10-Q

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 March 31, 2017

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.)
333 West San Carlos Street, Suite 1000
San Jose, California	95110
(Address of Principal Executive Offices)	(Zip Code)

(408) 280-7900

(Registrant’s Telephone Number, Including Area Code)

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes ☑ No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

☐ Large accelerated filer	☑ Accelerated filer
☐ Non-accelerated  filer (Do not check if a smaller reporting company)	☐ 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 ☑

The number of shares outstanding of the Registrant’s Common Stock as of April 26, 2017 was 32,142,332.

1

TABLE OF CONTENTS

	Page
PART I  FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets	3
Condensed Consolidated Statements of Operations and Comprehensive Income	4
Condensed Consolidated Statements of Cash Flows	5
Notes to Condensed Consolidated Financial Statements	6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
Item 3. Quantitative and Qualitative Disclosures About Market Risk	25
Item 4. Controls and Procedures	25
PART II  OTHER INFORMATION
Item 1. Legal Proceedings	26
Item 1A. Risk Factors	26
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	26
Item 3. Defaults Upon Senior Securities	26
Item 4. Mine Safety Disclosures	26
Item 5. Other Information	26
Item 6. Exhibits	27
SIGNATURES	28
INDEX TO EXHIBITS	29

2

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

PDF SOLUTIONS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)

(in thousands, except par value)

	March 31, 2017			December 31, 2016
ASSETS
Current assets:
Cash and cash equivalents	$	114,926		$	116,787
Accounts receivable, net of allowance of $200		50,088			48,157
Prepaid expenses and other current assets		6,741			5,335
Total current assets		171,755			170,279
Property and equipment, net		20,798			19,341
Goodwill		215			215
Intangible assets, net		4,035			4,223
Deferred tax assets		16,201			15,640
Other non-current assets		14,615			12,631
Total assets	$	227,619		$	222,329
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	2,436		$	2,206
Accrued compensation and related benefits		4,988			5,959
Accrued and other current liabilities		1,913			2,080
Deferred revenues – current portion		9,777			8,189
Billings in excess of recognized revenue		200			88
Total current liabilities		19,314			18,522
Long-term income taxes payable		3,247			3,354
Other non-current liabilities		1,802			1,650
Total liabilities		24,363			23,526
Commitments and contingencies (Note 9)
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 38,810 and 38,514, respectively; shares outstanding 32,124 and 31,864, respectively		5			5
Additional paid-in-capital		285,930			281,423
Treasury stock at cost, 6,687 and 6,650 shares, respectively		(55,726	)		(54,882	)
Accumulated deficit		(25,235	)		(25,752	)
Accumulated other comprehensive loss		(1,718	)		(1,991	)
Total stockholders’ equity		203,256			198,803
Total liabilities and stockholders’ equity	$	227,619		$	222,329

See accompanying Notes to Condensed Consolidated Financial Statements (unaudited). 

3

PDF SOLUTIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(unaudited)

(in thousands, except per share amounts)

	Three Months Ended March 31,
	2017			2016
Revenues:
Design-to-silicon-yield solutions	$	19,698		$	18,578
Gainshare performance incentives		4,591			6,503
Total revenues		24,289			25,081
Costs of Design-to-silicon-yield solutions
Direct costs of Design-to-silicon-yield solutions		11,335			10,110
Amortization of acquired technology		96			96
Total cost of Design-to-silicon-yield solutions		11,431			10,206
Gross profit		12,858			14,875
Operating expenses:
Research and development		7,282			6,311
Selling, general and administrative		5,899			5,124
Amortization of other acquired intangible assets		92			117
Total operating expenses		13,273			11,552
Income (loss) from operations		(415	)		3,323
Interest and other income (expense), net		(230	)		(236	)
Income (loss) before income taxes		(645	)		3,087
Income tax provision (benefit)		(1,162	)		1,026
Net income	$	517		$	2,061
Net income per share:
Basic	$	0.02		$	0.07
Diluted	$	0.02		$	0.07
Weighted average common shares:
Basic		31,991			31,168
Diluted		33,594			31,754
Net income	$	517		$	2,061
Other comprehensive income:
Foreign currency translation adjustments, net of tax		273			360
Comprehensive income	$	790		$	2,421

See accompanying Notes to Condensed Consolidated Financial Statements (unaudited). 

4

PDF SOLUTIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands)

	Three Months Ended March 31,
	2017			2016
Operating activities:
Net income	$	517		$	2,061
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation and amortization		1,091			765
Stock-based compensation expense		2,884			2,666
Amortization of acquired intangible assets		188			213
Deferred taxes		(580	)		458
Loss on disposal of property and equipment		-			107
Provision for doubtful accounts		-			53
Unrealized loss (gain) on foreign currency forward contract		92			(23	)
Changes in operating assets and liabilities:
Accounts receivable, net of allowance		(1,931	)		4,062
Prepaid expenses and other current assets		(1,395	)		178
Accounts payable		476			250
Accrued compensation and related benefits		(1,040	)		(564	)
Accrued and other liabilities		(587	)		(833	)
Deferred revenues		1,734			1,674
Billings in excess of recognized revenues		112			(1,153	)
Other non-current assets		(1,977	)		(5,917	)
Net cash (used in) provided by operating activities		(416	)		3,997
Investing activities:
Purchases of property and equipment		(2,313	)		(1,780	)
Net cash used in investing activities		(2,313	)		(1,780	)
Financing activities:
Proceeds from exercise of stock options		717			182
Proceeds from employee stock purchase plan		909			777
Payments for taxes related to net share settlement of equity awards		(844	)		(9	)
Net cash provided by financing activities		782			950
Effect of exchange rate changes on cash and cash equivalents		86			73
Net change in cash and cash equivalents		(1,861	)		3,240
Cash and cash equivalents, beginning of period		116,787			126,158
Cash and cash equivalents, end of period	$	114,926		$	129,398
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Taxes	$	681		$	281
Property and equipment received and accrued in accounts payable and accrued and other liabilities	$	885		$	1,218

See accompanying Notes to Condensed Consolidated Financial Statements (unaudited).

5

PDF SOLUTIONS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. BASIS OF PRESENTATION

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, 2016.

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, 2016, 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 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 for fixed-price solution implementation service contracts, accounting for goodwill and intangible assets, stock-based compensation expense and accounting for income taxes. Actual results could differ from those estimates.

Revenue Recognition  — The Company derives revenue from two sources: Design-to-silicon-yield solutions and Gainshare performance incentives.

Design-to-silicon-yield solutions — Revenues that are derived from Design-to-silicon-yield solutions come from services and software and hardware licenses. The Company recognizes revenue for each element of Design-to-silicon-yield solutions as follows:

The Company generates a significant portion of its Design-to-silicon-yield solutions revenue from fixed-price solution implementation service contracts delivered over a specific period of time. These contracts require reliable estimation of costs to perform obligations and the overall scope of each engagement. Revenue under project–based contracts for solution implementation services is recognized as services are performed using percentage of completion method of contract accounting based on costs or labor-hours input method, whichever is the most appropriate measure of the progress towards completion of the contract. Losses on fixed-price solution implementation contracts are recognized in the period when they become probable. Revisions in profit estimates are reflected in the period in which the conditions that require the revisions become known and can be estimated (cumulative catch-up method). During the period ended March 31, 2017, the Company recognized changes in one of its project’s profitability from revisions in estimates due to the scope changes that resulted in unfavorable changes of net income of $0.6 million or $0.01 per diluted share. Revenue under time and materials contracts for solution implementation services are recognized as the services are performed.

On occasion, the Company licenses its software products as a component of its fixed-price service contracts. In such instances, the software products are licensed to customers over a specified term of the agreement with support and maintenance to be provided, if applicable, over the license term. The amount of product and service revenue recognized in a given period is affected by the Company’s judgment as to whether an arrangement includes multiple deliverables and, if so, the Company’s determination of the fair value of each deliverable. In general, vendor-specific objective evidence of selling price (“VSOE”) does not exist for the Company’s solution implementation services and software products and because the Company’s services and products include our unique technology, the Company is not able to determine third-party evidence of selling price (“TPE”). Therefore, in such circumstances the Company uses best estimated selling prices (“BESP”) in the allocation of arrangement consideration. In determining BESP, the Company applies significant judgment as the Company’s weighs a variety of factors, based on the facts and circumstances of the arrangement. The Company typically arrives at BESP for a product or service that is not sold separately by considering company-specific factors such as geographies, internal costs, gross margin objectives, pricing practices used to establish bundled pricing, and existing portfolio pricing and discounting. After fair value is established for each deliverable, the total transaction amount is allocated to each deliverable based upon its relative selling price. Fees allocated to solution implementation services are recognized using the percentage of completion method of contract accounting. Fees allocated to software and related support and maintenance are recognized under software revenue recognition guidance.

6

In some instances, the Company also licenses its DFI system as a separate component of fixed-price service contracts. The Company allocates revenue to all deliverables based on their relative selling prices. The Company currently does not have VSOE for its DFI system, thus the Company uses either TPE or BESP in the allocation of arrangement consideration.

The Company defers certain pre-contract costs incurred for specific anticipated contracts. Deferred costs consist primarily of direct costs to provide solution implementation services in relation to the specific anticipated contracts. The Company recognizes such costs as a component of cost of revenues, the timing of which is dependent upon persuasive evidence of contract arrangement assuming all other revenue recognition criteria are met. The Company also defers costs from arrangements that required us to defer the revenues, typically due to revenue recognition from multi-element arrangements or from contracts subject to customer acceptance. 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. Deferred costs balance was $0.6 million and $0.5 million as of March 31, 2017 and December 31, 2016, respectively. The balance was included in prepaid expenses and other current assets and other non-current assets in the accompanying consolidated balance sheets.

The Company also licenses its software products separately from solution implementations. For software license arrangements that do not require significant modification or customization of the underlying software, software license revenue is recognized under the residual method when (l) persuasive evidence of an arrangement exists, (2) delivery has occurred, (3) the fee is fixed or determinable, (4) collectability is probable, and (5) the arrangement does not require services that are essential to the functionality of the software. When arrangements include multiple elements such as support and maintenance, consulting (other than for fixed price solution implementations), installation, and training, revenue is allocated to each element of a transaction based upon its fair value as determined by the Company's VSOE and such services are recorded as services revenue. VSOE for maintenance is generally established based upon negotiated renewal rates while VSOE for consulting, installation, and training services is established based upon the Company's customary pricing for such services when sold separately. When software is licensed for a specified term, fees for support and maintenance are generally bundled with the license fee over the entire term of the contract. The Company is unable to establish VSOE of fair value for maintenance services that are generally bundled with term licenses. In these cases, the Company recognizes revenue ratably over the term of the contract. For multiple-element arrangements containing non-software services, the Company: (1) determines whether each element constitutes a separate unit of accounting; (2) determines the fair value of each element using the selling price hierarchy of VSOE, TPE or BESP, as applicable; and (3) allocates the total price to each separate unit of accounting based on the relative selling price method. An element constitutes a separate unit of accounting when the delivered item has standalone value and delivery of the undelivered element is probable and within our control. For multiple-element arrangements that contain both software and non-software elements, the Company allocates revenue to software or software-related elements as a group and any non-software elements separately based on the selling price hierarchy of VSOE, TPE or BESP. Once revenue is allocated to software or software-related elements as a group, we recognize revenue in conformance with software revenue accounting guidance. Revenue is recognized when revenue recognition criteria are met for each element.

Revenue from software-as-a-service (SaaS) that allow for the use of a hosted software product or service over a contractually determined period of time without taking possession of software are accounted for as subscriptions and recognized as revenue ratably over the coverage period beginning on the date the service is made available to customers. Revenue for software licenses with extended payment terms is not recognized in excess of amounts due. For software license arrangements that require significant modification or customization of the underlying software, the software license revenue is recognized as services are performed using the percentage of completion method of contract accounting, and such revenue is recorded as services revenue.

Deferred revenues consist substantially of amounts invoiced in advance of revenue recognition and is recognized as the revenue recognition criteria are met. Deferred revenues that will be recognized during the succeeding 12 month period is recorded as current deferred revenues and the remaining portion is recorded as non- current deferred revenues. Non-current portion of deferred revenue was $1.7 million and $1.5 million, respectively, as of March 31, 2017 and December 31, 2016. This balance was recorded in the other non-current liabilities in the accompanying consolidated balance sheets.

7

Gainshare Performance Incentives — When the Company enters into a contract to provide yield improvement services, the contract usually includes two components: (1) a fixed fee for performance by the Company of services delivered over a specific period of time; and (2) a Gainshare performance incentive component where the customer may pay a contingent variable fee, usually after the fixed fee period has ended. Revenue derived from Gainshare performance incentives represents profit sharing and performance incentives earned contingent upon the Company’s customers reaching certain defined operational levels established in related solution implementation service contracts. Gainshare performance incentives periods are usually subsequent to the delivery of all contractual services and therefore have virtually no cost to the Company. Due to the uncertainties surrounding attainment of such operational levels, the Company recognizes Gainshare performance incentives revenue (to the extent of completion of the related solution implementation contract) upon receipt of performance reports or other related information from the customer supporting the determination of amounts and probability of collection.  

2. RECENT ACCOUNTING PRONOUNCEMENTS

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) as modified by ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, ASU No. 2016-11, Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815), ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, and ASU 2016-20, Revenue from Contracts with Customers (Topic 606): Technical Corrections and Improvements. The new revenue recognition standard provides a five-step analysis of transactions to determine when and how revenue is recognized. The core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This new standard is effective for annual periods beginning after December 15, 2017, including interim periods within that reporting period. The new standard also permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the modified retrospective method). The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting

In February 2016, the Financial Accounting Standards Board (or FASB) issued ASU No. 2016-02, Leases (Topic 842). The update requires that most leases, including operating leases, be recorded on the balance sheet as an asset and a liability, initially measured at the present value of the lease payments. Subsequently, the lease asset will be amortized generally on a straight-line basis over the lease term, and the lease liability will bear interest expense and be reduced for lease payments. The amendments in this update are effective for public companies’ financial statements issued for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is still in the process of evaluating the impact of adopting this new accounting standard on its consolidated financial statements and footnote disclosures.

In August 2016, the FASB issued ASU No. 2016-15, Classification of Certain Cash Receipts and Cash Payments. The purpose of this standard is to clarify the treatment of several cash flow categories. This update is effective for annual periods beginning after December 15, 2017, and interim periods within those fiscal years, with early adoption permitted, including adoption in an interim period. The Company is currently assessing the impact that adopting this new accounting standard will have on its consolidated financial statements and footnote disclosures.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350) ("ASU No. 2017-04"). ASU No. 2017-04 eliminates step 2 from the annual goodwill impairment test. This update is effective for annual periods beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted, and is to be applied on a prospective basis. The Company is currently assessing the impact that adopting this new accounting standard will have on its consolidated financial statements and footnote disclosures. 

3. BALANCE SHEET COMPONENTS 

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 are primarily determined on an individual contract basis. Unbilled accounts receivable, included in accounts receivable, totaled $22.7 million and $20.8 million as of March 31, 2017 and December 31, 2016, 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 $11.8 million and $9.8 million as of March 31, 2017 and December 31, 2016, respectively. Deferred costs balance was $0.6 million and $0.5 million as of March 31, 2017 and December 31, 2016, respectively. The balance was included in prepaid expense and other current assets and other non-current assets in the accompanying balance sheets.

Property and equipment, net consists of (in thousands): 

	March 31, 2017			December 31, 2016
Property and equipment, net:
Computer equipment	$	10,568		$	10,642
Software		2,363			1,679
Furniture, fixtures and equipment		1,811			1,185
Leasehold improvements		1,961			1,132
Test equipment		11,843			11,723
Construction-in-progress		9,575			9,550
		38,121			35,911
Less: accumulated depreciation		(17,323	)		(16,570	)
Total	$	20,798		$	19,341

Depreciation and amortization expense was $1.1 million and $0.8 million for the three months ended March 31, 2017 and 2016, respectively.  

8

As of both March 31, 2017 and December 31, 2016, the carrying amount of goodwill was $0.2 million. The following is a rollforward of the Company's goodwill balance (in thousands):

	March 31, 2017
Balance as of December 31, 2016	$	215
Add: Goodwill from acquisition		—
Adjustment		—
Balance as of March 31, 2017	$	215

Intangible assets balance was $4.0 million and $4.2 million as of March 31, 2017 and December 31, 2016, respectively. Intangible assets as of March 31, 2017 and December 31, 2016 consist of the following (in thousands):

				March 31, 2017							December 31, 2016
	Amortization Period (Years)			Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Acquired identifiable intangibles:
Customer relationships	1	-	9	$	5,920	$	(3,895	)	$	2,025	$	5,920	$	(3,825	)	$	2,095
Developed technology	4	-	6		14,100		(12,455	)		1,645		14,100		(12,359	)		1,741
Tradename	2	-	4		610		(595	)		15		610		(583	)		27
Backlog		1			100		(100	)		-		100		(100	)		-
Patent	7	-	10		1,800		(1,450	)		350		1,800		(1,440	)		360
Other acquired intangibles		4			255		(255	)		-		255		(255	)		-
Total				$	22,785	$	(18,750	)	$	4,035	$	22,785	$	(18,562	)	$	4,223

The weighted average amortization period for acquired identifiable intangible assets was 6.18 years as of March 31, 2017. For both the three months ended March 31, 2017 and 2016, intangible asset amortization expense was $0.2 million. The Company expects annual amortization of acquired identifiable intangible assets to be as follows (in thousands):

Period Ending March 31,
2017	$	540
2018		701
2019		701
2020		701
2021		526
2022 and thereafter		866
Total future amortization expense	$	4,035

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 months ended March 31, 2017, there were no indicators of impairment related to the Company’s intangible assets.

