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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

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FORM 10-Q

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☑	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the Quarterly Period ended June 30, 2015
	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

 

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PDF SOLUTIONS, INC.

(Exact name of Registrant as Specified in its Charter)

 

Delaware	25-1701361
(State or Other Jurisdiction of	(I.R.S. Employer
Incorporation or Organization)	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	☐ Smaller reporting company
		(Do not check if a smaller reporting company)

   

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 July 30, 2015 was 31,623,351.

 

   

TABLE OF CONTENTS

 

	Page
PART I  FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)	3
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	29
Item 4. Controls and Procedures	29
PART II  OTHER INFORMATION
Item 1. Legal Proceedings	29
Item 1A. Risk Factors	30
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	30
Item 3. Defaults Upon Senior Securities	31
Item 4. Mine Safety Disclosures	31
Item 5. Other Information	31
Item 6. Exhibits	32
SIGNATURES	33
INDEX TO EXHIBITS	34

  

 

PART I — FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

PDF SOLUTIONS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)

(in thousands, except par value)

 

 

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

 

  

PDF SOLUTIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(unaudited)

(in thousands, except per share amounts)

 

 

 

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

 

  

PDF SOLUTIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands) 

   

 

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

 

  

PDF SOLUTIONS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

 

 

 

  

 

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. 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 1A of this Quarterly Report on Form 10-Q. 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.

 

Recent Development

 

On July 17, 2015, we completed our acquisition of Syntricity, Inc. (“Syntricity”), a provider of a hosted solution for characterization and yield management, pursuant to an Agreement and Plan of Merger dated July 9, 2015 between us and Syntricity. We believe that the acquisition should further enhance our ability to deliver our software products across a broader customer base. The aggregate consideration for the acquisition consisted of (i) $5.0 million in cash, $750,000 of which will be held in escrow and subject to certain working capital and indemnity adjustments and (ii) up to an additional $2.5 million in post-closing earnout payments.  

 

Industry Trend

 

Consistent with the trend since 2010, we believe that the largest logic foundries will continue significant investments in leading edge nodes and capacity in 2015. Leading foundries continue to invest in new technologies such as multi-patterned lithography and 3-D transistor architecture, which provide opportunities to increase our business.

 

The capacity utilization on 28nm, however, has declined during the first half of 2015 according to the foundry volume leader. We believe that it could remain low through the second half of 2015 as well, which would have a negative impact on our revenues.

 

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 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 or, in the case of one time and materials contract, if the customer takes advantage of contractual provisions that permit the suspension of contracted work for a period if their business experiences a financial hardship. 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, 2014, and in Item 1A, "Risk Factors," on pages 24 through 30 of our Quarterly Report on Form 10-Q for the three months ended March 31, 2105, for related information on the risks associated with customer concentration and Gainshare performance incentives revenue.

 

  

Financial Highlights 

 

 

	Financial highlights for the three months ended June 30, 2015, were as follows:
	•	Total revenues for the three months ended June 30, 2015, were $23.2 million, a decrease of $1.4 million, or 6%, compared to $24.6 million for the three months ended June 30, 2014. Design-to-silicon-yield solutions revenue for the three months ended June 30, 2015, was $14.2 million, an increase of $1.1 million, or 8%, when compared to Design-to-silicon yield solutions revenue of $13.1 million for the three months ended June 30, 2014. Gainshare performance incentives revenue for the three months ended June 30, 2015, was $9.1 million, a decrease of $2.4 million, or 21%, compared to $11.5 million for the three months ended June 30, 2014. The decrease in revenue from Gainshare performance incentives was primarily the result of lower net volumes reported at older nodes, primarily related to 32nm and 28nm engagements.

  

•

Net income for the three months ended June 30, 2015, was $2.1 million, compared to $4.7 million for the three months ended June 30, 2014. The decrease in net income was primarily attributable to a decrease in gross margin of $2.4 million and an increase in operating expense of $1.6 million, offset by a decrease in income tax provision of $1.5 million. The decrease in gross margin is primarily due to lower total revenues and higher cost of design-to-silicon yield solutions during the period. The decrease in income tax provision of $1.5 million was primarily due to a decrease in level of operating income.

 

•

Net income per basic and diluted share was $0.07 for the three months ended June 30, 2015, compared to net income per basic and diluted share of $0.15, for the three months ended June 30, 2014.

  

•

Cash and cash equivalents increased $16.2 million from $115.5 million at December 31, 2014, to $131.7 million at June 30, 2015, primarily due to an increase in cash from operating and financing activities during the period, offset by a decrease in cash from investing activities.

