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Table of Contents



 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



FORM 10-Q

 

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

 

 

 

For the Quarterly Period ended September 30, 2020

 

or

 

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

 

 

 

For the transition period from _______________ to ______________   

 

Commission File Number 000-31311

 

PDF SOLUTIONS, INC.

(Exact name of Registrant as Specified in its Charter)

 

Delaware 

25-1701361 

(State or Other Jurisdiction of Incorporation or Organization)

(I.R.S. Employer Identification No.)

  

  

2858 De La Cruz Blvd.

  

Santa Clara, California 

95050 

(Address of Principal Executive Offices)

(Zip Code)

 

(408) 280-7900

(Registrant’s Telephone Number, Including Area Code)

 

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

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $0.00015 par value

PDFS

The Nasdaq Stock Market LLC

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No  ☐

 

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

 

Large accelerated filer ☐

Accelerated filer ☑

Non-accelerated  filer ☐

Smaller reporting company 

 

Emerging growth company 

 

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

 

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

 

There were 36,629,905 shares of the Registrant’s Common Stock outstanding as of October 31, 2020.

 

1

 

 

 

TABLE OF CONTENTS

 

 

Page

PART I  FINANCIAL INFORMATION

  

Item 1. Financial Statements (Unaudited)

 

Condensed Consolidated Balance Sheets

3

Condensed Consolidated Statements of Comprehensive Loss

4

Condensed Consolidated Statements of Stockholders’ Equity

5

Condensed Consolidated Statements of Cash Flows

7

Notes to Condensed Consolidated Financial Statements

9

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

30

Item 3. Quantitative and Qualitative Disclosures About Market Risk

42

Item 4. Controls and Procedures

42

PART II  OTHER INFORMATION

  

Item 1. Legal Proceedings

43

Item 1A. Risk Factors

43

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

44

Item 3. Defaults Upon Senior Securities

44

Item 4. Mine Safety Disclosures

44

Item 5. Other Information

44

Item 6. Exhibits

45

SIGNATURES

46

INDEX TO EXHIBITS

45

 

2

 

 

 

PART I — FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

 

PDF SOLUTIONS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)

(in thousands, except par value)

 

  

September 30,

  

December 31,

 
  

2020

  

2019

 

ASSETS

        

Current assets:

        

Cash and cash equivalents

 $118,386  $97,605 
Short-term investments  49,983    

Accounts receivable, net of allowance for doubtful accounts of $963 in 2020 and $213 in 2019

  40,388   40,651 

Prepaid expenses and other current assets

  9,310   9,320 

Total current assets

  218,067   147,576 

Property and equipment, net

  39,487   40,798 

Operating lease right-of-use assets, net

  6,712   7,609 

Goodwill

  2,293   2,293 

Intangible assets, net

  5,269   6,221 

Deferred tax assets, net

  30,498   25,327 

Other non-current assets

  8,282   9,720 

Total assets

 $310,608  $239,544 

LIABILITIES AND STOCKHOLDERS’ EQUITY

        

Current liabilities:

        

Accounts payable

 $2,212  $7,636 

Accrued compensation and related benefits

  5,396   5,072 

Accrued and other current liabilities

  3,001   1,665 

Operating lease liabilities – current portion

  1,763   1,867 

Deferred revenues – current portion

  19,074   10,639 

Billings in excess of recognized revenues

  1,430   1,117 

Total current liabilities

  32,876   27,996 

Long-term income taxes payable

  5,137   5,368 

Non-current operating lease liabilities

  6,764   7,677 

Other non-current liabilities

  1,054   2,346 

Total liabilities

  45,831   43,387 

Commitments and contingencies (Note 13)

          

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 46,117 and 41,797, respectively; shares outstanding 36,626 and 32,503, respectively

  5   5 

Additional paid-in-capital

  403,450   325,197 

Treasury stock at cost, 9,491 and 9,294 shares, respectively

  (94,992)  (91,695)

Accumulated deficit

  (42,784)  (35,870)

Accumulated other comprehensive loss

  (902)  (1,480)

Total stockholders’ equity

  264,777   196,157 

Total liabilities and stockholders’ equity

 $310,608  $239,544 

 

See accompanying Notes to Condensed Consolidated Financial Statements (unaudited)

 

3

 

 

PDF SOLUTIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(unaudited)

(in thousands, except per share amounts)

 

   

Three Months Ended September 30,

   

Nine Months Ended September 30,

 
   

2020

   

2019

   

2020

   

2019

 

Revenues:

                               

Analytics

  $ 14,346     $ 12,691     $ 42,766     $ 36,099  

Integrated Yield Ramp

    8,766       9,223       22,912       26,924  

Total revenues

    23,112       21,914       65,678       63,023  
                                 

Costs and Expenses:

                               

Costs of revenues

    9,493       8,715       26,926       24,415  

Research and development

    8,328       8,435       24,672       23,993  

Selling, general and administrative

    8,420       5,990       24,052       19,940  

Amortization of other acquired intangible assets

    174       174       521       436  

Restructuring charges

                      92  

Interest and other expense (income), net

    361       (202 )     530       (307 )

Loss before income taxes

    (3,664 )     (1,198 )     (11,023 )     (5,546 )

Income tax benefit

    (930 )     (511 )     (4,109 )     (1,458 )

Net loss

  $ (2,734 )   $ (687 )   $ (6,914 )   $ (4,088 )
                                 

Other comprehensive income (loss):

                               

Foreign currency translation adjustments, net of tax

  $ 540     $ (461 )   $ 581     $ (477 )
Change in unrealized losses related to available-for-sale debt securities, net of tax     (3 )           (3 )      
Total other comprehensive income (loss)   $ 537     $ (461 )   $ 578     $ (477 )

Comprehensive loss

  $ (2,197 )   $ (1,148 )   $ (6,336 )   $ (4,565 )
                                 

Net loss per share:

                               

Basic

  $ (0.08 )   $ (0.02 )   $ (0.21 )   $ (0.13 )

Diluted

  $ (0.08 )   $ (0.02 )   $ (0.21 )   $ (0.13 )
                                 

Weighted average common shares:

                               

Basic

    35,479       32,392       33,696       32,405  

Diluted

    35,479       32,392       33,696       32,405  

 

 See accompanying Notes to Condensed Consolidated Financial Statements (unaudited)

  

4

 

 

PDF SOLUTIONS, INC.

CONDENDSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(unaudited)

(in thousands)

  

  

Nine Months Ended September 30, 2020

 
                          

Accumulated

     
          

Additional

              

Other

  

Total

 
  

Common Stock

  

Paid-In

  

Treasury Stock

  

Accumulated

  

Comprehensive

  

Stockholders’

 
  

Shares

  

Amount

  

Capital

  

Shares

  

Amount

  

Deficit

  

Loss

  

Equity

 

Balances, December 31, 2019

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

Issuance of common stock in connection with employee stock purchase plan

  89   -   810   -   -   -   -   810 

Issuance of common stock in connection with exercise of options

  21   -   161   -   -   -   -   161 

Vesting of restricted stock units

  182   -   -   -   -   -   -   - 

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

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

Stock-based compensation expense

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

Comprehensive loss

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

Balances, March 31, 2020

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

Issuance of common stock in connection with exercise of options

  56   -   463   -   -   -   -   463 

Vesting of restricted stock units

  131   -   -   -   -   -   -   - 

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

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

Stock-based compensation expense

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

Comprehensive income (loss)

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

Balances, June 30, 2020

  32,982   5   333,157   9,439   (93,968)  (40,050)  (1,439)  197,705 
Issuance of common stock, net of issuance costs of $0.1 million  3,307   -   65,077   -   -   -   -   65,077 
Issuance of common stock in connection with employee stock purchase plan  93   -   860   -   -   -   -   860 

Issuance of common stock in connection with exercise of options

  101   -   1,210   -   -   -   -   1,210 

Vesting of restricted stock units

  143   -   -   -   -   -   -   - 

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

  -   -   -   52   (1,024)  -   -   (1,024)

Stock-based compensation expense

  -   -   3,146   -   -   -   -   3,146 

Comprehensive income (loss)

  -   -   -   -   -   (2,734)  537   (2,197)

Balances, September 30, 2020

  36,626  $5  $403,450   9,491  $(94,992) $(42,784) $(902) $264,777 

 

 See accompanying Notes to Condensed Consolidated Financial Statements (unaudited)

  

5

 

PDF SOLUTIONS, INC.

CONDENDSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(unaudited)

(in thousands)

 

   

Nine Months Ended September 30, 2019

 
                                                   

Accumulated

         
                   

Additional

                           

Other

   

Total

 
   

Common Stock

   

Paid-In

   

Treasury Stock

   

Accumulated

   

Comprehensive

   

Stockholders’

 
   

Shares

   

Amount

   

Capital

   

Shares

   

Amount

   

Deficit

   

Loss

   

Equity

 

Balances, December 31, 2018

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

Issuance of common stock in connection with employee stock purchase plan

    87       -       782       -       -       -       -       782  

Issuance of common stock in connection with exercise of options

    87       -       518       -       -       -       -       518  

Vesting of restricted stock units

    104       -       -       -       -       -       -       -  

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

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

Repurchases of common stock

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

Stock-based compensation expense

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

Comprehensive loss

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

Balances, March 31, 2019

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

Issuance of common stock in connection with exercise of options

    69       -       326       -       -       -       -       326  

Vesting of restricted stock units

    176       -       -       -       -       -       -       -  

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

    -       -       -       72       (918 )     -       -       (918 )
Repurchases of common stock     (300 )     -       -       300       (3,790 )     -       -       (3,790 )