4. STOCKHOLDERS’ EQUITY

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 March 31,
	2017		2016
Cost of Design-to-silicon-yield solutions	$	1,192	$	1,085
Research and development		834		706
Selling, general and administrative		858		875
Stock-based compensation expenses	$	2,884	$	2,666

9

On March 31, 2017, the Company had the following stock-based compensation plans:

Stock Plans — At the annual meeting of stockholders on November 16, 2011, the Company’s stockholders approved the 2011 Stock Incentive Plan, which was amended and restated at the 2013 annual meeting of stockholders on May 28, 2013, when the Company’s stockholders approved the First Amended and Restated 2011 Stock Incentive Plan, and then subsequently amended at the 2014 annual meeting of stockholders on May 27, 2014, when the Company’s stockholders approved the Second Amended and Restated 2011, Incentive Plan and then subsequently amended at the 2016 annual meeting of stockholders on May 31, 2016, when the Company’s stockholders approved the third amended and restated 2011 Stock Incentive Plan (as amended, the “2011 Plan”). Under the 2011 Plan, the Company may award stock options, stock appreciation rights, stock grants or stock units covering shares of the Company's common stock to employees, directors, non-employee directors and contractors. The aggregate number of shares reserved for awards under this plan is 7,800,000 shares, plus up to 3,500,000 shares previously issued under the 2001 Plan that are forfeited or repurchased by the Company or shares subject to awards previously issued under the 2001 Plan that expire or that terminate without having been exercised or settled in full on or after November 16, 2011. In case of awards other than options or stock appreciation rights, the aggregate number of shares reserved under the 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.

On April 11, 2017, the Company’s Board of Directors amended the 2011 Plan, subject to stockholder approval to increase the number of shares reserved for awards under it to a total of 9,050,000 shares, which is an increase of an additional 1,250,000 shares.

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

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 March 31,
	2017			2016
Expected life (in years)		4.41			4.42
Volatility		40.57	%		44.74	%
Risk-free interest rate		1.87	%		1.21	%
Expected dividend		—			—
Weighted average fair value per share of options granted during the period	$	7.85		$	4.08

As of March 31, 2017, 8.3 million shares of common stock were reserved to cover stock-based awards under the 2011 Plan, of which 3.5 million shares were available for future grant. The number of shares reserved and available under the 2011 Plan includes 0.5 million shares that were subject to awards previously made under the 2001 Plan and were forfeited, expired or repurchased by the Company after adoption of the 2011 Plan through March 31, 2017.  As of March 31, 2017, there were no outstanding awards that had been granted outside of the 2011 Plan, 2001 Plan or the IDS Plan (collectively, the "Stock Plans").  

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Stock option activity under the Company’s Stock Plans during the three months ended March 31, 2017, was as follows:

	Number of Options (in thousands)			Weighted Average Exercise Price per Share		Weighted Average Remaining Contractual Term (years)		Aggregate Intrinsic Value (in thousands)
Outstanding, January 1, 2017		1,364		$	8.00
Granted (weighted average fair value of $7.84 per share)		9		$	21.94
Exercised		(89	)	$	8.09
Canceled		(3	)	$	17.73
Expired		-		$	-
Outstanding, March 31, 2017		1,281		$	8.06		4.28	$	18,659
Vested and expected to vest, March 31, 2017		1,272		$	8.01		4.25	$	18,592
Exercisable, March 31, 2017		1,145		$	7.21		3.73	$	17,639

The aggregate intrinsic value in the table above represents the total intrinsic value based on the Company’s closing stock price of $22.62 per share as of March 31, 2017. The total intrinsic value of options exercised during the three months ended March 31, 2017, was $1.2 million.

As of March 31, 2017, 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 2.9 years. The total fair value of shares vested during the three months ended March 31, 2017, was $0.1 million.

Nonvested restricted stock units activity during the three months ended March 31, 2017, was as follows:

	Shares (in thousands)			Weighted Average Grant Date Fair Value Per Share
Nonvested, January 1, 2017		1,542		$	15.50
Granted		9		$	21.94
Vested		(109	)	$	14.04
Forfeited		(7	)	$	15.84
Nonvested, March 31, 2017		1,435		$	15.64

As of March 31, 2017, there was $17.8 million of total unrecognized compensation cost related to nonvested restricted stock units. That cost is expected to be recognized over a weighted average period of 2.6 years. Restricted stock units do not have rights to dividends prior to vesting.

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 (1) 675,000 shares, (2) 2% 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 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:

	Three Months Ended March 31,
	2017			2016
Expected life (in years)		1.25			1.25
Volatility		33.32	%		44.15	%
Risk-free interest rate		0.93	%		0.50	%
Expected dividend		—			—
Weighted average fair value per share of options granted during the period	$	6.78		$	3.56

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During the three months ended March 31, 2017 and 2016, a total of 100,000 and 84,000 shares, respectively, were issued at a weighted-average purchase price of $9.13 and $9.21 per share, respectively. As of March 31, 2017, there was $0.8 million of unrecognized compensation cost related to the Purchase Plan. That cost is expected to be recognized over a weighted average period of 1.1 years. As of March 31, 2017, 4.4 million shares were available for future issuance under the Purchase Plan.   

Stock Repurchase Program —On October 25, 2016, the Board of Directors adopted a program, effective immediately, to repurchase up to $25.0 million of the Company’s common stock both on the open market and in privately negotiated transactions over the next two years. As of March 31, 2017, there has been no common stock repurchased under this new program and $25.0 million remained available for future repurchases.

5. INCOME TAXES

Income tax provision decreased $2.2 million for the three months ended March 31, 2017, to $1.2 million income tax benefit as compared to an income tax provision of $1.0 million for the three months ended March 31, 2016. The Company’s effective tax rate was 180% and 33% for the three months ended March 31, 2017 and 2016, respectively.  The Company’s effective tax rate increased in the three months ended March 31, 2017, as compared to the same period in 2016, primarily due to the recognition of excess tax benefits related to employee stock compensation of $0.7 million as a result of the adoption of ASU 2016-09 as well as the changes in unrecognized tax benefit.

The Company’s total amount of unrecognized tax benefits, excluding interest and penalties, as of March 31, 2017, was $11.8 million, of which $7.0 million, if recognized, would decrease the Company’s effective tax rate. The Company’s total amount of unrecognized tax benefits, excluding interest and penalties, as of December 31, 2016, was $11.9 million, of which $7.2 million, if recognized, would affect the Company's effective tax rate. As of March 31, 2017, the Company has recorded unrecognized tax benefits of $2.7 million, including interest and penalties, as long-term taxes payable in its condensed consolidated balance sheet. The remaining $9.6 million has been recorded net of our deferred tax assets, of which $4.8 million is subject to a full valuation allowance. 

The valuation allowance was approximately $6.7 million and $6.8 million as of March 31, 2017 and December 31, 2016, respectively, which was related to California R&D tax credits and California net operating losses related to our acquisition of Syntricity that we currently do not believe are more likely than not to be ultimately realized.

The Company conducts business globally and, as a result, files numerous consolidated and separate income tax returns in the U.S. federal, various state and foreign jurisdictions. Because the Company used some of the tax attributes carried forward from previous years to tax years that are still open, statutes of limitation remain open for all tax years to the extent of the attributes carried forward into tax year 2002 for federal and California tax purposes. The Company is not subject to income tax examinations in any of its major foreign subsidiaries’ jurisdictions.

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6. NET INCOME PER SHARE

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

	Three Months Ended March 31,
	2017		2016
Numerator:
Net income	$	517	$	2,061
Denominator:
Basic weighted-average shares outstanding		31,991		31,168
Effect of dilutive options and restricted stock		1,603		586
Diluted weighted average shares outstanding		33,594		31,754
Net income per share - Basic	$	0.02	$	0.07
Net income per share - Diluted	$	0.02	$	0.07

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

	Three Months Ended March 31,
	2017		2016
Outstanding options		40		284
Nonvested restricted stock units		-		1,026
Employee Stock Purchase Plan		30		460
Total		70		1,770

7. CUSTOMER AND GEOGRAPHIC INFORMATION

Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or group, in deciding how to allocate resources and in assessing performance.

The Company’s chief operating decision maker, the chief executive officer, reviews discrete financial information presented on a consolidated basis for purposes of regularly making operating decisions and assessing financial performance. Accordingly, the Company considers itself to be in one operating segment, specifically the licensing and implementation of yield improvement solutions for companies designing and/or manufacturing integrated circuits. 

The Company had revenues from individual customers in excess of 10% of total revenues as follows: 

	Three Months Ended March 31,
Customer	2017			2016
A		48	%		50	%
B		*	%		14	%

* represents less than 10%

The Company had gross accounts receivable from individual customers in excess of 10% of gross accounts receivable as follows: 

Customer	March 31, 2017			December 31, 2016
A		41	%		42	%
C		13	%		13	%

* represents less than 10% 

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

	Three Months Ended March 31,
	2017					2016
	Revenues		Percentage of Revenues			Revenues		Percentage of Revenues
United States	$	11,634		48	%	$	12,121		48	%
Taiwan		3,837		16			2,184		9
Germany		2,308		10			3,035		12
South Korea		1,990		8			3,313		13
Rest of the world		4,520		18			4,428		18
Total revenue	$	24,289		100	%	$	25,081		100	%

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

	March 31, 2017		December 31, 2016
United States	$	20,248	$	18,818
Rest of the world		550		523
Total long-lived assets, net	$	20,798	$	19,341

8. FAIR VALUE MEASUREMENTS

Fair value is the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. The multiple assumptions used to value financial instruments are referred to as inputs, and a hierarchy for inputs used in measuring fair value is established, that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs reflect assumptions market participants would use in pricing an asset or liability based on market data obtained from independent sources while unobservable inputs reflect a reporting entity’s pricing based upon its own market assumptions. These inputs are ranked according to a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels.

Level 1 -	Inputs are quoted prices in active markets for identical assets or liabilities.
Level 2 -	Inputs are quoted prices for similar assets or liabilities in an active market, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable and market-corroborated inputs which are derived principally from or corroborated by observable market data.
Level 3 -	Inputs are derived from valuation techniques in which one or more significant inputs or value drivers are unobservable.

The following table represents the Company’s assets measured at fair value on a recurring basis as of March 31, 2017, and the basis for that measurement (in thousands):

Assets	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Money market mutual funds	$	26,483	$	26,483	$	—	$	—

The following table represents the Company’s assets measured at fair value on a recurring basis as of December 31, 2016, and the basis for that measurement (in thousands):

Assets	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Money market mutual funds	$	26,456	$	26,456	$	—	$	—

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The Company enters into foreign currency forward contracts to reduce the exposure to foreign currency exchange rate fluctuations on certain foreign currency denominated monetary assets and liabilities, primarily on third-party accounts payables and intercompany balances. The primary objective of the Company’s hedging program is to reduce volatility of earnings related to foreign currency exchange rate fluctuations. The counterparty to these foreign currency forward contracts is a large global financial institution that the Company believes is creditworthy, and therefore, the Company believes the credit risk of counterparty nonperformance is not significant. These foreign currency forward contracts are not designated for hedge accounting treatment. Therefore, the change in fair value of these contracts is recorded into earnings as a component of other income (expense), net, and offsets the change in fair value of the foreign currency denominated assets and liabilities, which is also recorded in other income (expense), net. For the three months ended March 31, 2017 and 2016, the Company recognized a realized gain of $0.1 million and $0.3 million on the contracts, respectively, which was recorded in other income (expense), net in the Company’s Statements of Operations and Comprehensive Income.  

The Company carries these derivatives financial instruments on its Consolidated Balance Sheets at their fair values. The Company’s foreign currency forward contracts are classified as Level 2 because it is not actively traded and the valuation inputs are based on quoted prices and market observable data of similar instruments. As of March 31, 2017, the Company had one outstanding forward contract with a notional amount of $7.2 million and recorded $0.1 million other current liabilities associated with this outstanding forward contract. As of December 31, 2016, the Company had one outstanding forward contract with a notional amount of $6.9 million and had recorded $15,000 other current liabilities associated with the outstanding forward contract.  

9. COMMITMENTS AND CONTINGENCIES

 Leases

The Company leases administrative and sales offices and certain equipment under noncancelable 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 2024. Rent expense was $0.5 million and $0.6 million for the three months ended March 31, 2017 and 2016, respectively.  

Future minimum lease payments under noncancelable operating leases at March 31, 2017, are as follows (in thousands): 

Period Ending March 31,	Amount
2017 (remaining nine months)	$	1,434
2018		1,307
2019		439
2020		374
2021		291
2022 and thereafter		73
Total future minimum lease payments	$	3,918

Indemnifications  — The Company generally provides a warranty to its customers that its software will perform substantially in accordance with documented specifications typically for a period of 90 days following delivery of its products. The Company also indemnifies certain customers from third-party claims of intellectual property infringement relating to the use of its products. Historically, costs related to these guarantees have not been significant. The Company is unable to estimate the maximum potential impact of these guarantees on its future results of operations.

 Purchase obligations — The Company has purchase obligations with certain suppliers for the purchase of goods and services entered in the ordinary course of business. As of March 31, 2017, total outstanding purchase obligations were $9.1 million, which are primarily due within the next 12 months.

Indemnification of Officers and Directors  — As permitted by the Delaware general corporation law, the Company has included a provision in its certificate of incorporation to eliminate the personal liability of its officers and directors for monetary damages for breach or alleged breach of their fiduciary duties as officers or directors, other than in cases of fraud or other willful misconduct.

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In addition, the Bylaws of the Company provide that the Company is required to indemnify its officers and directors even when indemnification would otherwise be discretionary, and the Company is required to advance expenses to its officers and directors as incurred in connection with proceedings against them for which they may be indemnified. The Company has entered into indemnification agreements with its officers and directors containing provisions that are in some respects broader than the specific indemnification provisions contained in the Delaware general corporation law. The indemnification agreements require the Company to indemnify its officers and directors against liabilities that may arise by reason of their status or service as officers and directors other than for liabilities arising from willful misconduct of a culpable nature, to advance their expenses incurred as a result of any proceeding against them as to which they could be indemnified, and to obtain directors’ and officers’ insurance if available on reasonable terms. The Company has obtained directors’ and officers’ liability insurance in amounts comparable to other companies of the Company’s size and in the Company’s industry. Since a maximum obligation of the Company is not explicitly stated in the Company’s Bylaws or in its indemnification agreements and will depend on the facts and circumstances that arise out of any future claims, the overall maximum amount of the obligations cannot be reasonably estimated.

Litigation — From time to time, the Company is subject to various claims and legal proceedings that arise in the ordinary course of business. The Company accrues for losses related to litigation when a potential loss is probable and the loss can be reasonably estimated in accordance with FASB requirements. As of March 31, 2017, the Company was not party to any material legal proceedings, thus no loss was probable and no amount was accrued.   

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements 

The following discussion of our financial condition and results of operations contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements other than statements of historical fact may be forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may,” “could,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential”, “target” or “continue,” the negative effect of terms like these or other similar expressions. Any statement concerning future financial performance (including future revenues, earnings or growth rates), ongoing business strategies or prospects, and possible actions taken by us or our subsidiaries, which may be provided by us are also forward-looking statements. These forward-looking statements are only predictions. Forward-looking statements are based on current expectations and projections about future events and are inherently subject to a variety of risks and uncertainties, many of which are beyond our control, which could cause actual results to differ materially from those anticipated or projected. All forward-looking statements included in this document are based on information available to us on the date of filing and we further caution investors that our business and financial performance are subject to substantial risks and uncertainties. We assume no obligation to update any such forward-looking statements. In evaluating these statements, you should specifically consider various factors, including the risk factors set forth in Item 1. “Business” and Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2016, filed with the Securities and Exchange Commission on March 8, 2017. All references to “we”, “us”, “our”, “PDF”, “PDF Solutions” or “the Company” refer to PDF Solutions, Inc. 

 Overview

We analyze our customers’ IC design and manufacturing processes to identify, quantify, and correct the issues that cause yield loss to improve our customers’ profitability by improving time-to-market, increasing yield and reducing total design and manufacturing costs. We package our solutions in various ways to meet our customers’ specific business and budgetary needs, each of which provides us various revenue streams. We receive a mix of fixed fees and variable, performance-based fees for the vast majority of our yield improvement solutions. The fixed fees are typically reflective of the length of time and the resources needed to characterize a customer’s manufacturing process and receive preliminary results of proposed yield improvement suggestions. The variable fee, or what we call Gainshare, usually depends on our achieving certain yield targets by a deadline.  Variable fees are currently typically tied to wafer volume on the node size of the manufacturing facility where we performed the yield improvement solutions. We receive license fees and service fees for related installation, integration, training, and maintenance and support services for our software that we license on a stand-alone basis.