   

Financial highlights for the six months ended June 30, 2015, were as follows:

 

•

Total revenues for the six months ended June 30, 2015, were $50.0 million, a decrease of $1.7 million, or 3%, compared to $51.7 million for the six months ended June 30, 2014. Design-to-silicon-yield solutions revenue for the six months ended June 30, 2015, was $32.3 million, an increase of $4.3 million, or 15%, when compared to Design-to-silicon yield solutions revenue of $28.0 million for the six months ended June 30, 2014. The increase in Design-to-silicon yield solutions revenue was primarily the result of recognizing $6.0 million in revenue upon signing of two contracts with one customer, offset by the wind down of several older engagements across multiple nodes not being fully offset yet by the ramp up of newer 20nm and 14nm engagements. Gainshare performance incentives revenue for the six months ended June 30, 2015, was $17.7 million, a decrease of $6.0 million, or 25%, compared to $23.7 million for the six months ended June 30, 2014. The decrease in revenue from Gainshare performance incentives was primarily the result of lower net volumes reported at older nodes, primarily related to 32nm and 28nm engagements.

  

•

Net income for the six months ended June 30, 2015, was $8.1 million, compared to $11.0 million for the six months ended June 30, 2014. The decrease in net income was primarily attributable to a decrease in gross margin of $1.8 million and an increase in operating expense of $2.2 million, offset by a decrease in income tax provision of $0.9 million. The decrease in gross margin was primarily due to a decrease in revenues from Gainshare performance incentives not fully offset by a corresponding decrease in direct cost of design-to-silicon yield solutions. The decrease in income tax provision of $0.9 million was primarily due to a decrease in level of operating income.

 

•

Net income per basic and diluted share was $0.26 and $0.25, respectively, for the six months ended June 30, 2015 compared to net income per basic and diluted share of $0.36 and $0.34, respectively, for the six months ended June 30, 2014, a decrease of $0.10 and $0.09 per basic and diluted share, respectively.

 

 

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, 2014. 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 revenue from two sources: Design-to-silicon-yield solutions, which include services and software licenses, and Gainshare performance incentives.

 

Design-to-Silicon-Yield Solutions — Revenue that is derived from Design-to-silicon-yield solutions comes from services and software licenses. We recognize revenue for 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 the cost-to-cost percentage of completion method of contract accounting. Losses on 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. If we do not accurately estimate the resources required or the scope of work to be performed, or do not manage the projects properly within the planned period of time or satisfy our obligations under contracts, resulting contract margins could be materially different than those anticipated when the contracts were executed. Any such reductions in contract margin could have a material negative impact on our operating results.  Revenue under certain time and materials contracts for solution implementation services is 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 at each customer's option over the license term. The amount of product and service revenue recognized in a given period is affected by our 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 our 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 fair value. Fees allocated to solution implementation services are recognized using the cost-to-cost percentage of completion method of contract accounting. Fees allocated to software and related support and maintenance are recognized under software revenue recognition guidance.  

 

We also license our software products separately from our solution implementation services. 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 (1) 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 revenues. VSOE for maintenance is generally established based upon negotiated renewal rates while VSOE for consulting, installation, and training services is established based upon our customary pricing for such services when sold separately. Revenues for software licenses with extended payment terms are not recognized in excess of amounts due. For software license arrangements that require significant modification or customization of the underlying software, the software license revenues are recognized as services are performed using the cost-to-cost percentage of completion method of contract accounting, and such revenues are recorded as services revenue. 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 the revenue recognition policy by contract. At the end of reporting period, we evaluate our 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.

 

 

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 incentives component where the customer may pay a contingent variable fee, usually after the fixed fee period has ended. Revenues derived from Gainshare performance incentives represent 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 no cost to us. Due to the uncertainties surrounding attainment of such operational levels, we recognize Gainshare performance incentives revenues (to the extent of completion of the related solution implementation services) upon receipt of performance reports or other related information from our customers supporting the determination of amounts and probability of collection. Gainshare performance incentives revenue is dependent on many factors which are outside our control, which can include among others, continued production of the related ICs by our customers, sustained yield improvements by our customers, and our ability to enter into new Design-to-silicon-yield solutions contracts containing provisions for Gainshare performance incentives.

 

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 in the condensed consolidated statements of operations. As of June 30, 2015, we believe that most of our deferred tax assets are “more likely than not” to be realized with the exception of California R&D tax credits that have not met the “more likely than not” realization threshold criteria because on an annual basis and pursuant to current law, we generate more California credits than California tax. As a result, at June 30, 2015, the excess California R&D tax credits continue to be subject to a full valuation allowance. See Note 5 to the condensed consolidated financial statements for further disclosures regarding our income taxes. 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 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. 

