Purchase Plan. During the six months ended June 30, 2020 and 2019, a total of approximately 89,000 and 87,000 shares, respectively, were issued at a weighted-average purchase price of $9.02 and $8.93 per share, respectively. As of June 30, 2020, there was $0.5 million of unrecognized compensation cost related to the Purchase Plan. That cost is expected to be recognized over a weighted average period of 0.8 year. As of June 30, 2020, 5.8 million shares were available for future issuance under the 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 amended, the “2011 Plan”). 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 this plan is 11,550,000 shares, plus up to 3,500,000 shares previously issued under the 2001 Stock Plan adopted by the Company in 2001, which expired in 2011 (the “2001 Plan”) that are 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.

 

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

 

As of June 30, 2020, 12.1 million shares of common stock were reserved to cover stock-based awards under the 2011 Plan, of which 4.6 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 June 30, 2020. As of June 30, 2020, there were no outstanding awards that had been granted outside of the 2011, 2001 or the IDS Plans (collectively, the “Stock Plans”).

 

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

 

  

Three Months Ended June 30,

  

Six Months Ended June 30,

 
  

2020

  

2019

  

2020

  

2019

 

Expected life (in years)

  4.45   4.46   4.45   4.46 

Volatility

  43.14%  42.19%  40.05%  44.71%

Risk-free interest rate

  0.28%  1.94%  0.70%  2.44%

Expected dividend

            

Weighted average fair value per share of options granted during the period

 $5.92  $4.67  $5.42  $4.54 

 

 

18

 

 

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

 

  

Three Months Ended June 30,

  

Six Months Ended June 30,

 
  

2020

  

2019

  

2020

  

2019

 

Costs of revenues

 $883  $799  $1,792  $1,659 

Research and development

  1,010   901   2,465   2,619 

Selling, general and administrative

  1,085   734   2,089   1,632 

Stock-based compensation expenses

 $2,978  $2,434  $6,346  $5,910 

 

The stock-based compensation expense in the table above includes immaterial expense or credit adjustments related to cash-settled SARs granted to certain employees. The Company accounted for these awards as liability awards and the amount was included in accrued compensation and related benefits. Stock-based compensation capitalized in the capitalized software development costs included in Property and Equipment, net, was approximately $0.1 million and $0.2 million for the three and six months ended June 30, 2020, respectively. Stock-based compensation capitalized in the capitalized software development costs included in Property and Equipment, net, was approximately $0.2 million during the three and six months ended June 30, 2019.

 

 Additional information with respect to options under the Stock Plans during the six months ended June 30, 2020, was as follows:

 

          

Weighted

     
      

Weighted

  

Average

     
      

Average

  

Remaining

  

Aggregate

 
  

Number of

  

Exercise

  

Contractual

  

Intrinsic

 
  

Options

  

Price per

  

Term

  

Value

 
  

(in thousands)

  

Share

  

(years)

  

(in thousands)

 

Outstanding, January 1, 2020

  745  $10.64         

Granted (weighted average fair value of $5.42 per share)

  19  $16.03         

Exercised

  (77) $8.13         

Canceled

  (3) $10.66         

Expired

  (10) $10.06         

Outstanding, June 30, 2020

  674  $11.09   4.38  $5,743 

Vested and expected to vest, June 30, 2020

  663  $11.04   4.30  $5,673 

Exercisable, June 30, 2020

  518  $10.36   3.12  $4,794 

 

The aggregate intrinsic value in the table above represents the total intrinsic value based on the Company’s closing stock price of $19.56 per share as of June 30, 2020. The total intrinsic value of options exercised during the six months ended June 30, 2020, was $0.6 million.

 

As of June 30, 2020, there was $0.6 million of total unrecognized compensation cost related to unvested stock options. That cost is expected to be recognized over a weighted average period of 2.6 years. The total fair value of shares vested during the six months ended June 30, 2020, was $0.2 million.

 

19

 

Nonvested restricted stock units activity during the six months ended June 30, 2020, was as follows:

 

      

Weighted

 
      

Average Grant

 
  

Shares

  

Date Fair Value

 
  

(in thousands)

  

Per Share

 

Nonvested, January 1, 2020

  1,887  $12.30 

Granted

  307  $15.60 

Vested

  (457) $13.04 

Forfeited

  (48) $13.80 

Nonvested, June 30, 2020

  1,689