Stock-based compensation expense

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

Comprehensive income (loss)

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

Balances, June 30, 2019

    32,291       5       318,356       9,035       (88,324 )     (33,853 )     (1,292 )     194,892  
Issuance of common stock in connection with employee stock purchase plan     85       -       751       -       -       -       -       751  

Issuance of common stock in connection with exercise of options

    53       -       267       -       -       -       -       267  

Vesting of restricted stock units

    92       -       -       -       -       -       -       -  

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

    -       -       -       40       (524 )     -       -       (524 )
Repurchases of common stock     (171 )     -       -       171       (2,060 )     -       -       (2,060 )

Stock-based compensation expense

    -       -       2,809       -       -       -       -       2,809  

Comprehensive loss

    -       -       -       -       -       (687 )     (461 )     (1,148 )

Balances, September 30, 2019

    32,350     $ 5     $ 322,183       9,246     $ (90,908 )   $ (34,540 )   $ (1,753 )   $ 194,987  

 

See accompanying Notes to Condensed Consolidated Financial Statements (unaudited)

 

6

 

 

PDF SOLUTIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands)

 

  

Nine Months Ended September 30,

 
  

2020

  

2019

 

Cash flows from operating activities:

        

Net loss

 $(6,914) $(4,088)

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

        
Depreciation and amortization  5,030   4,306 

Stock-based compensation expense

  9,476   8,642 

Amortization of acquired intangible assets

  952   867 

Amortization of costs capitalized to obtain revenue contracts

  367   344 

Adjustment to contingent consideration related to acquisition

     36 

Provision (reversal of allowance) for doubtful accounts and write-off of accounts receivable

  (50)  67 

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

  321   130 
Accretion of discount on short-term investments  (3)   

Deferred taxes

  (5,309)  (3,998)

Changes in operating assets and liabilities:

        

Accounts receivable

  313   16,946 

Prepaid expenses and other current assets

  235   (236)
Operating lease right-of-use assets  1,048   1,089 

Other non-current assets

  1,442   (2,937)

Accounts payable

  (3,900)  (191)

Accrued compensation and related benefits

  227   (431)

Accrued and other liabilities

  1,568   1,393 

Deferred revenues

  6,928   1,482 

Billings in excess of recognized revenues

  313   584 

Operating lease liabilities

  (1,168)  (994)
Net cash provided by operating activities  10,876   23,011 
         

Cash flows from investing activities:

        
Purchases of short-term investments  (49,983)   

Purchases of property and equipment

  (4,786)  (6,841)
Prepayment for the purchase of property and equipment  (579)   

Payment for business acquisition

     (2,660)

Cash used in investing activities

  (55,348)  (9,501)
         

Cash flows from financing activities:

        

Proceeds from issuance of common stock, net of issuance costs paid

  64,995    

Proceeds from exercise of stock options

  1,834   983 

Proceeds from employee stock purchase plan

  1,670   1,534 

Payments for taxes related to net share settlement of equity awards

  (3,297)  (1,898)

Repurchases of common stock

     (9,639)

Repurchases of contingent consideration related to acquisition

     (206)

Net cash provided by (used in) financing activities

  65,202   (9,226)
         

Effect of exchange rate changes on cash and cash equivalents

  51   (114)
Net change in cash and cash equivalents  20,781   4,170 

Cash and cash equivalents, beginning of period

  97,605   96,089 
Cash and cash equivalents, end of period $118,386  $100,259 

 

Continued on next page.

 

7

 

PDF SOLUTIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED

(unaudited)

(in thousands)

 

   

Nine Months Ended September 30,

 
   

2020

   

2019

 

Supplemental disclosure of cash flow information:

               

Cash paid during the period for taxes

  $ 2,188     $ 2,454  

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

  $ 1,598     $ 1,268  
                 

Supplemental disclosure of noncash information:

               

Stock-based compensation capitalized as software development costs

  $ 190     $ 244  

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

  $ 161     $ 1,340  

Advances for purchase of fixed assets transferred from prepaid assets to property and equipment

  $     $ 1,416  

Operating lease liabilities arising from obtaining right-of-use assets

  $ 151     $  
Issuance costs for common stock included in accounts payable and accrued and other liabilities   $ 82     $  

Common shares repurchased from a cashless exercise of stock options

  $     $ 128  

 

See accompanying Notes to Condensed Consolidated Financial Statements (unaudited)