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 Industry Trend

Consistent with the trend since 2010, we expect that the largest logic foundries will continue to invest significantly in leading edge nodes and capacity throughout 2017. Leading foundries continue to invest in new technologies such as multi-patterned lithography and 3-D transistor architecture. In addition, China’s investment in semiconductors should accelerate the growth of the industry in the next few years. These provide opportunities to increase our business.

Although capacity utilization on 28nm increased from the second quarter of 2016 through the end of 2016, several foundries have stated they expect an inventory correction in 28nm that started in the first quarter of 2017 to continue through the first half of this year. We expect our Gainshare results to be consistent with those general market trends. We saw utilization on 14nm increase in the second half of 2016, dip just slightly in the first quarter of 2017, and expect it to continue to grow throughout 2017.Gainshare revenue will continue to fluctuate quarter to quarter despite these utilization trends as our Gainshare revenue depends on many factors, including the average selling price of wafers subject to Gainshare and volume.

Generally, the demand for consumer electronics and communications devices continues to drive technological innovation in the semiconductor industry as the need for products with greater performance, lower power consumption, reduced costs and smaller size continues to grow with each new product generation. In addition, advances in computing systems and mobile devices have fueled demand for higher capacity memory chips. To meet these demands, IC manufacturers and designers are constantly challenged to improve the overall performance of their ICs by designing and manufacturing ICs with more embedded applications to create greater functionality while lowering cost per transistor. As a result, both logic and memory manufacturers have migrated to more and more advanced manufacturing nodes, capable of integrating more devices with higher performance, higher density, and lower power. As this trend continues, companies will continually be challenged to improve process capabilities to optimally produce ICs with minimal random and systematic yield loss, which is driven by the lack of compatibility between the design and its respective manufacturing process. We believe that as volume production of deep submicron ICs continues to grow, the difficulties of integrating IC designs with their respective processes and ramping new manufacturing processes will create a greater need for products and services like ours that address the yield loss and escalating cost issues the semiconductor industry is facing today and will face in the future.   

Customer Contracts

Although a substantial portion of our total revenues are concentrated in a small number of customers, the total revenues for each of these customers in any period is the result of Design-to-silicon-yield solutions and Gainshare performance incentives revenues recognized in the period under multiple, separate contracts, with no interdependent performance obligations. These contracts were all entered into in the ordinary course of our business and contain general terms and conditions that are standard across most of our yield improvement solutions customers, including providing services typically targeted to one manufacturing process node, for example the 28 or 20 nanometer node. Fluctuations in future results may occur if any of these customers renegotiate pre-existing contractual commitments due to adverse changes in their own business. See the additional discussion in Part I, Item 1, "Customers," on page 9 of our Annual Report on Form 10-K for the year ended December 31, 2016, and in Item 1A, "Risk Factors," on pages 13 through 20 of our Annual Report on Form 10-K for the year ended December 31, 2016, for related information on the risks associated with customer concentration and Gainshare performance incentives revenue.

 Financial Highlights  

Financial highlights for the three months ended March 31, 2017, were as follows: 

• Total revenues for the three months ended March 31, 2017, were $24.3 million, a decrease of $0.8 million, or 3%, compared to $25.1 million for the three months ended March 31, 2016. Design-to-silicon-yield solutions revenue for the three months ended March 31, 2017, was $19.7 million, an increase of $1.1 million, or 6%, when compared to Design-to-silicon yield solutions revenue of $18.6 million for the three months ended March 31, 2016. The increase in Design-to-silicon-yield solutions was primarily the result of more billable hours to revenue generating projects in the period due to increased business activity, particularly in Asia, and an increase in the revenue from our Exensio big data solution. Gainshare performance incentives revenue for the three months ended March 31, 2017, was $4.6 million, a decrease of $1.9 million, or 29%, compared to $6.5 million for the three months ended March 31, 2016. The decrease in revenue from Gainshare performance incentives was primarily the result of lower gainshare from 28nm volumes, partially offset by higher gainshare from 14nm volumes, compared to the volumes from those nodes for the three months ended March 31, 2016.

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•  Net income for the three months ended March 31, 2017 was $0.5 million, compared to net income of $2.1 million for the three months ended March 31, 2016. The decrease in net income was primarily attributable to a $2.0 million decrease in gross margin due to the mix shift between Design-to-silicon yield solutions and Gainshare performance incentive revenue and a $1.7 million increase in operating expense, primarily driven by the continued activity related to our development of DFI solution, offset by a $2.2 million decrease in tax provision primarily due to the recognition of excess tax benefits related to employee stock compensation as a result of the adoption of ASU 2016-09 as well as the changes in unrecognized tax benefit.

•  Net income per basic and diluted share was $0.02 for the three months ended March 31, 2017, as compared to net income per basic and diluted share of $0.07 for the three months ended March 31, 2016. 

Critical Accounting Policies

There were no significant changes in our critical accounting policies. Please refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2016. The following is a brief discussion of the more significant accounting policies and methods that we use. 

General

Our discussion and analysis of our financial conditions, results of operations and cash flows are based on our consolidated financial statements, which have been prepared in conformity with accounting principles generally accepted in the United States of America. Our preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. We based our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. The most significant estimates and assumptions relate to revenue recognition, stock-based compensation and the realization of deferred tax assets. Actual amounts may differ from such estimates under different assumptions or conditions. 

Revenue Recognition

We derive revenues from two sources: Design-to-silicon-yield Solutions and Gainshare performance incentives.

Design-to-silicon-yield solutions — Revenues that are derived from Design-to-silicon-yield solutions come from services and software and hardware licenses. We recognize revenue for each element of Design-to-silicon-yield solutions as follows:

We generate a significant portion of our Design-to-silicon-yield solutions revenue from fixed-price solution implementation service contracts delivered over a specific period of time. These contracts require reliable estimation of costs to perform obligations and the overall scope of each engagement. Revenue under project–based contracts for solution implementation services is recognized as services are performed using percentage of completion method of contract accounting based on costs or labor-hours input method, whichever is the most appropriate measure of the progress towards completion of the contract. Losses on fixed-price solution implementation contracts are recognized in the period when they become probable. Revisions in profit estimates are reflected in the period in which the conditions that require the revisions become known and can be estimated. Revenue under time and materials contracts for solution implementation services are recognized as the services are performed.

On occasion, we license our software products as a component of our fixed-price service contracts. In such instances, the software products are licensed to customers over a specified term of the agreement with support and maintenance to be provided, if applicable, over the license term. The amount of product and service revenue recognized in a given period is affected by the Company’s judgment as to whether an arrangement includes multiple deliverables and, if so, our determination of the fair value of each deliverable. In general, vendor-specific objective evidence of selling price (“VSOE”) does not exist for our solution implementation services and software products and because our services and products include our unique technology, we are not able to determine third-party evidence of selling price (“TPE”). Therefore, in such circumstances we use best estimated selling prices (“BESP”) in the allocation of arrangement consideration. In determining BESP, we apply significant judgment as we weigh a variety of factors, based on the facts and circumstances of the arrangement. We typically arrive at BESP for a product or service that is not sold separately by considering company-specific factors such as geographies, internal costs, gross margin objectives, pricing practices used to establish bundled pricing, and existing portfolio pricing and discounting. After fair value is established for each deliverable, the total transaction amount is allocated to each deliverable based upon its relative selling price. Fees allocated to solution implementation services are recognized using the percentage of completion method of contract accounting. Fees allocated to software and related support and maintenance are recognized under software revenue recognition guidance.

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In some instances, we also license our DFI system as a separate component of fixed-price service contracts. We allocate revenue to all deliverables based on their relative selling prices. We currently do not have VSOE for our DFI system, thus we use either TPE or BESP in the allocation of arrangement consideration.

We defer certain pre-contract costs incurred for specific anticipated contracts. Deferred costs consist primarily of direct costs to provide solution implementation services in relation to the specific anticipated contracts. We recognize such costs as a component of cost of revenues, the timing of which is dependent upon persuasive evidence of contract arrangement assuming all other revenue recognition criteria are met. We also defer costs from arrangements that required us to defer the revenues, typically due to revenue recognition from multi-element arrangements or from contracts subject to customer acceptance. These costs are recognized in proportion to the related revenue. At the end of reporting period, we evaluate its deferred costs for their probable recoverability. We recognize impairment of deferred costs when it is determined that the costs no longer have future benefits and are no longer recoverable. 

We also license our software products separately from solution implementations. For software license arrangements that do not require significant modification or customization of the underlying software, software license revenue is recognized under the residual method when (l) persuasive evidence of an arrangement exists, (2) delivery has occurred, (3) the fee is fixed or determinable, (4) collectability is probable, and (5) the arrangement does not require services that are essential to the functionality of the software. When arrangements include multiple elements such as support and maintenance, consulting (other than for our fixed price solution implementations), installation, and training, revenue is allocated to each element of a transaction based upon its fair value as determined by our VSOE and such services are recorded as services revenue. VSOE for maintenance is generally established based upon negotiated renewal rates while VSOE for consulting, installation, and training services is established based upon the our customary pricing for such services when sold separately. When software is licensed for a specified term, fees for support and maintenance are generally bundled with the license fee over the entire term of the contract. We are unable to establish VSOE of fair value for maintenance services that are generally bundled with term licenses. In these cases, we recognize revenue ratably over the term of the contract. For multiple-element arrangements containing non-software services, the Company: (1) determines whether each element constitutes a separate unit of accounting; (2) determines the fair value of each element using the selling price hierarchy of VSOE, TPE or BESP, as applicable; and (3) allocates the total price to each separate unit of accounting based on the relative selling price method. An element constitutes a separate unit of accounting when the delivered item has standalone value and delivery of the undelivered element is probable and within our control. For multiple-element arrangements that contain both software and non-software elements, we allocate revenue to software or software-related elements as a group and any non-software elements separately based on the selling price hierarchy of VSOE, TPE or BESP. Once revenue is allocated to software or software-related elements as a group, we recognize revenue in conformance with software revenue accounting guidance. Revenue is recognized when revenue recognition criteria are met for each element.

Revenue from software-as-a-service (or SaaS) that allow for the use of a hosted software product or service over a contractually determined period of time without taking possession of software are accounted for as subscriptions and recognized as revenue ratably over the coverage period beginning on the date the service is made available to customers. Revenue for software licenses with extended payment terms is not recognized in excess of amounts due. For software license arrangements that require significant modification or customization of the underlying software, the software license revenue is recognized as services are performed using the percentage of completion method of contract accounting, and such revenue is recorded as services revenue.

Deferred revenues consist substantially of amounts invoiced in advance of revenue recognition and is recognized as the revenue recognition criteria are met. Deferred revenues that will be recognized during the succeeding 12 month period is recorded as current deferred revenues and the remaining portion is recorded as non- current deferred revenues.

Gainshare Performance Incentives — When we enter into a contract to provide yield improvement services, the contract usually includes two components: (1) a fixed fee for performance by us of services delivered over a specific period of time; and (2) a Gainshare performance incentive component where the customer may pay a contingent variable fee, usually after the fixed fee period has ended. Revenue derived from Gainshare performance incentives represents profit sharing and performance incentives earned contingent upon our customers reaching certain defined operational levels established in related solution implementation service contracts. Gainshare performance incentives periods are usually subsequent to the delivery of all contractual services and therefore have virtually no cost to us. Due to the uncertainties surrounding attainment of such operational levels, we recognize Gainshare performance incentives revenue (to the extent of completion of the related solution implementation contract) upon receipt of performance reports or other related information from the customer supporting the determination of amounts and probability of collection.  

19

Stock-Based Compensation

Stock-based compensation is estimated at the grant date based on the award’s fair value and is recognized on a straight-line basis over the vesting periods, generally four years. As stock-based compensation expense recognized is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

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

Income Taxes

We are required to assess the likelihood that our deferred tax assets will be recovered from future taxable income and if we believe that they are not likely to be realizable before the expiration dates applicable to such assets then, to the extent we believe that recovery is not likely, establish a valuation allowance. Changes in the net deferred tax assets, less offsetting valuation allowance, in a period are recorded through the income tax provision (benefit) in the condensed consolidated statements of operations. The valuation allowance was approximately $6.7 million and $6.8 million as of March 31, 2017 and December 31, 2016, respectively, which was related to California R&D tax credits and California net operating losses related to acquisition that we currently do not believe to be more likely than not to be ultimately realized. If we conclude at a future financial reporting period that there has been a change in our ability to realize our California R&D credit and net operating loss carry forward deferred tax assets, and it is at such time no longer “more–likely-than-not” that we will realize the tax credits before applicable expiration dates, our tax provision will increase in the period in which we make such determination.

Our income tax calculations are based on application of the respective U.S. federal, state or foreign tax law. Our tax filings, however, are subject to audit by the respective tax authorities. Accordingly, we recognize tax liabilities based upon our estimate of whether, and the extent to which, additional taxes will be due when such estimates are more-likely-than-not to be sustained. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. To the extent the final tax liabilities are different than the amounts originally accrued, the increases or decreases are recorded as income tax expense or benefit in the consolidated statements of operations. At March 31, 2017, no deferred taxes have been provided on undistributed earnings of approximately $6.5 million from the Company’s international subsidiaries since these earnings have been, and under current plans will continue to be, permanently reinvested outside the United States. It is not practicable to determine the amount of the unrecognized tax liability at this time.  

Software Development Costs

Internally developed software includes software developed to meet our internal needs to provide solution implementation services to our end-customers. These capitalized costs consist of internal compensation related costs and external direct costs incurred during the application development stage and are amortized over their useful lives, generally six years. The costs to develop software that is marketed externally have not been capitalized as we believe our current software development process is essentially completed concurrent with the establishment of technological feasibility. As such, all related software development costs are expensed as incurred and included in research and development expense in our consolidated statements of operations.

20

Goodwill and Intangible Assets

We record goodwill when the purchase consideration of an acquisition exceeds the fair value of the net tangible and identified intangible assets as of the date of acquisition. We perform an annual impairment assessment of goodwill during the fourth quarter of each calendar year or more frequently if required to determine if any events or circumstances exist, such as an adverse change in business climate or a decline in the overall industry demand, that would indicate that it would more likely than not reduce the fair value of a reporting unit below its carrying amount, including goodwill. If events or circumstances do not indicate that the fair value of a reporting unit is below its carrying amount, then goodwill is not considered to be impaired and no further testing is required. If further testing is required, we perform a two-step process. The first step involves comparing the fair value of its reporting unit to its carrying value, including goodwill. If the carrying value of the reporting unit exceeds its fair value, the second step of the test is performed by comparing the carrying value of the goodwill in the reporting unit to its implied fair value. An impairment charge is recognized for the excess of the carrying value of goodwill over its implied fair value. For the purpose of impairment testing, we have determined that we have one reporting unit. There was no impairment of goodwill for the period ended March 31, 2017.

Our long-lived assets, excluding goodwill, consist of property and equipment and intangible assets. We periodically review our long-lived assets for impairment. For assets to be held and used, we initiate our review whenever events or changes in circumstances indicate that the carrying amount of a long-lived asset group may not be recoverable. Recoverability of an asset group is measured by comparison of its carrying amount to the expected future undiscounted cash flows that the asset group is expected to generate. If it is determined that an asset group is not recoverable, an impairment loss is recorded in the amount by which the carrying amount of the asset group exceeds its fair value. During the three months ended March 31, 2017, there was no impairment related to our long-lived assets.

Recent Accounting Pronouncements and Accounting Changes

See Note 2 of “Notes to Condensed Consolidated Financial Statements (Unaudited)” of this Quarterly Report on Form 10-Q for a description of recent accounting pronouncements and accounting changes, including the expected dates of adoption and estimated effects, if any, on our consolidated financial statements.   

