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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


☐	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.

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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

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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)

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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)

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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)

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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)

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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)

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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

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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.

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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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