 

8

 

PDF SOLUTIONS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

 

 

1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation 

 

The interim unaudited condensed consolidated financial statements included herein have been prepared by PDF Solutions, Inc. (the “Company”) pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”), including the instructions to the Quarterly Report on Form 10-Q and Article 10 of Regulation S-X. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. The interim unaudited condensed consolidated financial statements reflect, in the opinion of management, all adjustments necessary (consisting only of normal recurring adjustments), to present a fair statement of results for the interim periods presented. The operating results for any interim period are not necessarily indicative of the results that may be expected for other interim periods or the full fiscal year. The accompanying interim unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

 

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

 

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

 

Reclassification of Prior Period Amounts

 

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

 

Change in Presentation

 

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

 

9

 

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

 

  

Three Months Ended September 30, 2019

  

Nine Months Ended September 30, 2019

 
      

Change in

          

Change in

     
  

Previously

  

Presentation

  

Current

  

Previously

  

Presentation

  

Current

 
  

Reported

  

Reclassification

  

Presentation

  

Reported

  

Reclassification

  

Presentation

 

Revenues:

                        

Solutions

 $16,208  $(16,208)  N/A  $46,298  $(46,298)  N/A 

Gainshare performance incentives

  5,706   (5,706)  N/A   16,725   (16,725)  N/A 

Analytics

  N/A   12,691  $12,691   N/A   36,099  $36,099 

Integrated Yield Ramp

  N/A   9,223   9,223   N/A   26,924   26,924 

Total revenues

 $21,914  $  $21,914  $63,023  $  $63,023 

 

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

 

Use of Estimates 

 

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

 

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

 

 

10

 

Cash and Cash Equivalents and Short-term Investments 

 

The Company considers all highly liquid investments with an original maturity of 90 days or less or investments with a remaining maturity of 90 days or less at the time of purchase to be cash equivalents, and those investments with original maturities greater than 90 days and less than one year to be short-term investments. The Company classifies securities with readily determinable market values as available-for-sale. Short-term investments include available-for-sale securities and are carried at estimated fair value, with the unrealized gains and losses deemed temporary in nature, net of tax, reported as a component of accumulated other comprehensive loss in stockholders’ equity. Realized gains and losses and declines in value determined to be other than temporary are based on the specific identification method and are included as a component of other expense, net in the Condensed Consolidated Statements of Operations and Comprehensive Loss.

 

The Company periodically reviews short-term investments for impairment. In the event a decline in value is determined to be other-than-temporary, an impairment loss is recognized. When determining if a decline in value is other-than-temporary, the Company takes into consideration the current market conditions, the duration and severity of and the reason for the decline, and the likelihood that it would need to sell the security prior to a recovery of par value.

 

As of  September 30, 2020, short-term investments consisted solely of about $50.0 million of U.S. Treasury bills. The cost of these securities approximated fair value and there was no material gross realized or unrealized gains or losses as of September 30, 2020. As of  December 31, 2019, the Company held no short-term investments. There were also no impairments in the investments’ value in the three and nine months ended September 30, 2020. Refer to Note 12 “Fair Value Measurements” for further discussion on the Company’s investments.

 

Recently Adopted Accounting Standards

 

Intangibles – Goodwill and Other

 

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

 

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

 

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

 

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

 

11

 

 

Accounting Standards Not Yet Effective

 

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASU 2016-13), which requires measurement and recognition of expected credit losses for financial assets held at the reporting date based on internal information, external information, or a combination of both relating to past events, current conditions, and reasonable and supportable forecasts. ASU No. 2016-13 replaces the existing incurred loss impairment model with a forward-looking expected credit loss model, which will result in earlier recognition of credit losses. Subsequent to the issuance of ASU No. 2016-13, the FASB issued ASU No. 2018-19, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instrument, ASU No. 2019-05, Financial Instruments – Credit Losses (Topic 326) Targeted Transition Relief, ASU No. 2016-13, ASU No. 2019-10 Financial Instruments-Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842), and ASU No. 2019-11 Codification Improvements to Topic 326, Financial Instruments-Credit Losses. The subsequent ASUs do not change the core principle of the guidance in ASU No. 2016-13. Instead, these amendments are intended to clarify and improve operability of certain topics included within ASU No. 2016-13.

 

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

  

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

 

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

 

In August 2020, the FASB issued ASU No. 2020-16, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 8150-20): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which is intended to simplify the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. The guidance allows for either full retrospective adoption or modified retrospective adoption. Additionally, the ASU will require entities to use the “if-converted” method when calculating diluted earnings per share for convertible instruments. The ASU will be effective for annual reporting periods beginning after December 15, 2023 for SRCs and interim periods within those annual periods. Early adoption is permitted. The Company does not anticipate that the adoption of this ASU will have a significant impact on its condensed consolidated financial statements or the related disclosures.