 

 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 June 30,								Six Months Ended June 30,
		2015				2014				2015				2014
Revenues:
Design-to-silicon-yield solutions			61	%			53	%			65	%			54	%
Gainshare performance incentives			39				47				35				46
Total revenues			100	%			100	%			100	%			100	%
Costs of design-to-silicon-yield solutions			43				36				37				36
Gross profit			57				64				63				64
Operating expenses:
Research and development			19				14				17				13
Selling, general and administrative			22				19				20				18
Amoritization of other acquired intangible assets			—				—				—				—
Restructuring changes			—				—				—				—
Total operating expenses			41				33				37				31
Income from operations			16				31				26				33
Interest and other income (expense), net			—				—				—				—
Income before taxes			16				31				26				33
Income tax provision			7				12				10				12
Net income			9	%			19	%			16	%			21	%

 

 

Comparison of the Three Months Ended June 30, 2015 and 2014

 

		Three Months Ended June 30,								$				%
Revenues		2015				2014				Change				Change
(in thousands, except for percentages)
Design-to-silicon-yield solutions		$	14,159			$	13,091			$	1,068				8	%
Gainshare performance incentives			9,051				11,519				(2,468	)			(21	)%
Total revenues		$	23,210			$	24,610			$	(1,400	)			(6	)%

    

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 June 30, 2015, compared to the three months ended June 30, 2014, primarily due to an increase in fixed fee integrated solutions, the result of more billable hours to revenue-generating projects in the period due to increased business activity. 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 including photovoltaic and LED, 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 $2.5 million for the three months ended June 30, 2015, compared to the three months ended June 30, 2014.  The decrease was primarily the result of lower net volumes reported at older nodes, primarily related to 32nm and 28nm engagement.. 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 provisions for Gainshare performance incentives.  

 

 

		Three Months Ended
		June 30,								$				%
Cost of Design-to-Silicon-Yield Solutions		2015				2014				Change				Change
(in thousands, except for percentages)
Costs of Design-to-silicon-yield solutions		$	9,888			$	8,847			$	1,041				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 and costs recognized in connection with licensing our software. Services 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 sold in conjunction with our software products. Direct costs of Design-to-silicon-yield solutions for the three months ended June 30, 2015 increased $1.0 million compared to the three months ended June 30, 2014, primarily due to a $0.7 million increase in deferred cost, a $0.1 million increase in subcontractor expense, a $0.1 million increase in depreciation expense, a $0.4 million increase in equipment cost, and a $0.2 million increase in facility expense, offset by a $0.2 million decrease in personnel-related expense due to lower headcount, partially as a result of resource realignment to research and development activities, lower variable compensation, somewhat offset by higher stock-based compensation expense, a $0.3 million decrease in travel cost. The direct costs of Design-to-silicon-yield solutions as a percentage of revenues during the three months ended June 30, 2015 was 43% compared to 36% in the three months ended June 30, 2014.

  

  

		Three Months Ended
		June 30,								$				%
Research and Development		2015				2014				Change				Change
(in thousands, except for percentages)
Research and development		$	4,437			$	3,337			$	1,100				33	%

 

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 and facilities cost allocations, and stock-based compensation charges. Research and development expenses increased $1.1 million for the three months ended June 30, 2015, compared to the three months ended June 30, 2014, primarily due to a $0.4 million increase in subcontractor expense and a $0.6 million increase in personnel-related expense due to higher headcount, partially as a result of resource realighment and higher stock-based compensation expense. 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 when we hire personnel as a result of the size and the timing of product development projects. 

 

		Three Months Ended
		June 30,								$				%
Selling, General and Administrative		2015				2014				Change				Change
(in thousands, except for percentages)
Selling, general and administrative		$	5,216			$	4,661			$	555				12	%

 

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 $0.6 million for the three months ended June 30, 2015, compared to the three months ended June 30, 2014, primarily due to a $0.2 million increase in subcontractor expense, a $0.5 million increase in acquisition related costs, offset by a $0.2 million decrease in personal-related expense, which was mainly due to decreased variable compensation and a decrease in stock based compensation 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.  

 

 

		Three Months Ended
		June 30,								$				%
Amortization of Other Acquired Intangible Assets		2015				2014				Change				Change
(In thousands, except for percentages)
Amortization of other acquired intangible assets		$	—			$	12			$	(12	)			(100	)%

 

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 acquired intangible assets were fully amortized as of June 30, 2014. No amortization of other acquired intangible assets was recorded during the three months ended June 30, 2015.

 

 

 

		Three Months Ended
		June 30,								$				%
Interest and Other Income (Expense), Net		2015				2014				Change				Change
(in thousands, except for percentages)
Interest and other income (expense), net		$	52			$	(27	)		$	79				(293	)%

  

Interest and Other Income (expense), net.  Interest and other income (expense), net increased $79,000 for the three months ended June 30, 2015 compared to the three months ended June 30, 2014. The change was primarily due to foreign exchange rate movements. We anticipate interest and other income (expense) will fluctuate in future periods as a result of our projected use of cash and fluctuations of foreign exchange rates.