  Results of Operations

The following table sets forth, for the periods indicated, the percentage of total revenues represented by the line items reflected in our condensed consolidated statements of operations:  

	Three Months Ended March 31,
	2017			2016
Revenues:
Design-to-silicon-yield solutions		81	%		74	%
Gainshare performance incentives		19			26
Total revenues		100	%		100	%
Costs of design-to-silicon-yield solutions		47			40
Amortization of acquired technology		1			1
Total costs of Design-to-silicon-yield solutions		48			41
Gross profit		52			59
Operating expenses:
Research and development		30			25
Selling, general and administrative		24			20
Amortization of other acquired intangible assets		1			1
Total operating expenses		55			46
Income (loss) from operations		(2	)		13
Interest and other income (expense), net		(1	)		(1	)
Income (loss) before taxes		(3	)		12
Income tax provision (benefit)		(5	)		4
Net income		2	%		8	%

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Comparison of the Three Months Ended March 31, 2017 and 2016

	Three Months Ended March 31,							%
Revenues	2017		2016		Change			Change
(in thousands, except for percentages)
Design-to-silicon-yield solutions	$	19,698	$	18,578	$	1,120			6	%
Gainshare performance incentives		4,591		6,503		(1,912	)		(29	)%
Total revenues	$	24,289	$	25,081	$	(792	)		(3	)%

Design-to-silicon-yield solutions. Design-to-silicon-yield solutions revenue is derived from services (including solution implementations, software support and maintenance, consulting, and training) and software licenses, provided during our customer yield improvement engagements as well as during solution product sales.  Design-to-silicon-yield solutions revenue increased $1.1 million for the three months ended March 31, 2017, compared to the three months ended March 31, 2016, primarily due to an increase in the revenue from fixed fee integrated solutions, the result of more billable hours to revenue-generating projects in the period due to increased business activity, particularly in Asia, and an increase in the revenue from our Exensio big data solution. Our Design-to-silicon-yield solutions revenue may fluctuate in the future and is dependent on a number of factors, including the semiconductor industry’s continued acceptance of our solutions, the timing of purchases by existing customers, and our ability to attract new customers and penetrate new markets, and further penetration of our current customer base. Fluctuations in future results may also occur if any of our significant customers renegotiate pre-existing contractual commitments due to adverse changes in their own business or, in the case of a time and materials contract, may take advantage of contractual provisions that permit the suspension of contracted work for a period if their business experiences a financial hardship.  

Gainshare Performance Incentives. Gainshare performance incentives revenues represent profit sharing and performance incentives earned contingent upon our customers reaching certain defined operational levels. Revenue derived from Gainshare performance incentives decreased $1.9 million for the three months ended March 31, 2017, compared to the three months ended March 31, 2016.  The decrease was primarily the result of lower gainshare from 28nm volumes, partially offset by higher gainshare from 14nm volumes, compared to the volumes from those nodes in the comparable period. Our Gainshare performance incentives revenue may continue to fluctuate from period to period. Gainshare performance incentives revenue is dependent on many factors that are outside our control, including among others, continued production of ICs by our customers at facilities at which we generate Gainshare, sustained yield improvements by our customers, and our ability to enter into new Design-to-silicon-yield solutions contracts containing Gainshare performance incentives.  

	Three Months Ended March 31,						%
Costs of Design-to-silicon-yield solutions	2017		2016		Change		Change
(in thousands, except for percentages)
Direct costs of Design-to-silicon-yield solutions	$	11,335	$	10,110	$	1,225		12	%
Amortization of acquired technology		96		96		-		-	%
Total costs of Design-to-silicon-yield solutions	$	11,431	$	10,206	$	1,225		12	%

Costs of Design-to-silicon-yield solutions. Costs of Design-to-silicon-yield solutions consist of costs incurred to provide and support our services, costs recognized in connection with licensing our software, and amortization of acquired technology. Direct costs of Design-to-silicon-yield solutions consist of service and software licenses costs. Service costs consist of material, employee compensation and related benefits, overhead costs, travel and facilities-related costs. Software license costs consist of costs associated with licensing third-party software used by the Company in providing services to our customers in solution engagements, or sold in conjunction with our software products. Direct costs of Design-to-silicon-yield solutions increased $1.2 million for the three months ended March 31, 2017, compared to the three months ended March 31, 2016, primarily due to a $0.7 million increase in personnel-related cost driven by hiring in Asia and world-wide merit increases, a $0.2 million increase in subcontractor expense, a $0.3 million increase in depreciation expense of test equipment, and a $0.1 million increase in travel expense. Amortization of acquired technology for the three months ended March 31, 2017 and 2016 was due to the amortization of acquired technology from the Syntricity acquisition.

	Three Months Ended
	March 31						%
Research and Development	2017		2016		Change		Change
(in thousands, except for percentages)
Research and development	$	7,282	$	6,311	$	971		15	%

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Research and Development. Research and development expenses consist primarily of personnel-related costs to support product development activities, including compensation and benefits, outside development services, travel, facilities cost allocations, and stock-based compensation charges. Research and development expenses increased $1.0 million for the three months ended March 31, 2017, compared to the three months ended March 31, 2016, primarily due to a $0.3 million personnel-related expense due to higher headcount and world-wide merit increases, a $0.5 million increase in subcontractor expense, a $0.1 million increase in lab supplies, a $0.1 million increase in travel expense, and a $0.1 million increase in depreciation expense. The increased investment in research and development is primarily driven by continued development activity related to our DFI solution. We anticipate our expenses in research and development will fluctuate in absolute dollars from period to period as a result of cost control initiatives and the timing of product development projects and revenue generating activity requirements. 

	Three Months Ended
	March 31,				$		%
Selling, General and Administrative	2017		2016		Change		Change
(in thousands, except for percentages)
Selling, general and administrative	$	5,899	$	5,124	$	775		15	%

Selling, General and Administrative. Selling, general and administrative expenses consist primarily of compensation and benefits for sales, marketing and general and administrative personnel, legal and accounting services, marketing communications, travel and facilities cost allocations, and stock-based compensation charges. Selling, general and administrative expenses increased $0.8 million for the three months ended March 31, 2017, compared to the three months ended March 31, 2016, primarily due to a $0.2 million increase in personnel-related expense due to world-wide merit increases, a $0.1 million increase in facilities expense, a $0.2 million increase in subcontractor expense, and a $0.2 million increase in legal expense. We anticipate our selling, general and administrative expenses will fluctuate in absolute dollars from period to period as a result of cost control initiatives and to support increased selling efforts in the future.  

Amortization of Other Acquired Intangible Assets. Amortization of other acquired intangible assets consists of amortization of intangibles acquired as a result of certain business combinations. The amortization of other acquired intangible assets for the three months ended March 31, 2017 decreased by $25,000 compared to the three months ended March 31, 2016, primarily the result of certain intangible assets becoming fully amortized.

Interest and Other Income (expense), net. Interest and other expense, net decreased by $6,000 for the three months ended March 31, 2017 compared to the three months ended March 31, 2016. The change was primarily due to foreign exchange rate movements.

	Three Months Ended
	March 31,					$			%
Income Tax Provision (benefit)	2017			2016		Change			Change
(in thousands, except for percentages)
Income tax provision (benefit)	$	(1,162	)	$	1,026	$	(2,188	)		(213	)%

23

Income Tax Provision (benefit). Income tax provision decreased $2.2 million for the three months ended March 31, 2017, compared to three months ended March 31, 2016, primarily due to the recognition of excess tax benefits related to employee stock compensation as a result of the adoption of ASU 2016-09 as well as the changes in unrecognized tax benefit. 

Liquidity and Capital Resources

As of March 31, 2017, our working capital, defined as total current assets less total current liabilities, was $152.4 million, compared to $151.8 million as of December 31, 2016. Cash and cash equivalents were $114.9 million as of March 31, 2017, compared to $116.8 million as of December 31, 2016.  As of March 31, 2017 and December 31, 2016, cash and cash equivalents held by our foreign subsidiaries were $3.7 million and $3.4 million, respectively. We believe that our existing cash resources and anticipated funds from operations will satisfy our cash requirements to fund our operating activities, capital expenditures and other obligations for the next twelve months.

During three months ended March 31, 2017, cash used in operating activities of $0.4 million was a result of $0.5 million of net income, non-cash adjustments to net income of $3.7 million and an increase in the net change in operating assets and liabilities of $4.6 million. Non-cash charges consisted primarily of stock-based compensation of $2.9 million, depreciation and amortization of $1.1 million, and amortization of acquired intangible assets of $0.2 million, partially offset by deferred taxes of $0.6 million. Cash flow decreases resulting from the net change in operating assets and liabilities primarily consisted of a $1.9 million increase in accounts receivable, mainly due to the timing of customer payments, a $1.4 million increase in prepaid expense and other current assets, a $1.0 million decrease in accrued compensation and related benefits, a $0.6 million of decrease in accrued and other liabilities, and a $2.0 million increase in other non-current assets, partially offset by a $0.5 million increase in accounts payable, a $1.7 million increase in deferred revenue, and a $0.1 million increase in billing in excess of recognized revenue. Cash flows used in investing activities of $2.3 million for the three months ended March 31, 2017, consisted of payments for capital expenditures, primarily test equipment. Cash flows provided by financing activities of $0.8 million for the three months ended March 31, 2017, consisted of $0.7 million of proceeds from the exercise of stock options and $0.9 million of proceeds from our Employee Stock Purchase Plan, offset by $0.8 million of cash payments for taxes related to net share settlement of equity awards.

  During the three months ended March 31, 2016, cash generated from operating activities of $4.0 million was a result of $2.1 million of net income, non-cash adjustments to net income of $4.2 million and a decrease in the net change in operating assets and liabilities of $2.3 million. Non-cash charges consisted primarily of stock-based compensation of $2.7 million, deferred taxes of $0.5 million, depreciation and amortization of $0.8 million, amortization of acquired intangible assets of $0.2 million, and loss on disposal of property and equipment of $0.1 million. Cash flow decreases resulting from the net change in operating assets and liabilities primarily consisted of a $0.6 million decrease in accrued compensation and related benefits, $0.8 million decrease in accrued and other liability primarily due to payment of earn-out consideration related to Syntricity acquisition, a $1.2 million decrease in billing in excess of recognized revenue, and a $5.9 million increase in other non-current assets, offset by a $4.1 million decrease in accounts receivable, due to timing of customer payment, a $0.2 million decrease in prepaid expense and other current assets, a $0.3 million increase in accounts payable due to timing of payment of third party services, and a $1.7 million increase in deferred revenue. Cash flows used in investing activities of $1.8 million for the three months ended March 31, 2016, consisted of payments for capital expenditures, primarily test equipment. Cash flows provided by financing activities of $1.0 million for the three months ended March 31, 2016, primarily consisted of $0.2 million of proceeds from the exercise of stock options, $0.8 million of proceeds from our Employee Stock Purchase Plan.

Off-Balance Sheet Agreements 

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

24

Contractual Obligations

The following table summarizes our known contractual obligations (in thousands) as of March 31, 2017:

	Payments Due by Period
Contractual Obligations	2017 (remaining nine months)		2018		2019		2020		2021		2022 and thereafter		Total
Operating lease obligations	$	1,434	$	1,307	$	439	$	374	$	291	$	73	$	3,918
Purchase obligations(1)		7,979		483		222		222		222		—		9,128
Total(2)	$	9,413	$	1,790	$	661	$	596	$	513	$	73	$	13,046

(1)	Purchase obligations consist of agreements to purchase goods and services entered in the ordinary course of business.
(2)	The contractual obligation table above excludes liabilities for uncertain tax positions of $2.7 million, which are not practicable to assign to any particular years, due to the inherent uncertainty of the tax positions.  See Note 5 of “Notes to Consolidated Financial Statements” for further discussion.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

The following discusses our exposure to market risk related to changes in interest rates and foreign currency exchange rates. We do not currently own any equity investments, nor do we expect to own any in the foreseeable future. This discussion contains forward-looking statements that are subject to risks and uncertainties. Actual results could vary materially as a result of a number of factors.

Interest Rate Risk.   As of March 31, 2017, we had cash and cash equivalents of $114.9 million. Cash and cash equivalents consisted of cash and highly liquid money market instruments. We would not expect our operating results or cash flows to be affected to any significant degree by the effect of a sudden change in market interest on our portfolio. A hypothetical increase in market interest rates of 100 basis points from the market rates in effect at March 31, 2017, would cause the fair value of these investments to decrease by an immaterial amount which would not have significantly impacted our financial position or results of operations. Declines in interest rates over time will result in lower interest income and interest expense.

Foreign Currency and Exchange Risk.   Certain of our payables for our international offices are denominated in the local currency, including the Euro, Yen and RMB. Therefore, a portion of our operating expenditures is subject to foreign currency risks. We enter into foreign currency forward contracts to reduce the exposure to foreign currency exchange rate fluctuations on certain foreign currency denominated monetary assets and liabilities. We do not use foreign currency forward contracts for speculative or trading purposes. We record these forward contracts at fair value. The counterparty to these foreign currency forward contracts is a large global financial institution that we believe is creditworthy, and therefore, we believe the credit risk of counterparty non-performance is not significant. The change in fair value of these contracts is recorded into earnings as a component of other income (expense), net and offsets the change in fair value of foreign currency denominated monetary assets and liabilities, which is also recorded in other income (expense), net. As of March 31, 2017, we had one outstanding forward contract with a notional amount of $7.2 million. The foreign currency exchange rate movement of plus-or-minus 10% will result in the change in fair value of this contract of plus-or-minus $0.7 million.  

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our principal executive officer and principal financial and accounting officer, evaluated the effectiveness of our "disclosure controls and procedures" as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) as of March 31, 2017, in connection with the filing of this Quarterly Report on Form 10-Q. Based on that evaluation as of March 31, 2017, our principal executive officer and principal financial and accounting officer concluded that our disclosure controls and procedures were effective to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in rules and forms of the SEC and accumulated and communicated to our management as appropriate to allow timely decisions regarding required disclosure.    

25

 Changes in Internal Control over Financial Reporting

There were no changes in the Company's internal control over financial reporting during the three months ended March 31, 2017, that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. 

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

From time to time, we are subject to various claims and legal proceedings that arise in the ordinary course of business. We accrue for losses related to litigation when a potential loss is probable and the loss can be reasonably estimated in accordance with FASB requirements. During the reported period, we were not a party to any material legal proceedings, thus no loss was probable and no amount was accrued at March 31, 2017.

Item 1A. Risk Factors

Item 1A, “Risk Factors,” on pages 13 through 20 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, provides information on the significant risks associated with our business. There have been no subsequent material changes to these risks.  

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

None.  

Item 3. Defaults Upon Senior Securities

None.  

Item 4. Mine Safety Disclosures

None. 

Item 5. Other Information

None. 

26

Item 6. Exhibits

Exhibit Number	Description
31.01	Certification of the principal executive officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.02	Certification of the principal financial and accounting officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.01	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.02	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS	XBRL Instance Document.
101.SCH	XBRL Taxonomy Extension Schema Document.
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB	XBRL Taxonomy Extension Label Linkbase Document.
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document.

27

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	PDF SOLUTIONS, INC.
Date: May 2, 2017	By:	/s/ JOHN K. KIBARIAN
		John K. Kibarian
		President and Chief Executive Officer
		(principal executive officer)

Date: May 2, 2017	By:	/s/ GREGORY C. WALKER
		Gregory C. Walker
		Vice President, Finance and Chief Financial Officer
		(principal financial and accounting officer)

28

INDEX TO EXHIBITS

Exhibit Number	Description
31.01	Certification of the principal executive officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.02	Certification of the principal financial and accounting officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.01	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.02	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS	XBRL Instance Document.
101.SCH	XBRL Taxonomy Extension Schema Document.
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB	XBRL Taxonomy Extension Label Linkbase Document.
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document.