 

 

12

 

 

2. REVENUE FROM CONTRACTS WITH CUSTOMERS

 

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

 

The Company recognizes revenue in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”) Topic 606, Revenue from Contracts with Customers, and its related amendments (collectively known as “ASC 606”). ASC 606 outlines a single comprehensive model to use in accounting for revenue arising from contracts with customers. Revenue is recognized when control of products or services is transferred to customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those promised products or services.

 

The Company determines revenue recognition through the following five steps:

 

 

Identification of the contract, or contracts, with a customer

 

Identification of the performance obligations in the contract

 

Determination of the transaction price

 

Allocation of the transaction price to the performance obligations in the contract

 

Recognition of revenue when, or as, performance obligations are satisfied

 

The Company accounts for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance, and collectability of consideration is probable.

 

Contracts with multiple performance obligations

 

The Company enters into contracts that can include various combinations of licenses, products and services, some of which are distinct and are accounted for as separate performance obligations. For contracts with multiple performance obligations, the Company allocates the transaction price of the contract to each performance obligation on a relative basis using standalone selling price.

 

Analytics Revenue

 

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

 

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

 

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

 

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

 

13

 

Integrated Yield Ramp Revenue

 

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

 

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

 

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

 

Disaggregation of Revenue

 

The Company disaggregates revenue from contracts with customers into the timing of the transfer of goods and services and the geographical regions. The Company determined that disaggregating revenue into these categories achieves the disclosure objective to depict how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors.

 

The Company’s performance obligations are satisfied either over time or at a point-in-time. The following table represents a disaggregation of revenue by timing of revenue:

  

  

Three Months Ended September 30,

  

Nine Months Ended September 30,

 
  

2020

  

2019

  

2020

  

2019

 

Over time

  55%  70%  56%  67%

Point-in-time

  45%  30%  44%  33%

Total

  100%  100%  100%  100%

 

International revenues accounted for approximately 67% and 60% of our total revenues for the three and nine months ended September 30, 2020, respectively, compared to 66% and 60% of our total revenues for the three and nine months ended September 30, 2019, respectively. See Note 11. Customer and Geographic Information.

 

Significant Judgments

 

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

 

For revenue under project-based contracts for fixed-price implementation services, revenue is recognized as services are performed using a percentage-of-completion method based on costs or labor-hours input method, whichever is the most appropriate measure of the progress towards completion of the contract. Due to the nature of the work performed in these arrangements, the estimation of percentage of completion method is complex, subject to many variables and requires significant judgment. Key factors reviewed by the Company to estimate costs to complete each contract are future labor and product costs and expected productivity efficiencies. If circumstances arise that change the original estimates of revenues, costs, or extent of progress toward completion, revisions to the estimates are made. These revisions may result in increases or decreases in estimated revenues or costs, and such revisions are reflected in revenue on a cumulative catch-up basis in the period in which the circumstances that gave rise to the revision become known.

 

14

 

The Company’s contracts with customers often include promises to transfer products, licenses software and provide services, including professional services, technical support services, and rights to unspecified updates to a customer. Determining whether licenses and services are distinct performance obligations that should be accounted for separately, or not distinct and thus accounted for together, requires significant judgment. The Company rarely licenses software on a standalone basis, so the Company is required to estimate the range of SSPs for each performance obligation. In instances where SSP is not directly observable because the Company does not license the software or sell the service separately, the Company determines the SSP using information that may include market conditions and other observable inputs. The Company, in some cases, has more than one SSP for individual performance obligations. In these instances, the Company may use information such as the size of the customer and geographic region of the customer in determining the SSP.

 

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

 

Contract Balances  

 

The Company performs its obligations under a contract with a customer by licensing software or providing services in exchange for consideration from the customer. The timing of the Company’s performance often differs from the timing of the customer’s payment, which results in the recognition of a receivable, a contract asset or a contract liability.

 

The Company classifies the right to consideration in exchange for software or services transferred to a customer as either a receivable or a contract asset. A receivable is a right to consideration that is unconditional, as compared to a contract asset, which is a right to consideration that is conditional upon factors other than the passage of time. The majority of the Company’s contract assets represent unbilled amounts related to fixed-price service contracts when the revenue recognized exceeds the amount billed to the customer. The contract assets are generally classified as current and are recorded on a net basis with deferred revenue (i.e. contract liabilities) at the contract level. At September 30, 2020 and December 31, 2019, contract assets of $3.8 million and $3.6 million, respectively, are included in prepaid expenses and other current assets in the Condensed Consolidated Balance Sheets. The Company did not record any asset impairment charges related to contract assets for the periods presented.