29

EX-31.01

 Exhibit 31.01

CERTIFICATIONS

 I, John K. Kibarian, certify that:

1. I have reviewed this quarterly report on Form 10-Q of PDF Solutions, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

By:	/s/ JOHN K. KIBARIAN
	John K. Kibarian
	President and Chief Executive Officer
	(principal executive officer)

Date: May 2, 2017

EX-31.02

Exhibit 31.02

CERTIFICATIONS

I, Gregory C. Walker, certify that:

1. I have reviewed this quarterly report on Form 10-Q of PDF Solutions, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

By:	/s/ GREGORY C. WALKER
	Gregory C. Walker
	Vice President, Finance and Chief Financial Officer
	(principal financial and accounting officer)

Date: May 2, 2017

EX-32.01

Exhibit 32.01

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of PDF Solutions, Inc. (the “Company”) on Form 10-Q for the quarter ended March 31, 2017, as filed with the Securities and Exchange Commission on May 2, 2017 (the “Report”), I, John K. Kibarian, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

By:	/s/ JOHN K. KIBARIAN
	John K. Kibarian
	President and Chief Executive Officer
	(principal executive officer)

Date: May 2, 2017

EX-32.02

Exhibit 32.02

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of PDF Solutions, Inc. (the “Company”) on Form 10-Q for the quarter ended March 31, 2017 as filed with the Securities and Exchange Commission on May 2, 2017 (the “Report”), I, Gregory C. Walker, Vice President, Finance and Chief Financial Officer, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

By:	/s/ GREGORY C. WALKER
	Gregory C. Walker
	Vice President, Finance and Chief Financial Officer
	(principal financial and accounting officer)

Date: May 2, 2017

XML

Document And Entity Information - shares	3 Months Ended
	Mar. 31, 2017	Apr. 26, 2017
Document Information [Line Items]
Entity Registrant Name	PDF SOLUTIONS INC
Entity Central Index Key	0001120914
Trading Symbol	pdfs
Current Fiscal Year End Date	--12-31
Entity Filer Category	Accelerated Filer
Entity Current Reporting Status	Yes
Entity Voluntary Filers	No
Entity Well-known Seasoned Issuer	No
Entity Common Stock, Shares Outstanding (in shares)		32,142,332
Document Type	10-Q
Document Period End Date	Mar. 31, 2017
Document Fiscal Year Focus	2017
Document Fiscal Period Focus	Q1
Amendment Flag	false

XML

Condensed Consolidated Balance Sheets (Current Period Unaudited) - USD ($) $ in Thousands	Mar. 31, 2017	Dec. 31, 2016
Current assets:
Cash and cash equivalents	$ 114,926	$ 116,787
Accounts receivable, net of allowance of $200	50,088	48,157
Prepaid expenses and other current assets	6,741	5,335
Total current assets	171,755	170,279
Property and equipment, net	20,798	19,341
Goodwill	215	215
Intangible assets, net	4,035	4,223
Deferred tax assets	16,201	15,640
Other non-current assets	14,615	12,631
Total assets	227,619	222,329
Current liabilities:
Accounts payable	2,436	2,206
Accrued compensation and related benefits	4,988	5,959
Accrued and other current liabilities	1,913	2,080
Deferred revenues – current portion	9,777	8,189
Billings in excess of recognized revenue	200	88
Total current liabilities	19,314	18,522
Long-term income taxes payable	3,247	3,354
Other non-current liabilities	1,802	1,650
Total liabilities	24,363	23,526
Commitments and contingencies (Note 9)
Stockholders’ equity:
Preferred stock, $0.00015 par value, 5,000 shares authorized, no shares issued and outstanding	0	0
Common stock, $0.00015 par value, 70,000 shares authorized: shares issued 38,810 and 38,514, respectively; shares outstanding 32,124 and 31,864, respectively	5	5
Additional paid-in-capital	285,930	281,423
Treasury stock at cost, 6,687 and 6,650 shares, respectively	(55,726)	(54,882)
Accumulated deficit	(25,235)	(25,752)
Accumulated other comprehensive loss	(1,718)	(1,991)
Total stockholders’ equity	203,256	198,803
Total liabilities and stockholders’ equity	$ 227,619	$ 222,329

XML

Condensed Consolidated Balance Sheets (Current Period Unaudited) (Parentheticals) - USD ($) shares in Thousands, $ in Millions	Mar. 31, 2017	Dec. 31, 2016
Accounts receivable, allowance	$ 0.2	$ 0.2
Preferred stock, par value (in dollars per share)	$ 0.00015	$ 0.00015
Preferred stock, shares authorized (in shares)	5,000	5,000
Preferred stock, shares issued (in shares)	0	0
Preferred stock, shares outstanding (in shares)	0	0
Common stock, par value (in dollars per share)	$ 0.00015	$ 0.00015
Common stock, shares authorized (in shares)	70,000	70,000
Common stock, shares issued (in shares)	38,810	38,514
Common stock, shares outstanding (in shares)	32,124	31,864
Treasury stock, shares (in shares)	6,687	6,650

XML

Condensed Consolidated Statements of Operations and Comprehensive Income (Unaudited) - USD ($) shares in Thousands, $ in Thousands	3 Months Ended
	Mar. 31, 2017	Mar. 31, 2016
Revenues:
Design-to-silicon-yield solutions	$ 19,698	$ 18,578
Gainshare performance incentives	4,591	6,503
Total revenues	24,289	25,081
Costs of Design-to-silicon-yield solutions
Direct costs of Design-to-silicon-yield solutions	11,335	10,110
Amortization of acquired technology	96	96
Total cost of Design-to-silicon-yield solutions	11,431	10,206
Gross profit	12,858	14,875
Operating expenses:
Research and development	7,282	6,311
Selling, general and administrative	5,899	5,124
Amortization of other acquired intangible assets	92	117
Total operating expenses	13,273	11,552
Income (loss) from operations	(415)	3,323
Interest and other income (expense), net	(230)	(236)
Income (loss) before income taxes	(645)	3,087
Income tax provision (benefit)	(1,162)	1,026
Net income	$ 517	$ 2,061
Net income per share:
Basic (in dollars per share)	$ 0.02	$ 0.07
Diluted (in dollars per share)	$ 0.02	$ 0.07
Weighted average common shares:
Basic (in shares)	31,991	31,168
Diluted (in shares)	33,594	31,754
Net income	$ 517	$ 2,061
Other comprehensive income:
Foreign currency translation adjustments, net of tax	273	360
Comprehensive income	$ 790	$ 2,421

XML

Condensed Consolidated Statements of Cash Flows (Unaudited) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2017	Mar. 31, 2016
Operating activities:
Net income	$ 517	$ 2,061
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation and amortization	1,091	765
Stock-based compensation expense	2,884	2,666
Amortization of acquired intangible assets	188	213
Deferred taxes	(580)	458
Loss on disposal of property and equipment		107
Provision for doubtful accounts		53
Unrealized loss (gain) on foreign currency forward contract	92	(23)
Changes in operating assets and liabilities:
Accounts receivable, net of allowance	(1,931)	4,062
Prepaid expenses and other current assets	(1,395)	178
Accounts payable	476	250
Accrued compensation and related benefits	(1,040)	(564)
Accrued and other liabilities	(587)	(833)
Deferred revenues	1,734	1,674
Billings in excess of recognized revenues	112	(1,153)
Other non-current assets	(1,977)	(5,917)
Net cash (used in) provided by operating activities	(416)	3,997
Investing activities:
Purchases of property and equipment	(2,313)	(1,780)
Net cash used in investing activities	(2,313)	(1,780)
Financing activities:
Proceeds from exercise of stock options	717	182
Proceeds from employee stock purchase plan	909	777
Payments for taxes related to net share settlement of equity awards	(844)	(9)
Net cash provided by financing activities	782	950
Effect of exchange rate changes on cash and cash equivalents	86	73
Net change in cash and cash equivalents	(1,861)	3,240
Cash and cash equivalents, beginning of period	116,787	126,158
Cash and cash equivalents, end of period	114,926	129,398
Supplemental disclosure of cash flow information:
Taxes	681	281
Property and equipment received and accrued in accounts payable and accrued and other liabilities	$ 885	$ 1,218

XML

Note 1 - Basis of Presentation

3 Months Ended

Mar. 31, 2017

Notes to Financial Statements

Organization, Consolidation and Presentation of Financial Statements Disclosure [Text Block]

1.

BASIS OF PRESENTATION

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,

2016.

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,

2016,

 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 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 for fixed-price solution implementation service contracts, accounting for goodwill and intangible assets, stock-based compensation expense and accounting for income taxes. Actual results could differ from those estimates.

Revenue Recognition

 — The Company derives revenue from

two

sources: Design-to-silicon-yield solutions and Gainshare performance incentives.

Design-to-silicon-yield solutions — Revenues that are derived from Design-to-silicon-yield solutions come from services and software and hardware licenses. The Company recognizes revenue for each element of Design-to-silicon-yield solutions as follows:

The Company generates a significant portion of its Design-to-silicon-yield solutions revenue from fixed-price solution implementation service contracts delivered over a specific period of time. These contracts require reliable estimation of costs to perform obligations and the overall scope of each engagement. Revenue under project–based contracts for solution implementation services is recognized as services are performed using percentage of completion method of contract accounting based on costs or labor-hours input method, whichever is the most appropriate measure of the progress towards completion of the contract. Losses on fixed-price solution implementation contracts are recognized in the period when they become probable. Revisions in profit estimates are reflected in the period in which the conditions that require the revisions become known and can be estimated (cumulative catch-up method). During the period ended

March

31,

2017,

the Company recognized changes in

one

of its project’s profitability from revisions in estimates due to the scope changes that resulted in unfavorable changes of net income of

$0.6

million or

$0.01

per diluted share. Revenue under time and materials contracts for solution implementation services are recognized as the services are performed.

On occasion, the Company licenses its software products as a component of its fixed-price service contracts. In such instances, the software products are licensed to customers over a specified term of the agreement with support and maintenance to be provided, if applicable, over the license term. The amount of product and service revenue recognized in a given period is affected by the Company’s judgment as to whether an arrangement includes multiple deliverables and, if so, the Company’s determination of the fair value of each deliverable. In general, vendor-specific objective evidence of selling price (“VSOE”) does not exist for the Company’s solution implementation services and software products and because the Company’s services and products include our unique technology, the Company is not able to determine

third

-party evidence of selling price (“TPE”). Therefore, in such circumstances the Company uses best estimated selling prices (“BESP”) in the allocation of arrangement consideration. In determining BESP, the Company applies significant judgment as the Company’s weighs a variety of factors, based on the facts and circumstances of the arrangement. The Company typically arrives at BESP for a product or service that is not sold separately by considering company-specific factors such as geographies, internal costs, gross margin objectives, pricing practices used to establish bundled pricing, and existing portfolio pricing and discounting. After fair value is established for each deliverable, the total transaction amount is allocated to each deliverable based upon its relative selling price. Fees allocated to solution implementation services are recognized using the percentage of completion method of contract accounting. Fees allocated to software and related support and maintenance are recognized under software revenue recognition guidance.

In some instances, the Company also licenses its DFI system as a separate component of fixed-price service contracts. The Company allocates revenue to all deliverables based on their relative selling prices. The Company currently does not have VSOE for its DFI system, thus the Company uses either TPE or BESP in the allocation of arrangement consideration.

The Company defers certain pre-contract costs incurred for specific anticipated contracts. Deferred costs consist primarily of direct costs to provide solution implementation services in relation to the specific anticipated contracts. The Company recognizes such costs as a component of cost of revenues, the timing of which is dependent upon persuasive evidence of contract arrangement assuming all other revenue recognition criteria are met. The Company also defers costs from arrangements that required us to defer the revenues, typically due to revenue recognition from multi-element arrangements or from contracts subject to customer acceptance. 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. Deferred costs balance was

$0.6

million and

$0.5

million as of

March

31,

2017

and

December

31,

2016,

respectively. The balance was included in prepaid expenses and other current assets and other non-current assets in the accompanying consolidated balance sheets.

The Company also licenses its software products separately from solution implementations. For software license arrangements that do not require significant modification or customization of the underlying software, software license revenue is recognized under the residual method when (l) persuasive evidence of an arrangement exists,

(2)

delivery has occurred,

(3)

the fee is fixed or determinable,

(4)

collectability is probable, and

(5)

the arrangement does not require services that are essential to the functionality of the software. When arrangements include multiple elements such as support and maintenance, consulting (other than for fixed price solution implementations), installation, and training, revenue is allocated to each element of a transaction based upon its fair value as determined by the Company's VSOE and such services are recorded as services revenue. VSOE for maintenance is generally established based upon negotiated renewal rates while VSOE for consulting, installation, and training services is established based upon the Company's customary pricing for such services when sold separately. When software is licensed for a specified term, fees for support and maintenance are generally bundled with the license fee over the entire term of the contract. The Company is unable to establish VSOE of fair value for maintenance services that are generally bundled with term licenses. In these cases, the Company recognizes revenue ratably over the term of the contract. For multiple-element arrangements containing non-software services, the Company:

(1)

determines whether each element constitutes a separate unit of accounting;

(2)

determines the fair value of each element using the selling price hierarchy of VSOE, TPE or BESP, as applicable; and

(3)

allocates the total price to each separate unit of accounting based on the relative selling price method. An element constitutes a separate unit of accounting when the delivered item has standalone value and delivery of the undelivered element is probable and within our control. For multiple-element arrangements that contain both software and non-software elements, the Company allocates revenue to software or software-related elements as a group and any non-software elements separately based on the selling price hierarchy of VSOE, TPE or BESP. Once revenue is allocated to software or software-related elements as a group, we recognize revenue in conformance with software revenue accounting guidance. Revenue is recognized when revenue recognition criteria are met for each element.

Revenue from software-as-a-service (SaaS) that allow for the use of a hosted software product or service over a contractually determined period of time without taking possession of software are accounted for as subscriptions and recognized as revenue ratably over the coverage period beginning on the date the service is made available to customers. Revenue for software licenses with extended payment terms is not recognized in excess of amounts due. For software license arrangements that require significant modification or customization of the underlying software, the software license revenue is recognized as services are performed using the percentage of completion method of contract accounting, and such revenue is recorded as services revenue.

Deferred revenues consist substantially of amounts invoiced in advance of revenue recognition and is recognized as the revenue recognition criteria are met. Deferred revenues that will be recognized during the succeeding

12

month period is recorded as current deferred revenues and the remaining portion is recorded as non- current deferred revenues. Non-current portion of deferred revenue was

$1.7

million and

$1.5

million, respectively, as of

March

31,

2017

and

December

31,

2016.

This balance was recorded in the other non-current liabilities in the accompanying consolidated balance sheets.

Gainshare Performance Incentives — When the Company enters into a contract to provide yield improvement services, the contract usually includes

two

components:

(1)

a fixed fee for performance by the Company of services delivered over a specific period of time; and

(2)

a Gainshare performance incentive component where the customer

may

pay a contingent variable fee, usually after the fixed fee period has ended. Revenue derived from Gainshare performance incentives represents profit sharing and performance incentives earned contingent upon the Company’s customers reaching certain defined operational levels established in related solution implementation service contracts. Gainshare performance incentives periods are usually subsequent to the delivery of all contractual services and therefore have virtually no cost to the Company. Due to the uncertainties surrounding attainment of such operational levels, the Company recognizes Gainshare performance incentives revenue (to the extent of completion of the related solution implementation contract) upon receipt of performance reports or other related information from the customer supporting the determination of amounts and probability of collection.  

XML

Note 2 - Recent Accounting Pronouncements

3 Months Ended

Mar. 31, 2017

Notes to Financial Statements

New Accounting Pronouncements and Changes in Accounting Principles [Text Block]

2.

RECENT ACCOUNTING PRONOUNCEMENTS

In

May

2014,

the FASB issued ASU No.

2014

-

09,

Revenue from Contracts with Customers (Topic

606)

as modified by ASU No.

2015

-

14,

Revenue from Contracts with Customers (Topic

606):

Deferral of the Effective Date, ASU

2016

-

08,

Revenue from Contracts with Customers (Topic

606):

Principal versus Agent Considerations (Reporting Revenue Gross versus Net), ASU No.

2016

-

10,

Revenue from Contracts with Customers (Topic

606):

Identifying Performance Obligations and Licensing, ASU No.

2016

-

11,

Revenue Recognition (Topic

605)

and Derivatives and Hedging (Topic

815),

ASU No.

2016

-

12,

Revenue from Contracts with Customers (Topic

606):

Narrow-Scope Improvements and Practical Expedients, and ASU

2016

-

20,

Revenue from Contracts with Customers (Topic

606):

Technical Corrections and Improvements. The new revenue recognition standard provides a

five

-step analysis of transactions to determine when and how revenue is recognized. The core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This new standard is effective for annual periods beginning after

December

15,

2017,

including interim periods within that reporting period. The new standard also permits

two

methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the modified retrospective method). The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting

In

February

2016,

the Financial Accounting Standards Board (or FASB) issued ASU No.

2016

-

02,

Leases (Topic

842).

The update requires that most leases, including operating leases, be recorded on the balance sheet as an asset and a liability, initially measured at the present value of the lease payments. Subsequently, the lease asset will be amortized generally on a straight-line basis over the lease term, and the lease liability will bear interest expense and be reduced for lease payments. The amendments in this update are effective for public companies’ financial statements issued for fiscal years beginning after

December

15,

2018,

including interim periods within those fiscal years. The Company is still in the process of evaluating the impact of adopting this new accounting standard on its consolidated financial statements and footnote disclosures.

In

August

2016,

the FASB issued ASU No.

2016

-

15,

Classification of Certain Cash Receipts and Cash Payments. The purpose of this standard is to clarify the treatment of several cash flow categories. This update is effective for annual periods beginning after

December

15,

2017,

and interim periods within those fiscal years, with early adoption permitted, including adoption in an interim period. The Company is currently assessing the impact that adopting this new accounting standard will have on its consolidated financial statements and footnote disclosures.

In

January

2017,

the FASB issued ASU No.

2017

-

04,

Intangibles - Goodwill and Other (Topic

350)

("ASU No.

2017

-

04").

ASU No.

2017

-

04

eliminates step

2

from the annual goodwill impairment test. This update is effective for annual periods beginning after

December

15,

2019,

and interim periods within those fiscal years, with early adoption permitted, and is to be applied on a prospective basis. The Company is currently assessing the impact that adopting this new accounting standard will have on its consolidated financial statements and footnote disclosures. 

XML

Note 3 - Balance Sheet Components

3 Months Ended

Mar. 31, 2017

Notes to Financial Statements

Supplemental Balance Sheet Disclosures [Text Block]

3.

BALANCE SHEET COMPONENTS

 

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 are primarily determined on an individual contract basis. Unbilled accounts receivable, included in accounts receivable, totaled

$22.7

million and

$20.8

million as of

March

31,

2017

and

December

31,

2016,

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

$11.8

million and

$9.8

million as of

March

31,

2017

and

December

31,

2016,

respectively. Deferred costs balance was

$0.6

million and

$0.5

million as of

March

31,

2017

and

December

31,

2016,

respectively. The balance was included in prepaid expense and other current assets and other non-current assets in the accompanying balance sheets.

Property and equipment, net consists of (in thousands): 

	March 31 , 201 7			December 31, 2016
Property and equipment, net:
Computer equipment	$	10,568		$	10,642
Software		2,363			1,679
Furniture, fixtures and equipment		1,811			1,185
Leasehold improvements		1,961			1,132
Test equipment		11,843			11,723
Construction-in-progress		9,575			9,550
		38,121			35,911
Less: accumulated depreciation		(17,323	)		(16,570	)
Total	$	20,798		$	19,341

Depreciation and amortization expense was

$1.1

million and

$0.8

million for the

three

months ended

March

31,

2017

and

2016,

respectively.  

As of both

March

31,

2017

and

December

31,

2016,

the carrying amount of goodwill was 

$0.2

million. The following is a rollforward of the Company's goodwill balance (in thousands):

	March 31 , 201 7
Balance as of December 31, 2016	$	215
Add: Goodwill from acquisition		—
Adjustment		—
Balance as of March 31, 2017	$	215

Intangible assets balance was

$4.0

million and

$4.2

million as of

March

31,

2017

and

December

31,

2016,

respectively. Intangible assets as of

March

31,

2017

and

December

31,

2016

consist of the following (in thousands):

				March 31, 2017							December 31, 201 6
	Amortization Period (Years)			Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Acquired identifiable intangibles:
Customer relationships	1	-	9	$	5,920	$	(3,895	)	$	2,025	$	5,920	$	(3,825	)	$	2,095
Developed technology	4	-	6		14,100		(12,455	)		1,645		14,100		(12,359	)		1,741
Tradename	2	-	4		610		(595	)		15		610		(583	)		27
Backlog		1			100		(100	)		-		100		(100	)		-
Patent	7	-	10		1,800		(1,450	)		350		1,800		(1,440	)		360
Other acquired intangibles		4			255		(255	)		-		255		(255	)		-
Total				$	22,785	$	(18,750	)	$	4,035	$	22,785	$	(18,562	)	$	4,223

The weighted average amortization period for acquired identifiable intangible assets was

6.18

years as of

March

31,

2017.

For both the

three

months ended

March

31,

2017

and

2016,

intangible asset amortization expense was

$0.2

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

Period Ending March 31 ,
2017	$	540
2018		701
2019		701
2020		701
2021		526
2022 and thereafter		866
Total future amortization expense	$	4,035

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

months ended

March

31,

2017,

there were

no

indicators of impairment related to the Company’s intangible assets.

XML

Note 4 - Stockholders' Equity

3 Months Ended

Mar. 31, 2017

Notes to Financial Statements

Shareholders' Equity and Share-based Payments [Text Block]

4.

STOCKHOLDERS’ EQUITY

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 March 31,
	2017		2016
Cost of Design-to-silicon-yield solutions	$	1,192	$	1,085
Research and development		834		706
Selling, general and administrative		858		875
Stock-based compensation expenses	$	2,884	$	2,666

On

March

31,

2017,

the Company had the following stock-based compensation plans:

Stock Plans —

At the annual meeting of stockholders on

November

16,

2011,

the Company’s stockholders approved the

2011

Stock Incentive Plan, which was amended and restated at the

2013

annual meeting of stockholders on

May

28,

2013,

when the Company’s stockholders approved the First Amended and Restated

2011

Stock Incentive Plan, and then subsequently amended at the

2014

annual meeting of stockholders on

May

27,

2014,

when the Company’s stockholders approved the Second Amended and Restated

2011,

Incentive Plan and then subsequently amended at the

2016

annual meeting of stockholders on

May

31,

2016,

when the Company’s stockholders approved the

third

amended and restated

2011

Stock Incentive Plan (as amended, the

“2011

Plan”). Under the

2011

Plan, the Company

may

award stock options, stock appreciation rights, stock grants or stock units covering shares of the Company's common stock to employees, directors, non-employee directors and contractors. The aggregate number of shares reserved for awards under this plan is

7,800,000

shares, plus up to

3,500,000

shares previously issued under the

2001

Plan that are forfeited or repurchased by the Company or shares subject to awards previously issued under the

2001

Plan that expire or that terminate without having been exercised or settled in full on or after

November

16,

2011.

In case of awards other than options or stock appreciation rights, the aggregate number of shares reserved under the 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.

On

April

11,

2017,

the Company’s Board of Directors amended the

2011

Plan, subject to stockholder approval to increase the number of shares reserved for awards under it to a total of

9,050,000

shares, which is an increase of an additional

1,250,000

shares.

In

2001,

the Company adopted a

2001

Stock Plan (the

“2001

Plan”). In

2003,

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

2001

Stock Option / Stock Issuance Plan (the “IDS Plan”).  Both of the

2001Plan

and the IDS Plans expired in

2011.

  Stock options granted under the

2001

and IDS Plans generally expire

ten

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

four

-year period. Although no new awards

may

be granted under the

2001

or IDS Plans, awards made under the

2001

and IDS Plans that are currently outstanding remain subject to the terms of each such plan, respectively.

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 March 31,
	2017			2016
Expected life (in years)		4.41			4.42
Volatility		40.57	%		44.74	%
Risk-free interest rate		1.87	%		1.21	%
Expected dividend		—			—
Weighted average fair value per share of options granted during the period	$	7.85		$	4.08

As of

March

31,

2017,

8.3

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

2011

Plan, of which 

3.5

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

2011

Plan includes

0.5

million shares that were subject to awards previously made under the

2001

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

2011

Plan through

March

31,

2017.

  As of

March

31,

2017,

there were no outstanding awards that had been granted outside of the

2011

Plan,

2001

Plan or the IDS Plan (collectively, the "Stock Plans").  

Stock option activity under the Company’s Stock Plans during the

three

months ended

March

31,

2017,

was as follows:

	Number of Options (in thousands)			Weighted Average Exercise Price per Share		Weighted Average Remaining Contractual Term (years)		Aggregate Intrinsic Value (in thousands)
Outstanding, January 1, 2017		1,364		$	8.00
Granted (weighted average fair value of $7.84 per share)		9		$	21.94
Exercised		(89	)	$	8.09
Canceled		(3	)	$	17.73
Expired		-		$	-
Outstanding, March 31, 2017		1,281		$	8.06		4.28	$	18,659
Vested and expected to vest, March 31, 2017		1,272		$	8.01		4.25	$	18,592
Exercisable, March 31, 2017		1,145		$	7.21		3.73	$	17,639

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

$22.62

per share as of

March

31,

2017.

The total intrinsic value of options exercised during the

three

months ended

March

31,

2017,

was

$1.2

million.

As of

March

31,

2017,

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

2.9

years. The total fair value of shares vested during the

three

months ended

March

31,

2017,

was

$0.1

million.

Nonvested restricted stock units activity during the

three

months ended

March

31,

2017,

was as follows:

	Shares (in thousands)			Weighted Average Grant Date Fair Value Per Share
Nonvested, January 1, 2017		1,542		$	15.50
Granted		9		$	21.94
Vested		(109	)	$	14.04
Forfeited		(7	)	$	15.84
Nonvested, March 31, 2017		1,435		$	15.64

As of

March

31,

2017,

there was

$17.8

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

2.6

years. Restricted stock units do not have rights to dividends prior to vesting.

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

(1)

 

675,000

 shares,

(2)

 

2%

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 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:

	Three Months Ended March 31,
	2017			2016
Expected life (in years)		1.25			1.25
Volatility		33.32	%		44.15	%
Risk-free interest rate		0.93	%		0.50	%
Expected dividend		—			—
Weighted average fair value per share of options granted during the period	$	6.78		$	3.56

During the

three

months ended

March

31,

2017

and

2016,

a total of

100,000

and

84,000

shares, respectively, were issued at a weighted-average purchase price of

$9.13

and

$9.21

per share, respectively. As of

March

31,

2017,

there was

$0.8

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

1.1

years. As of

March

31,

2017,

4.4

million shares were available for future issuance under the Purchase Plan.   

Stock Repurchase Program

—On

October

25,

2016,

the Board of Directors adopted a program, effective immediately, to repurchase up to

$25.0

million of the Company’s common stock both on the open market and in privately negotiated transactions over the next

two

years. As of

March

31,

2017,

there has been no common stock repurchased under this new program and

$25.0

million remained available for future repurchases.

XML

Note 5 - Income Taxes

3 Months Ended

Mar. 31, 2017

Notes to Financial Statements

Income Tax Disclosure [Text Block]

5.

INCOME TAXES

Income tax provision decreased

$2.2

million for the

three

months ended

March

31,

2017,

to

$1.2

million income tax benefit as compared to an income tax provision of

$1.0

million for the

three

months ended

March

31,

2016.

The Company’s effective tax rate was

180%

and

33%

for the

three

months ended

March

31,

2017

and

2016,

respectively.  The Company’s effective tax rate increased in the

three

months ended

March

31,

2017,

as compared to the same period in

2016,

primarily due to the recognition of excess tax benefits related to employee stock compensation of

$0.7

million as a result of the adoption of ASU

2016

-

09

as well as the changes in unrecognized tax benefit.

The Company’s total amount of unrecognized tax benefits, excluding interest and penalties, as of

March

31,

2017,

was

$11.8

million, of which

$7.0

million, if recognized, would decrease the Company’s effective tax rate. The Company’s total amount of unrecognized tax benefits, excluding interest and penalties, as of

December

31,

2016,

was

$11.9

million, of which

$7.2

million, if recognized, would affect the Company's effective tax rate. As of

March

31,

2017,

the Company has recorded unrecognized tax benefits of 

$2.7

million, including interest and penalties, as long-term taxes payable in its condensed consolidated balance sheet. The remaining

$9.6

million has been recorded net of our deferred tax assets, of which

$4.8

million is subject to a full valuation allowance. 

The valuation allowance was approximately

$6.7

million and

$6.8

million as of

March

31,

2017

and

December

31,

2016,

respectively, which was related to California R&D tax credits and California net operating losses related to our acquisition of Syntricity that we currently do not believe are more likely than not to be ultimately realized.

The Company conducts business globally and, as a result, files numerous consolidated and separate income tax returns in the U.S. federal, various state and foreign jurisdictions. Because the Company used some of the tax attributes carried forward from previous years to tax years that are still open, statutes of limitation remain open for all tax years to the extent of the attributes carried forward into tax year

2002

for federal and California tax purposes. The Company is not subject to income tax examinations in any of its major foreign subsidiaries’ jurisdictions.

XML

Note 6 - Net Income Per Share

3 Months Ended

Mar. 31, 2017

Notes to Financial Statements

Earnings Per Share [Text Block]

6.

NET INCOME PER SHARE

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

	Three Months Ended March 31,
	2017		2016
Numerator:
Net income	$	517	$	2,061
Denominator:
Basic weighted-average shares outstanding		31,991		31,168
Effect of dilutive options and restricted stock		1,603		586
Diluted weighted average shares outstanding		33,594		31,754
Net income per share - Basic	$	0.02	$	0.07
Net income per share - Diluted	$	0.02	$	0.07

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

	Three Months Ended March 31,
	2017		2016
Outstanding options		40		284
Nonvested restricted stock units		-		1,026
Employee Stock Purchase Plan		30		460
Total		70		1,770

XML

Note 7 - Customer and Geographic Information

3 Months Ended

Mar. 31, 2017

Notes to Financial Statements

Segment Reporting Disclosure [Text Block]

7.

CUSTOMER AND GEOGRAPHIC INFORMATION

Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or group, in deciding how to allocate resources and in assessing performance.

The Company’s chief operating decision maker, the chief executive officer, reviews discrete financial information presented on a consolidated basis for purposes of regularly making operating decisions and assessing financial performance. Accordingly, the Company considers itself to be in

one

operating segment, specifically the licensing and implementation of yield improvement solutions for companies designing and/or manufacturing integrated circuits. 

The Company had revenues from individual customers in excess of

10%

of total revenues as follows: 

	Three Months Ended March 31,
Customer	2017			2016
A		48	%		50	%
B		*	%		14	%

* represents less than 10%

The Company had gross accounts receivable from individual customers in excess of

10%

of gross accounts receivable as follows: 

Customer	March 31, 2017			December 31, 2016
A		41	%		42	%
C		13	%		13	%

* represents less than 10%  

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

	Three Months Ended March 31 ,
	201 7					201 6
	Revenues		Percentage of Revenues			Revenues		Percentage of Revenues
United States	$	11,634		48	%	$	12,121		48	%
Taiwan		3,837		16			2,184		9
Germany		2,308		10			3,035		12
South Korea		1,990		8			3,313		13
Rest of the world		4,520		18			4,428		18
Total revenue	$	24,289		100	%	$	25,081		100	%

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

	March 31 , 201 7		December 31, 201 6
United States	$	20,248	$	18,818
Rest of the world		550		523
Total long-lived assets, net	$	20,798	$	19,341

XML

Note 8 - Fair Value Measurements

3 Months Ended

Mar. 31, 2017

Notes to Financial Statements

Fair Value Disclosures [Text Block]

8.

FAIR VALUE MEASUREMENTS

Fair value is the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. The multiple assumptions used to value financial instruments are referred to as inputs, and a hierarchy for inputs used in measuring fair value is established, that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs reflect assumptions market participants would use in pricing an asset or liability based on market data obtained from independent sources while unobservable inputs reflect a reporting entity’s pricing based upon its own market assumptions. These inputs are ranked according to a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into

three

broad levels.

Level 1 -	Inputs are quoted prices in active markets for identical assets or liabilities.
Level 2 -	Inputs are quoted prices for similar assets or liabilities in an active market, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable and market-corroborated inputs which are derived principally from or corroborated by observable market data.
Level 3 -	Inputs are derived from valuation techniques in which one or more significant inputs or value drivers are unobservable.

The following table represents the Company’s assets measured at fair value on a recurring basis as of

March

31,

2017,

and the basis for that measurement (in thousands):

Assets	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Money market mutual funds	$	26,483	$	26,483	$	—	$	—

The following table represents the Company’s assets measured at fair value on a recurring basis as of

December

31,

2016,

and the basis for that measurement (in thousands):

Assets	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Money market mutual funds	$	26,456	$	26,456	$	—	$	—

The Company enters into foreign currency forward contracts to reduce the exposure to foreign currency exchange rate fluctuations on certain foreign currency denominated monetary assets and liabilities, primarily on

third

-party accounts payables and intercompany balances. The primary objective of the Company’s hedging program is to reduce volatility of earnings related to foreign currency exchange rate fluctuations. The counterparty to these foreign currency forward contracts is a large global financial institution that the Company believes is creditworthy, and therefore, the Company believes the credit risk of counterparty nonperformance is not significant. These foreign currency forward contracts are not designated for hedge accounting treatment. Therefore, the change in fair value of these contracts is recorded into earnings as a component of other income (expense), net, and offsets the change in fair value of the foreign currency denominated assets and liabilities, which is also recorded in other income (expense), net. For the

three

months ended

March

31,

2017

and

2016,

the Company recognized a realized gain of

$0.1

million and

$0.3

million on the contracts, respectively, which was recorded in other income (expense), net in the Company’s Statements of Operations and Comprehensive Income.  

The Company carries these derivatives financial instruments on its Consolidated Balance Sheets at their fair values. The Company’s foreign currency forward contracts are classified as Level

2

because it is not actively traded and the valuation inputs are based on quoted prices and market observable data of similar instruments. As of

March

31,

2017,

the Company had

one

outstanding forward contract with a notional amount of

$7.2

million and recorded

$0.1

million other current liabilities associated with this outstanding forward contract. As of

December

31,

2016,

the Company had

one

outstanding forward contract with a notional amount of

$6.9

million and had recorded

$15,000

other current liabilities associated with the outstanding forward contract.  

XML

Note 9 - Commitments and Contingencies

3 Months Ended

Mar. 31, 2017

Notes to Financial Statements

Commitments and Contingencies Disclosure [Text Block]

9.

COMMITMENTS AND CONTINGENCIES

 

Leases

The Company leases administrative and sales offices and certain equipment under noncancelable 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

2024.

Rent expense was

$0.5

million and

$0.6

million for the

three

months ended

March

31,

2017

and

2016,

respectively.  

Future minimum lease payments under noncancelable operating leases at

March

31,

2017,

are as follows (in thousands): 

Period Ending March 31 ,	Amount
2017 (remaining nine months)	$	1,434
2018		1,307
2019		439
2020		374
2021		291
2022 and thereafter		73
Total future minimum lease payments	$	3,918

Indemnifications

 — The Company generally provides a warranty to its customers that its software will perform substantially in accordance with documented specifications typically for a period of

90

 days following delivery of its products. The Company also indemnifies certain customers from

third

-party claims of intellectual property infringement relating to the use of its products. Historically, costs related to these guarantees have not been significant. The Company is unable to estimate the maximum potential impact of these guarantees on its future results of operations.

 

Purchase obligations

— The Company has purchase obligations with certain suppliers for the purchase of goods and services entered in the ordinary course of business. As of

March

31,

2017,

total outstanding purchase obligations were

$9.1

million, which are primarily due within the next

12

months.

Indemnification of Officers and Directors

 — As permitted by the Delaware general corporation law, the Company has included a provision in its certificate of incorporation to eliminate the personal liability of its officers and directors for monetary damages for breach or alleged breach of their fiduciary duties as officers or directors, other than in cases of fraud or other willful misconduct.