 

Deferred revenues consist substantially of amounts invoiced in advance of revenue recognition and are recognized as the revenue recognition criteria are met. Deferred revenues that will be recognized during the succeeding twelve-month period are recorded as current deferred revenues and the remaining portion is recorded in the other non-current liabilities in the Condensed Consolidated Balance Sheets. At September 30, 2020 and December 31, 2019, the non-current portion of deferred revenues included in non-current liabilities was $0.8 million and $2.3 million, respectively.  Revenue recognized for the three months ended  September 30, 2020 and 2019, that was included in deferred revenues and billings in excess of recognized revenues balances at the beginning of each reporting period was $4.7 million and $4.4 million, respectively. Revenue recognized for the nine months ended  September 30, 2020, and 2019, that was included in deferred revenues and billings in excess of recognized revenues balances at the beginning of each reporting period was $9.5 million and $13.0 million, respectively.

 

At September 30, 2020, the aggregate amount of the transaction price allocated to the remaining performance obligations related to customer contracts that were unsatisfied or partially unsatisfied was approximately $113.2 million. Given the applicable contract terms, the majority of this amount is expected to be recognized as revenue over the next three years, with the remainder in the following two years. This amount does not include contracts to which the customer is not committed, nor contracts for which we recognize revenue equal to the amount we have the right to invoice for services performed, or future sales-based or usage-based royalty payments in exchange for a license of intellectual property.  This amount is subject to change due to future revaluations of variable consideration, terminations, other contract modifications, or currency adjustments.  The estimated timing of the recognition of remaining unsatisfied performance obligations is subject to change and is affected by changes to the scope, change in timing of delivery of products and services, or contract modifications.

 

15

 

The adjustment to revenue recognized in the three months ended September 30, 2020 and 2019 from performance obligations satisfied (or partially satisfied) in previous periods was a decrease of $1.2 million and an increase of $0.3 million, respectively. The adjustment to revenue recognized in the nine months ended September 30, 2020 and 2019 from performance obligations satisfied (or partially satisfied) in previous periods was an increase of $0.4 million and an increase of $0.1 million, respectively. These amounts primarily represent changes in estimated percentage-of-completion based contracts and changes in estimated Gainshare royalty for those customers that reported actual Gainshare revenue with some time lag.

 

Costs to obtain or fulfill a contract

 

The Company capitalizes the incremental costs to obtain or fulfill a contract with a customer, including direct sales commissions and related fees, when it expects to recover those costs. Amortization expense related to these capitalized costs is recognized over the period associated with the revenue from which the cost was incurred. Total capitalized direct sales commission costs included in prepaid expenses and other current assets in the accompanying Condensed Consolidated Balance Sheets as of  September 30, 2020 and December 31, 2019 were $0.4 million. Total capitalized direct sales commission costs included in other non-current assets in the accompanying Condensed Consolidated Balance Sheets as of  September 30, 2020 and December 31, 2019 were $1.2 million and $0.4 million, respectively. Amortization of these assets during each of the three months ended September 30, 2020 and 2019 was $0.1 million. Amortization of these assets for the nine months ended September 30, 2020 and 2019was $0.4 million and $0.3 million, respectively. There was no impairment loss in relation to the costs capitalized for the periods presented.

 

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

 

Practical Expedients

 

The Company does not adjust transaction price for the effects of a significant financing component when the period between the transfers of the promised good or service to the customer and payment for that good or service by the customer is expected to be one year or less. The Company assessed each of its revenue generating arrangements in order to determine whether a significant financing component exists, and determined its contracts did not include a significant financing component for the three and nine months ended September 30, 2020 and 2019.

 

 

3.  STRATEGIC PARTNERSHIP AGREEMENT WITH ADVANTEST AND RELATED PARTY TRANSACTIONS

 

On July 29, 2020, the Company entered into a long-term strategic partnership with Advantest Corporation through its wholly-owned subsidiary, Advantest America, Inc. (collectively referred to herein as “Advantest”) that includes:

 

i. Securities Purchase Agreement and Stockholder Agreement

 

Pursuant to the Securities Purchase Agreement (“SPA”), the Company issued an aggregate of 3,306,924 shares of its common stock, par value $0.00015 per share (the “SPA Shares”), at a purchase price equal to $19.7085 per share to Advantest for aggregate gross proceeds of $65.2 million.

 

 

16

 

In connection with the SPA, the Company entered into a Stockholder Agreement (the “Stockholder Agreement”) with Advantest on July 30, 2020. Pursuant to the Stockholder Agreement, Advantest agreed that the Shares will be subject to a five-year lock-up period and Advantest will be subject to a five-year standstill period. The lock-up periods shall terminate upon occurrence of certain events (“Termination Event”) stipulated in the Stockholder Agreement.  Advantest is permitted to sell, transfer or dispose of the SPA Shares at any time to an affiliate or in order to maintain Advantest’s equivalent percentage beneficial ownership at 9.9% of the Company’s outstanding shares of common stock. Prior to the expiration of the lock-up period, upon the occurrence of certain events, for so long as the SPA Shares constitute at least 2.0% of the Company’s outstanding shares of common stock, if Advantest proposes to sell, transfer or dispose of any SPA Shares, the SPA Shares can be repurchased by the Company in its sole option at a repurchase price to be determined pursuant to the SPA.

 

Pursuant to the Stockholder Agreement, for so long as a Termination Event has not occurred, Advantest agreed to vote the SPA Shares in the manner recommended by the Board of Directors as reflected in any Company proxy statement, except on matters of: (i) the issuance of Company securities subject to Nasdaq Rule 5635(b), (ii) the approval of any merger, consolidation, or amalgamation (or similar business combination) of the Company, (iii) an amendment of the Company’s Certificate of Incorporation that would disproportionately and adversely affect Advantest, or (iv) any voluntary or involuntary bankruptcy, dissolution, insolvency, reorganization, rehabilitation or similar event of the Company.

 

There was no occurrence of any of the termination events as of the issuance of these condensed consolidated financial statements.

 

ii. Amendment #1 to Software License & Related Services Agreement

 

The Company entered into Amendment #1 to that certain Software License and Related Services Agreement (“SLA”), dated as of March 25, 2020 (“Amendment #1 to SLA”) with Advantest. Amendment #1 to SLA provides for an exclusive commercial arrangement in which the Company and Advantest will collaborate on, and the Company will initially host, develop and maintain, an Advantest-specific cloud layer on the Exensio platform. Amendment #1 to SLA provides for a renewable five-year cloud-based subscription by Advantest to the Company’s Exensio analytics platform and related services to be provided by the Company for an aggregate subscription price of over $50.0 million over the initial five-year term, subject to the achievement of certain milestones and the Company’s standard warranty and service level commitments.

 

Revenue recognized from this agreement during the three and nine months ended September 30, 2020 was $1.0 million. Accounts receivable from Advantest, comprised of billed and unbilled accounts receivable, amounted to $9.0 million, and Deferred revenue amounted to $8.0 million as of September 30, 2020.

 

iii. Development Agreement

 

The Company also entered into a multi-year Amended and Restated Master Development Agreement (the “Development Agreement”) with Advantest, pursuant to which the Company and Advantest agreed to collaborate on extensions to or combinations of both of their existing technology and new technology to address mutual customers’ needs (the “Integrated Products”) through one or more development phases subject to certain conditions as set forth therein. The Development Agreement includes the Company’s assistance in the development of a cloud-based software solution for Advantest’s customers that is based on the Company’s Exensio software analytics platform for both Advantest’s internal use as well as use by Advantest’s customers. Except as may be separately set forth in a statement of work, each party will bear its own costs and expenses incurred in connection with its development thereunder. Either party may terminate the Development Agreement or any statement of work thereunder at any time upon thirty (30) days’ prior written notice.

 

Costs and expenses incurred related to the Development Agreement have not been significant for the three and nine months ended September 30, 2020.

 

17


iv.  Commercial Agreement

 

The Company also entered into a multi-year Master Commercial Terms and Support Services Agreement (the “Commercial Agreement”) with Advantest. Pursuant to the Commercial Agreement, the Company and Advantest agreed to (i) commercialize and sell Integrated Products that are generated from the Development Agreement according to revenue sharing for each Integrated Product (as defined in the Commercial Agreement) as generally set forth in the Commercial Agreement and Integrated-Product specific revenue sharing and other terms agreed by the parties from time to time in addenda entered into thereunder; and (ii) provide technical services to support end customers’ use of the Integrated Products according to agreed-upon technical support sharing principles as set forth in the Commercial Agreement. Either party may terminate the Commercial Agreement at any time upon ninety (90) days’ prior written notice. Notwithstanding the foregoing, each party agreed to provide continuing technical support services for Integrated Products sold prior to termination as generally set forth in the Commercial Agreement.

 

No costs and expenses incurred related to the Commercial Agreement with Advantest for the three and nine months ended September 30, 2020.

 

The Company carries out transactions with Advantest on customary terms.

 

 

4. BALANCE SHEET COMPONENTS

 

Accounts receivable

 

Accounts receivable include amounts that are unbilled at the end of the period that are expected to be billed and collected within a 12-month period. Unbilled accounts receivable, included in accounts receivable, totaled $6.6 million and $7.4 million as of September 30, 2020, and December 31, 2019, respectively. Unbilled accounts receivable that are not expected to be billed and collected during the succeeding 12-month period are recorded in other non-current assets and totaled $2.3 million and $4.1 million as of September 30, 2020, and December 31, 2019, respectively.