In addition, the Bylaws of the Company provide that the Company is required to indemnify its officers and directors even when indemnification would otherwise be discretionary, and the Company is required to advance expenses to its officers and directors as incurred in connection with proceedings against them for which they

may

be indemnified. The Company has entered into indemnification agreements with its officers and directors containing provisions that are in some respects broader than the specific indemnification provisions contained in the Delaware general corporation law. The indemnification agreements require the Company to indemnify its officers and directors against liabilities that

may

arise by reason of their status or service as officers and directors other than for liabilities arising from willful misconduct of a culpable nature, to advance their expenses incurred as a result of any proceeding against them as to which they could be indemnified, and to obtain directors’ and officers’ insurance if available on reasonable terms. The Company has obtained directors’ and officers’ liability insurance in amounts comparable to other companies of the Company’s size and in the Company’s industry. Since a maximum obligation of the Company is not explicitly stated in the Company’s Bylaws or in its indemnification agreements and will depend on the facts and circumstances that arise out of any future claims, the overall maximum amount of the obligations cannot be reasonably estimated.

Litigation

— From time to time, the Company is subject to various claims and legal proceedings that arise in the ordinary course of business. The Company accrues for losses related to litigation when a potential loss is probable and the loss can be reasonably estimated in accordance with FASB requirements. As of

March

31,

2017,

the Company was not party to any material legal proceedings, thus no loss was probable and 

no

amount was accrued.   

XML

Significant Accounting Policies (Policies)

3 Months Ended

Mar. 31, 2017

Accounting Policies [Abstract]

Basis of Accounting, Policy [Policy Text Block]

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,

2016.

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,

2016,

 has been derived from the audited consolidated financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America.

Use of Estimates, Policy [Policy Text Block]

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 for fixed-price solution implementation service contracts, accounting for goodwill and intangible assets, stock-based compensation expense and accounting for income taxes. Actual results could differ from those estimates.

Revenue Recognition, Policy [Policy Text Block]

Revenue Recognition

 — The Company derives revenue from

two

sources: Design-to-silicon-yield solutions and Gainshare performance incentives.

Design-to-silicon-yield solutions — Revenues that are derived from Design-to-silicon-yield solutions come from services and software and hardware licenses. The Company recognizes revenue for each element of Design-to-silicon-yield solutions as follows:

The Company generates a significant portion of its Design-to-silicon-yield solutions revenue from fixed-price solution implementation service contracts delivered over a specific period of time. These contracts require reliable estimation of costs to perform obligations and the overall scope of each engagement. Revenue under project–based contracts for solution implementation services is recognized as services are performed using percentage of completion method of contract accounting based on costs or labor-hours input method, whichever is the most appropriate measure of the progress towards completion of the contract. Losses on fixed-price solution implementation contracts are recognized in the period when they become probable. Revisions in profit estimates are reflected in the period in which the conditions that require the revisions become known and can be estimated (cumulative catch-up method). During the period ended

March

31,

2017,

the Company recognized changes in

one

of its project’s profitability from revisions in estimates due to the scope changes that resulted in unfavorable changes of net income of

$0.6

million or

$0.01

per diluted share. Revenue under time and materials contracts for solution implementation services are recognized as the services are performed.

On occasion, the Company licenses its software products as a component of its fixed-price service contracts. In such instances, the software products are licensed to customers over a specified term of the agreement with support and maintenance to be provided, if applicable, over the license term. The amount of product and service revenue recognized in a given period is affected by the Company’s judgment as to whether an arrangement includes multiple deliverables and, if so, the Company’s determination of the fair value of each deliverable. In general, vendor-specific objective evidence of selling price (“VSOE”) does not exist for the Company’s solution implementation services and software products and because the Company’s services and products include our unique technology, the Company is not able to determine

third

-party evidence of selling price (“TPE”). Therefore, in such circumstances the Company uses best estimated selling prices (“BESP”) in the allocation of arrangement consideration. In determining BESP, the Company applies significant judgment as the Company’s weighs a variety of factors, based on the facts and circumstances of the arrangement. The Company typically arrives at BESP for a product or service that is not sold separately by considering company-specific factors such as geographies, internal costs, gross margin objectives, pricing practices used to establish bundled pricing, and existing portfolio pricing and discounting. After fair value is established for each deliverable, the total transaction amount is allocated to each deliverable based upon its relative selling price. Fees allocated to solution implementation services are recognized using the percentage of completion method of contract accounting. Fees allocated to software and related support and maintenance are recognized under software revenue recognition guidance.

In some instances, the Company also licenses its DFI system as a separate component of fixed-price service contracts. The Company allocates revenue to all deliverables based on their relative selling prices. The Company currently does not have VSOE for its DFI system, thus the Company uses either TPE or BESP in the allocation of arrangement consideration.

The Company defers certain pre-contract costs incurred for specific anticipated contracts. Deferred costs consist primarily of direct costs to provide solution implementation services in relation to the specific anticipated contracts. The Company recognizes such costs as a component of cost of revenues, the timing of which is dependent upon persuasive evidence of contract arrangement assuming all other revenue recognition criteria are met. The Company also defers costs from arrangements that required us to defer the revenues, typically due to revenue recognition from multi-element arrangements or from contracts subject to customer acceptance. 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. Deferred costs balance was

$0.6

million and

$0.5

million as of

March

31,

2017

and

December

31,

2016,

respectively. The balance was included in prepaid expenses and other current assets and other non-current assets in the accompanying consolidated balance sheets.

The Company also licenses its software products separately from solution implementations. For software license arrangements that do not require significant modification or customization of the underlying software, software license revenue is recognized under the residual method when (l) persuasive evidence of an arrangement exists,

(2)

delivery has occurred,

(3)

the fee is fixed or determinable,

(4)

collectability is probable, and

(5)

the arrangement does not require services that are essential to the functionality of the software. When arrangements include multiple elements such as support and maintenance, consulting (other than for fixed price solution implementations), installation, and training, revenue is allocated to each element of a transaction based upon its fair value as determined by the Company's VSOE and such services are recorded as services revenue. VSOE for maintenance is generally established based upon negotiated renewal rates while VSOE for consulting, installation, and training services is established based upon the Company's customary pricing for such services when sold separately. When software is licensed for a specified term, fees for support and maintenance are generally bundled with the license fee over the entire term of the contract. The Company is unable to establish VSOE of fair value for maintenance services that are generally bundled with term licenses. In these cases, the Company recognizes revenue ratably over the term of the contract. For multiple-element arrangements containing non-software services, the Company:

(1)

determines whether each element constitutes a separate unit of accounting;

(2)

determines the fair value of each element using the selling price hierarchy of VSOE, TPE or BESP, as applicable; and

(3)

allocates the total price to each separate unit of accounting based on the relative selling price method. An element constitutes a separate unit of accounting when the delivered item has standalone value and delivery of the undelivered element is probable and within our control. For multiple-element arrangements that contain both software and non-software elements, the Company allocates revenue to software or software-related elements as a group and any non-software elements separately based on the selling price hierarchy of VSOE, TPE or BESP. Once revenue is allocated to software or software-related elements as a group, we recognize revenue in conformance with software revenue accounting guidance. Revenue is recognized when revenue recognition criteria are met for each element.

Revenue from software-as-a-service (SaaS) that allow for the use of a hosted software product or service over a contractually determined period of time without taking possession of software are accounted for as subscriptions and recognized as revenue ratably over the coverage period beginning on the date the service is made available to customers. Revenue for software licenses with extended payment terms is not recognized in excess of amounts due. For software license arrangements that require significant modification or customization of the underlying software, the software license revenue is recognized as services are performed using the percentage of completion method of contract accounting, and such revenue is recorded as services revenue.

Deferred revenues consist substantially of amounts invoiced in advance of revenue recognition and is recognized as the revenue recognition criteria are met. Deferred revenues that will be recognized during the succeeding

12

month period is recorded as current deferred revenues and the remaining portion is recorded as non- current deferred revenues. Non-current portion of deferred revenue was

$1.7

million and

$1.5

million, respectively, as of

March

31,

2017

and

December

31,

2016.

This balance was recorded in the other non-current liabilities in the accompanying consolidated balance sheets.

Gainshare Performance Incentives — When the Company enters into a contract to provide yield improvement services, the contract usually includes

two

components:

(1)

a fixed fee for performance by the Company of services delivered over a specific period of time; and

(2)

a Gainshare performance incentive component where the customer

may

pay a contingent variable fee, usually after the fixed fee period has ended. Revenue derived from Gainshare performance incentives represents profit sharing and performance incentives earned contingent upon the Company’s customers reaching certain defined operational levels established in related solution implementation service contracts. Gainshare performance incentives periods are usually subsequent to the delivery of all contractual services and therefore have virtually no cost to the Company. Due to the uncertainties surrounding attainment of such operational levels, the Company recognizes Gainshare performance incentives revenue (to the extent of completion of the related solution implementation contract) upon receipt of performance reports or other related information from the customer supporting the determination of amounts and probability of collection.  

XML

Note 3 - Balance Sheet Components (Tables)

3 Months Ended

Mar. 31, 2017

Notes Tables

Property, Plant and Equipment [Table Text Block]

	March 31 , 201 7			December 31, 2016
Property and equipment, net:
Computer equipment	$	10,568		$	10,642
Software		2,363			1,679
Furniture, fixtures and equipment		1,811			1,185
Leasehold improvements		1,961			1,132
Test equipment		11,843			11,723
Construction-in-progress		9,575			9,550
		38,121			35,911
Less: accumulated depreciation		(17,323	)		(16,570	)
Total	$	20,798		$	19,341

Schedule of Goodwill [Table Text Block]

	March 31 , 201 7
Balance as of December 31, 2016	$	215
Add: Goodwill from acquisition		—
Adjustment		—
Balance as of March 31, 2017	$	215

Schedule of Finite-Lived Intangible Assets [Table Text Block]

				March 31, 2017							December 31, 201 6
	Amortization Period (Years)			Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Acquired identifiable intangibles:
Customer relationships	1	-	9	$	5,920	$	(3,895	)	$	2,025	$	5,920	$	(3,825	)	$	2,095
Developed technology	4	-	6		14,100		(12,455	)		1,645		14,100		(12,359	)		1,741
Tradename	2	-	4		610		(595	)		15		610		(583	)		27
Backlog		1			100		(100	)		-		100		(100	)		-
Patent	7	-	10		1,800		(1,450	)		350		1,800		(1,440	)		360
Other acquired intangibles		4			255		(255	)		-		255		(255	)		-
Total				$	22,785	$	(18,750	)	$	4,035	$	22,785	$	(18,562	)	$	4,223

Schedule of Finite-Lived Intangible Assets, Future Amortization Expense [Table Text Block]

Period Ending March 31 ,
2017	$	540
2018		701
2019		701
2020		701
2021		526
2022 and thereafter		866
Total future amortization expense	$	4,035

XML

Note 4 - Stockholders' Equity (Tables)

3 Months Ended

Mar. 31, 2017

Notes Tables

Schedule of Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Table Text Block]

	Three Months Ended March 31,
	2017		2016
Cost of Design-to-silicon-yield solutions	$	1,192	$	1,085
Research and development		834		706
Selling, general and administrative		858		875
Stock-based compensation expenses	$	2,884	$	2,666

Schedule of Share-based Payment Award, Stock Options, Valuation Assumptions [Table Text Block]

	Three Months Ended March 31,
	2017			2016
Expected life (in years)		4.41			4.42
Volatility		40.57	%		44.74	%
Risk-free interest rate		1.87	%		1.21	%
Expected dividend		—			—
Weighted average fair value per share of options granted during the period	$	7.85		$	4.08

	Three Months Ended March 31,
	2017			2016
Expected life (in years)		1.25			1.25
Volatility		33.32	%		44.15	%
Risk-free interest rate		0.93	%		0.50	%
Expected dividend		—			—
Weighted average fair value per share of options granted during the period	$	6.78		$	3.56

Share-based Compensation, Stock Options, Activity [Table Text Block]

	Number of Options (in thousands)			Weighted Average Exercise Price per Share		Weighted Average Remaining Contractual Term (years)		Aggregate Intrinsic Value (in thousands)
Outstanding, January 1, 2017		1,364		$	8.00
Granted (weighted average fair value of $7.84 per share)		9		$	21.94
Exercised		(89	)	$	8.09
Canceled		(3	)	$	17.73
Expired		-		$	-
Outstanding, March 31, 2017		1,281		$	8.06		4.28	$	18,659
Vested and expected to vest, March 31, 2017		1,272		$	8.01		4.25	$	18,592
Exercisable, March 31, 2017		1,145		$	7.21		3.73	$	17,639

Schedule of Share-based Compensation, Restricted Stock Units Award Activity [Table Text Block]

	Shares (in thousands)			Weighted Average Grant Date Fair Value Per Share
Nonvested, January 1, 2017		1,542		$	15.50
Granted		9		$	21.94
Vested		(109	)	$	14.04
Forfeited		(7	)	$	15.84
Nonvested, March 31, 2017		1,435		$	15.64

XML

Note 6 - Net Income Per Share (Tables)

3 Months Ended

Mar. 31, 2017

Notes Tables

Schedule of Earnings Per Share, Basic and Diluted [Table Text Block]

	Three Months Ended March 31,
	2017		2016
Numerator:
Net income	$	517	$	2,061
Denominator:
Basic weighted-average shares outstanding		31,991		31,168
Effect of dilutive options and restricted stock		1,603		586
Diluted weighted average shares outstanding		33,594		31,754
Net income per share - Basic	$	0.02	$	0.07
Net income per share - Diluted	$	0.02	$	0.07

Schedule of Antidilutive Securities Excluded from Computation of Earnings Per Share [Table Text Block]

	Three Months Ended March 31,
	2017		2016
Outstanding options		40		284
Nonvested restricted stock units		-		1,026
Employee Stock Purchase Plan		30		460
Total		70		1,770

XML

Note 7 - Customer and Geographic Information (Tables)

3 Months Ended

Mar. 31, 2017

Notes Tables

Schedule of Revenue by Major Customers by Reporting Segments [Table Text Block]

	Three Months Ended March 31,
Customer	2017			2016
A		48	%		50	%
B		*	%		14	%

Receivables by Major Customers [Table Text Block]

Customer	March 31, 2017			December 31, 2016
A		41	%		42	%
C		13	%		13	%

Schedule of Revenue from External Customers Attributed to Foreign Countries by Geographic Area [Table Text Block]

	Three Months Ended March 31 ,
	201 7					201 6
	Revenues		Percentage of Revenues			Revenues		Percentage of Revenues
United States	$	11,634		48	%	$	12,121		48	%
Taiwan		3,837		16			2,184		9
Germany		2,308		10			3,035		12
South Korea		1,990		8			3,313		13
Rest of the world		4,520		18			4,428		18
Total revenue	$	24,289		100	%	$	25,081		100	%

Schedule of Disclosure on Geographic Areas, Long-Lived Assets in Individual Foreign Countries by Country [Table Text Block]

	March 31 , 201 7		December 31, 201 6
United States	$	20,248	$	18,818
Rest of the world		550		523
Total long-lived assets, net	$	20,798	$	19,341

XML

Note 8 - Fair Value Measurements (Tables)

3 Months Ended

Mar. 31, 2017

Notes Tables

Fair Value, Assets Measured on Recurring Basis [Table Text Block]

Assets	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Money market mutual funds	$	26,483	$	26,483	$	—	$	—

Assets	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Money market mutual funds	$	26,456	$	26,456	$	—	$	—

XML

Note 9 - Commitments and Contingencies (Tables)

3 Months Ended

Mar. 31, 2017

Notes Tables

Schedule of Future Minimum Rental Payments for Operating Leases [Table Text Block]

Period Ending March 31 ,	Amount
2017 (remaining nine months)	$	1,434
2018		1,307
2019		439
2020		374
2021		291
2022 and thereafter		73
Total future minimum lease payments	$	3,918

XML

Note 1 - Basis of Presentation (Details Textual) - USD ($) $ / shares in Units, $ in Millions	3 Months Ended
	Mar. 31, 2017	Dec. 31, 2016
Impact of Estimates Revisions on Net Income	$ 0.6
Impact of Estimates Revisions on Earnings per Share, Diluted	$ 0.01
Deferred Pre-contract Costs	$ 0.6	$ 0.5
Other Noncurrent Liabilities [Member]
Deferred Revenue, Noncurrent	$ 1.7	$ 1.5

XML

Note 3 - Balance Sheet Components (Details Textual) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2017	Mar. 31, 2016	Dec. 31, 2016
Unbilled Receivables, Current	$ 22,700		$ 20,800
Unbilled Receivables, Not Billable, Amount Expected to be Collected after Next Twelve Months	11,800		9,800
Deferred Pre-contract Costs	600		500
Depreciation, Depletion and Amortization, Nonproduction	1,100	$ 800
Goodwill	215		215
Finite-Lived Intangible Assets, Net	$ 4,035		$ 4,223
Finite-Lived Intangible Assets, Remaining Amortization Period	6 years 65 days
Amortization of Intangible Assets	$ 188	$ 213
Impairment of Intangible Assets, Finite-lived	$ 0