 

Property and equipment

 

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

 

  

September 30,

  

December 31,

 
  

2020

  

2019

 

Computer equipment

 $11,385  $10,880 

Software

  5,035   4,690 

Furniture, fixtures and equipment

  2,433   2,395 

Leasehold improvements

  6,149   6,095 

Laboratory and other equipment

  5,013   4,933 

Test equipment

  24,118   22,980 

Construction-in-progress

  19,874   18,245 
   74,007   70,218 

Less: accumulated depreciation and amortization

  (34,520)  (29,420)

Total

 $39,487  $40,798 

 

Test equipment includes DFI™ assets at customer sites that are contributing to DFI™ revenues. The construction-in-progress balance related to construction of DFI™ assets totaled $18.5 million and $16.6 million as of  September 30, 2020 and December 31, 2019, respectively. Depreciation and amortization expense was $1.7 million during each of the three months ended September 30, 2020 and 2019. Depreciation and amortization expense for the nine months ended September 30, 2020 and 2019 was $5.0 million and $4.3 million, respectively.

 

Goodwill and Intangible Assets

 

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

 

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Intangible assets balance was $5.3 million and $6.2 million as of September 30, 2020 and December 31, 2019, respectively. Intangible assets as of September 30, 2020 and December 31, 2019 consist of the following (in thousands):

 

     

September 30, 2020

  

December 31, 2019

 
  

Amortization

  

Gross

      

Net

  

Gross

      

Net

 
  

Period

  

Carrying

  

Accumulated

  

Carrying

  

Carrying

  

Accumulated

  

Carrying

 
  

(Years)

  

Amount

  

Amortization

  

Amount

  

Amount

  

Amortization

  

Amount

 

Acquired identifiable intangibles:

                           

Customer relationships

 19  $7,440  $(5,270) $2,170  $7,440  $(4,935) $2,505 

Developed technology

 49   17,460   (14,669)  2,791   17,460   (14,101)  3,359 

Tradename

 27   790   (692)  98   790   (673)  117 

Patent

 710   1,800   (1,590)  210   1,800   (1,560)  240 

Total

    $27,490  $(22,221) $5,269  $27,490  $(21,269) $6,221 

 

The weighted average amortization period for acquired identifiable intangible assets was 5.7 years as of September 30, 2020. Intangible asset amortization expense was $0.3 million during each of the three months ended September 30, 2020 and 2019. Intangible asset amortization expense for the nine months ended September 30, 2020 and 2019 was $1.0 million and $0.9 million, respectively. The Company expects annual amortization of acquired identifiable intangible assets to be as follows (in thousands):

 

Year Ending December 31,

 

Amount

 

2020 (remaining three months)

 $317 

2021

  1,093 

2022

  886 

2023

  886 

2024

  747 

2025 and thereafter

  1,340 

Total future amortization expense

 $5,269 

 

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

 

 

5. LEASES

 

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

 

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

 

ROU assets represent the Company’s right to use an underlying asset for the lease term and operating lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized based on the present value of remaining lease payments over the lease term. In determining the present value of lease payments, implicit rate must be used when readily determinable. As the Company’s leases do not provide implicit rates, at the date of the Company’s adoption of the new lease standard, the discount rate is calculated using the Company’s incremental borrowing rate determined based on the information available. The operating lease ROU asset also includes any lease payments made and excludes lease incentives or tenant improvement allowance. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Operating lease expense for lease payments is recognized

 

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on a straight-line basis over the lease term. Variable lease payment amounts that cannot be determined at the commencement of the lease such as increases in lease payments based on changes in index rates or usage, and common area maintenance costs are not included in the ROU assets or operating lease liabilities. These are expensed as incurred and recorded as variable lease expense. 

 

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

 

  

Three Months Ended September 30,

  

Nine Months Ended September 30,

 
  

2020

  

2019

  

2020

  

2019

 

Operating lease expense

 $455  $463  $1,362  $1,402 

Short-term lease and variable lease expense

  127   130   401   333 

Total lease expense

 $582  $593  $1,763  $1,735 

 

Supplemental balance sheets information related to leases was as follows:

 

  

September 30,

  

December 31,

 
  

2020

  

2019

 

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

  6.7   7.2 

Weighted average discount rate for operating lease liabilities

  5.24%  5.25%

Operating lease ROU assets obtained (in thousands)

 $151  $333 

 

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

 

Year Ending December 31,

 

Amount(a)

 

2020 (remaining three months)

 $392 

2021