XML

Note 3 - Balance Sheet Components - Property and Equipment (Details) - USD ($) $ in Thousands	Mar. 31, 2017	Dec. 31, 2016
Property and equipment, gross	$ 38,121	$ 35,911
Less: accumulated depreciation	(17,323)	(16,570)
Total	20,798	19,341
Computer Equipment [Member]
Property and equipment, gross	10,568	10,642
Software and Software Development Costs [Member]
Property and equipment, gross	2,363	1,679
Furniture and Fixtures [Member]
Property and equipment, gross	1,811	1,185
Leasehold Improvements [Member]
Property and equipment, gross	1,961	1,132
Test Equipment [Member]
Property and equipment, gross	11,843	11,723
Construction in Progress [Member]
Property and equipment, gross	$ 9,575	$ 9,550

XML

Note 3 - Balance Sheet Components - Goodwill Activity (Details) $ in Thousands	3 Months Ended
	Mar. 31, 2017 USD ($)
Balance	$ 215
Add: Goodwill from acquisition	0
Adjustment	0
Balance	$ 215

XML

Note 3 - Balance Sheet Components - Intangible Assets (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2017	Dec. 31, 2016
Gross Carrying Amount	$ 22,785	$ 22,785
Accumulated Amortization	(18,750)	(18,562)
Intangible assets, net	4,035	4,223
Customer Relationships [Member]
Gross Carrying Amount	5,920	5,920
Accumulated Amortization	(3,895)	(3,825)
Intangible assets, net	$ 2,025	2,095
Customer Relationships [Member] | Minimum [Member]
Amortization Period (Year)	1 year
Customer Relationships [Member] | Maximum [Member]
Amortization Period (Year)	9 years
Developed Technology Rights [Member]
Gross Carrying Amount	$ 14,100	14,100
Accumulated Amortization	(12,455)	(12,359)
Intangible assets, net	$ 1,645	1,741
Developed Technology Rights [Member] | Minimum [Member]
Amortization Period (Year)	4 years
Developed Technology Rights [Member] | Maximum [Member]
Amortization Period (Year)	6 years
Trade Names [Member]
Gross Carrying Amount	$ 610	610
Accumulated Amortization	(595)	(583)
Intangible assets, net	$ 15	27
Trade Names [Member] | Minimum [Member]
Amortization Period (Year)	2 years
Trade Names [Member] | Maximum [Member]
Amortization Period (Year)	4 years
Order or Production Backlog [Member]
Amortization Period (Year)	1 year
Gross Carrying Amount	$ 100	100
Accumulated Amortization	(100)	(100)
Intangible assets, net
Patents [Member]
Gross Carrying Amount	1,800	1,800
Accumulated Amortization	(1,450)	(1,440)
Intangible assets, net	$ 350	360
Patents [Member] | Minimum [Member]
Amortization Period (Year)	7 years
Patents [Member] | Maximum [Member]
Amortization Period (Year)	10 years
Other Intangible Assets [Member]
Amortization Period (Year)	4 years
Gross Carrying Amount	$ 255	255
Accumulated Amortization	(255)	(255)
Intangible assets, net

XML

Note 3 - Balance Sheet Components - Annual Amortization of Identifiable Intangible Assets (Details) - USD ($) $ in Thousands	Mar. 31, 2017	Dec. 31, 2016
2017	$ 540
2018	701
2019	701
2020	701
2021	526
2022 and thereafter	866
Total future amortization expense	$ 4,035	$ 4,223

XML

Note 4 - Stockholders' Equity (Details Textual) - USD ($) $ / shares in Units, $ in Millions		3 Months Ended		12 Months Ended
	Apr. 11, 2017	Mar. 31, 2017	Mar. 31, 2016	Dec. 31, 2016	Oct. 25, 2016
Share-based Compensation Arrangement by Share-based Payment Award, Options, Forfeitures in Period		3,000
Share Price		$ 22.62
Share-based Compensation Arrangement by Share-based Payment Award, Options, Exercises in Period, Intrinsic Value		$ 1.2
Share-based Compensation Arrangement by Share-based Payment Award, Options, Vested in Period, Fair Value		$ 0.1
Stock Repurchase Program, Authorized Amount					$ 25.0
Stock Repurchase Program, Period in Force		2 years
Stock Repurchase Program, Remaining Authorized Repurchase Amount		$ 25.0
Employee Stock Option [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Options, Vested in Period, Fair Value		$ 0.6
Employee Service Share-based Compensation, Nonvested Awards, Compensation Cost Not yet Recognized, Period for Recognition		2 years 328 days
Restricted Stock Units (RSUs) [Member]
Employee Service Share-based Compensation, Nonvested Awards, Compensation Cost Not yet Recognized, Period for Recognition		2 years 219 days
Employee Service Share-based Compensation, Nonvested Awards, Compensation Not yet Recognized, Share-based Awards Other than Options		$ 17.8
Twenty Eleven Stock Incentive Plan [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Number of Shares Authorized		7,800,000
Share Based Compensation Arrangement By Share Based Payment Award Shares Reserved Decrease Rate		1.33
Common Stock, Capital Shares Reserved for Future Issuance		8,300,000
Share-based Compensation Arrangement by Share-based Payment Award, Number of Shares Available for Grant		3,500,000
Twenty Eleven Stock Incentive Plan [Member] | Subsequent Event [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Number of Shares Authorized	9,050,000
Share-based Compensation Arrangement by Share-based Payment Award, Number of Additional Shares Authorized	1,250,000
Twenty Eleven Stock Incentive Plan [Member] | Employee Stock Option [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Expiration Period		10 years
Share-based Compensation Arrangement by Share-based Payment Award, Award Vesting Period		4 years
Shares Previously Issued Under the 2001 Plan [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Number of Shares Authorized		3,500,000
IDS Plan [Member] | Employee Stock Option [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Expiration Period		10 years
Share-based Compensation Arrangement by Share-based Payment Award, Award Vesting Period		4 years
Two Thousand One Stock Incentive Plan [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Options, Forfeitures in Period		500,000
Employee Stock Purchase Plan [Member]
Employee Service Share-based Compensation, Nonvested Awards, Compensation Cost Not yet Recognized, Period for Recognition		1 year 36 days
Share-based Compensation Arrangement by Share-based Payment Award, Maximum Employee Subscription Rate		10.00%
Share-based Compensation Arrangement by Share-based Payment Award, Purchase Price of Common Stock, Percent		85.00%
ESPP Maximum Annual Share Replenishment				675,000
ESPP Maximum Annual Share Replenishment Percentage of Prior Year Outstanding Company Common Stock				2.00%
Stock Issued During Period, Shares, Employee Stock Purchase Plans		100,000	84,000
Employee Stock Purchase Plan Weighted Average Purchase Price of Shares Purchased		$ 9.13	$ 9.21
Employee Service Share-based Compensation, Nonvested Awards, Compensation Not yet Recognized, Stock Options		$ 0.8
Number Of ESPP Shares Available For Future Issuance		4,400,000

XML

Note 4 - Stockholders' Equity - Allocation of Recognized Period Costs (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2017	Mar. 31, 2016
Allocation of recognized period costs	$ 2,884	$ 2,666
Cost of Sales [Member]
Allocation of recognized period costs	1,192	1,085
Research and Development Expense [Member]
Allocation of recognized period costs	834	706
Selling, General and Administrative Expenses [Member]
Allocation of recognized period costs	$ 858	$ 875

XML

Note 4 - Stockholders' Equity - Stock Options, Valuation Assumptions (Details) - $ / shares	3 Months Ended
	Mar. 31, 2017	Mar. 31, 2016
Weighted average fair value (in dollars per share)	$ 7.84
Employee Stock Purchase Plan [Member]
Expected life (Year)	1 year 91 days	1 year 91 days
Volatility	33.32%	44.15%
Risk-free interest rate	0.93%	0.50%
Expected dividend
Weighted average fair value (in dollars per share)	$ 6.78	$ 3.56
Stock Plans [Member]
Expected life (Year)	4 years 149 days	4 years 153 days
Volatility	40.57%	44.74%
Risk-free interest rate	1.87%	1.21%
Expected dividend	0.00%	0.00%
Weighted average fair value (in dollars per share)	$ 7.85	$ 4.08

XML

Note 4 - Stockholders' Equity - Stock Options Activity (Details) $ / shares in Units, shares in Thousands, $ in Thousands	3 Months Ended
	Mar. 31, 2017 USD ($) $ / shares shares
Outstanding, January 1, 2017 (in shares) | shares	1,364
Outstanding, January 1, 2017 (in dollars per share) | $ / shares	$ 8
Granted (in shares) | shares	9
Granted (in dollars per share) | $ / shares	$ 21.94
Exercised (in shares) | shares	(89)
Exercised (in dollars per share) | $ / shares	$ 8.09
Canceled (in shares) | shares	(3)
Canceled (in dollars per share) | $ / shares	$ 17.73
Expired (in shares) | shares
Expired (in dollars per share) | $ / shares
Outstanding, March 31, 2017 (in shares) | shares	1,281
Outstanding, March 31, 2017 (in dollars per share) | $ / shares	$ 8.06
Outstanding, March 31, 2017 (Year)	4 years 102 days
Outstanding, March 31, 2017 | $	$ 18,659
Vested and expected to vest, March 31, 2017 (in shares) | shares	1,272
Vested and expected to vest, March 31, 2017 (in dollars per share) | $ / shares	$ 8.01
Vested and expected to vest, March 31, 2017 (Year)	4 years 91 days
Vested and expected to vest, March 31, 2017 | $	$ 18,592
Exercisable, March 31, 2017 (in shares) | shares	1,145
Exercisable, March 31, 2017 (in dollars per share) | $ / shares	$ 7.21
Exercisable, March 31, 2017 (Year)	3 years 266 days
Exercisable, March 31, 2017 | $	$ 17,639

XML

Note 4 - Stockholders' Equity - Stock Options Activity (Details) (Parentheticals)	3 Months Ended
	Mar. 31, 2017 $ / shares
Weighted average fair value (in dollars per share)	$ 7.84

XML

Note 4 - Stockholders' Equity - Nonvested Restricted Stock Units Activity (Details) - Restricted Stock Units (RSUs) [Member] shares in Thousands	3 Months Ended
	Mar. 31, 2017 $ / shares shares
Nonvested, Balance (in shares) | shares	1,542
Nonvested, Balance (in dollars per share) | $ / shares	$ 15.50
Granted (in shares) | shares	9
Granted (in dollars per share) | $ / shares	$ 21.94
Vested (in shares) | shares	(109)
Vested (in dollars per share) | $ / shares	$ 14.04
Forfeited (in shares) | shares	(7)
Forfeited (in dollars per share) | $ / shares	$ 15.84
Nonvested, Balance (in shares) | shares	1,435
Nonvested, Balance (in dollars per share) | $ / shares	$ 15.64

XML

Note 5 - Income Taxes (Details Textual) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2017	Mar. 31, 2016	Dec. 31, 2016
Increase (Decrease) in Income Taxes	$ (2,200)
Income Tax Expense (Benefit)	$ (1,162)	$ 1,026
Effective Income Tax Rate Reconciliation, Percent	180.00%	33.00%
Unrecognized Tax Benefits	$ 11,800		$ 11,900
Unrecognized Tax Benefits that Would Impact Effective Tax Rate	7,000		7,200
Unrecognized Tax Benefits In Long Term Liabilities	2,700
Unrecognized Tax Benefits In Deferred Tax Assets	9,600
Unrecognized Tax Benefits In Deferred Tax Asset Subject To Full Valuation Allowance	4,800
Deferred Tax Assets, Valuation Allowance	6,700		$ 6,800
Accounting Standards Update 2016-09 [Member]
Excess Tax Benefit from Share-based Compensation	$ 700

XML

Note 6 - Net Income Per Share - Calculation of Earnings Per Share (Details) - USD ($) $ / shares in Units, shares in Thousands, $ in Thousands	3 Months Ended
	Mar. 31, 2017	Mar. 31, 2016
Net income	$ 517	$ 2,061
Basic weighted-average shares outstanding (in shares)	31,991	31,168
Effect of dilutive options and restricted stock (in shares)	1,603	586
Diluted weighted average shares outstanding (in shares)	33,594	31,754
Net income per share - Basic (in dollars per share)	$ 0.02	$ 0.07
Net income per share - Diluted (in dollars per share)	$ 0.02	$ 0.07

XML

Note 6 - Net Income Per Share - Antidilutive Securities (Details) - shares shares in Thousands	3 Months Ended
	Mar. 31, 2017	Mar. 31, 2016
Antidilutive securities (in shares)	70	1,770
Employee Stock Option [Member]
Antidilutive securities (in shares)	40	284
Restricted Stock Units (RSUs) [Member]
Antidilutive securities (in shares)		1,026
Employee Stock Purchase Plan [Member]
Antidilutive securities (in shares)	30	460

XML

Note 7 - Customer and Geographic Information (Details Textual)	3 Months Ended
	Mar. 31, 2017
Number of Operating Segments	1

XML

Note 7 - Customer and Geographic Information - Revenue Percentage by Major Customers (Details) - Customer Concentration Risk [Member] - Sales Revenue, Net [Member]	3 Months Ended
	Mar. 31, 2017		Mar. 31, 2016
Customer A [Member]
Receivables percentage by major customer	48.00%		50.00%
Customer B [Member]
Receivables percentage by major customer		[1]	14.00%

[1] represents less than 10%

XML

Note 7 - Customer and Geographic Information - Receivables Percentage by Major Customers (Details) - Customer Concentration Risk [Member] - Accounts Receivable [Member]	3 Months Ended	12 Months Ended
	Mar. 31, 2017	Dec. 31, 2016
Customer A [Member]
Receivables percentage by major customer	41.00%	42.00%
Customer C [Member]
Receivables percentage by major customer	13.00%	13.00%	[1]

[1] represents less than 10%

XML

Note 7 - Customer and Geographic Information - Revenues by Geographic Area (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2017	Mar. 31, 2016
Revenues	$ 24,289	$ 25,081
Geographic Concentration Risk [Member] | Sales Revenue, Net [Member]
Revenues	$ 24,289	$ 25,081
Percentage of Revenues	100.00%	100.00%
Geographic Concentration Risk [Member] | Sales Revenue, Net [Member] | UNITED STATES
Revenues	$ 11,634	$ 12,121
Percentage of Revenues	48.00%	48.00%
Geographic Concentration Risk [Member] | Sales Revenue, Net [Member] | TAIWAN, PROVINCE OF CHINA
Revenues	$ 3,837	$ 2,184
Percentage of Revenues	16.00%	9.00%
Geographic Concentration Risk [Member] | Sales Revenue, Net [Member] | GERMANY
Revenues	$ 2,308	$ 3,035
Percentage of Revenues	10.00%	12.00%
Geographic Concentration Risk [Member] | Sales Revenue, Net [Member] | KOREA, REPUBLIC OF
Revenues	$ 1,990	$ 3,313
Percentage of Revenues	8.00%	13.00%
Geographic Concentration Risk [Member] | Sales Revenue, Net [Member] | Rest of the World [Member]
Revenues	$ 4,520	$ 4,428
Percentage of Revenues	18.00%	18.00%

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Note 7 - Customer and Geographic Information - Long-lived Assets by Geographic Area (Details) - USD ($) $ in Thousands	Mar. 31, 2017	Dec. 31, 2016
Long-lived assets	$ 20,798	$ 19,341
UNITED STATES
Long-lived assets	20,248	18,818
Rest of the World [Member]
Long-lived assets	$ 550	$ 523

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Note 8 - Fair Value Measurements (Details Textual) - Foreign Exchange Contract [Member] - USD ($)	3 Months Ended
	Mar. 31, 2017	Mar. 31, 2016	Dec. 31, 2016
Derivative Asset, Notional Amount	$ 7,200,000		$ 6,900,000
Other Current Liabilities [Member]
Derivative Liability, Current	100,000		$ 15,000
Other Nonoperating Income (Expense) [Member]
Derivative, Gain (Loss) on Derivative, Net	$ 100,000	$ 300,000

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Note 8 - Fair Value Measurements - Fair Value, Assets Measured on a Recurring Basis (Details) - Money Market Funds [Member] - USD ($) $ in Thousands	Mar. 31, 2017	Dec. 31, 2016
Money market mutual funds	$ 26,483	$ 26,456
Fair Value, Inputs, Level 1 [Member]
Money market mutual funds	26,483	26,456
Fair Value, Inputs, Level 2 [Member]
Money market mutual funds
Fair Value, Inputs, Level 3 [Member]
Money market mutual funds

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Note 9 - Commitments and Contingencies (Details Textual) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2017	Mar. 31, 2016
Operating Leases, Rent Expense, Net	$ 500	$ 600
Purchase Obligation, Due in Next Twelve Months	9,100
Loss Contingency Accrual	$ 0

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Note 9 - Commitments and Contingencies - Future Minimum Lease Payments Under Noncancelable Operating Leases (Details) $ in Thousands	Mar. 31, 2017 USD ($)
2017 (remaining nine months)	$ 1,434
2018	1,307
2019	439
2020	374
2021	291
2022 and thereafter	73
Total future minimum lease payments	$ 3,918