 

		Three Months Ended
		June 30,								$				%
Income Tax Provision		2015				2014				Change				Change
(in thousands, except for percentages)
Income tax provision		$	1,572			$	3,030			$	(1,458	)			(48	)%

 

Income Tax Provision. Income tax provision decreased $1.5 million for the three months ended June 30, 2015, compared to three months ended June 30, 2014, primarily due to a decrease in level of income.

 

 Comparison of the Six Months Ended June 30, 2015 and 2014 

 

 

		Six Months Ended
		June 30,								$				%
Revenues		2015				2014				Change				Change
(In thousands, except for percentages)
Design-to-silicon-yield solutions		$	32,311			$	28,010			$	4,301				15	%
Gainshare performance incentives			17,716				23,686				(5,970	)			(25	)%
Total		$	50,027			$	51,696			$	(1,669	)			(3	)%

 

Design-to-Silicon-Yield Solutions. Design-to-silicon-yield solutions revenue increased $4.3 million for the six months ended June 30, 2015 compared to the six months ended June 30, 2014, primarily due to the result of recognizing $6.0 million in revenue upon signing of the two contracts with one customer during the period, offset by the wind down of several older engagements across multiple notes. Our Design-to-silicon-yield solutions revenue may fluctuate in the future and are 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 including photovoltaic and LED, 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 businesses 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. Revenue derived from gainshare performance incentives decreased $6.0 million for the six months ended June 30, 2015 compared to the six months ended June 30, 2014.  The decrease was primarily the result of lower wafer volumes reported at 32nm and 28nm nodes, only slightly offset by the introduction of new gainsahre revenue from a 20nm node. 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 provisions for gainshare performance incentives.

 

		Six Months Ended
		June 30,								$				%
Cost of Design-to-Silicon-Yield Solutions		2015				2014				Change				Change
(In thousands, except for percentages)
Cost of Design-to-Silicon-Yield Solutions		$	18,692			$	18,552			$	140				1	%

 

Costs of Design-to-Silicon-Yield Solutions.   Costs of Design-to-silicon-yield solutions increased $0.1 million for the six months ended June 30, 2015 compared to the six months ended June 30, 2014. The increase was primarily due to a $1.4 million increase in deferred cost due to timing of completion of the contract signature process, a $0.2 million increase in subcontractor expense, a $0.4 million increase in equipment related cost, and a $0.2 million increase in depreciation expense related to our test equipment, offset by a $1.3 million decrease in personnel-related expense due to lower headcount, partially as a result of resource realignment to research and development activities, lower variable compensation, somewhat offset by higher stock-based compensation expense, a $0.5 million decrease in travel expense, and a $0.2 million decrease in facility expense.

 

		Six Months Ended
		June 30,								$				%
Research and Development		2015				2014				Change				Change
(In thousands, except for percentages)
Research and development		$	8,525			$	6,933			$	1,592				23	%

 

Research and Development. Research and development expenses increased $1.6 million for the six months ended June 30, 2015 compared to the six months ended June 30, 2014, primarily due to a $0.7 million increase in personnel-related expense, a $0.7 million increase in outside service expenses, a $0.1 million increase in facility expense. 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 when we hire personnel as a result of the size and the timing of product development projects and revenue generating activity requirements.

 

		Six Months Ended
		June 30,								$				%
Selling, General and Administrative		2015				2014				Change				Change
(In thousands, except for percentages)
Selling, general and administrative		$	9,672			$	8,990			$	682				8	%

 

Selling, General and Administrative. Selling, general and administrative expenses increased $0.7 million for the six months ended June 30, 2015 compared to the six months ended June 30, 2014, primarily due to a $0.2 million increase in travel expense, a $0.1 million in subcontractor expense, a $0.1 million increase in facility expense, a $0.1 million increase in legal and accounting expense, and a $0.5 million increase in acquisition related cost, offset by a $0.3 million decrease in personnel-related expense, which was mainly due to decreased variable compensation and a $0.1 million decrease in provision for doubtful accounts.

 

		Six Months Ended
		June 30,								$				%
Amortization of Other Acquired Intangible Assets		2015				2014				Change				Change
(In thousands, except for percentages)
Amortization of other acquired intangible assets		$	—			$	30			$	(30	)			(100	)%

  

 

Amortization of other acquired intangible assets consists of amortization of intangibles acquired as a result of certain business combinations. The acquired intangible assets were fully amortized as of June 30, 2014. No amortization of other acquired intangible assets was recorded during the six months ended June 30, 2015.  

 

		Six Months Ended
		June 30,								$				%
Restructuring Charges (Credits)		2015				2014				Change				Change
(In thousands, except for percentages)
Restructuring charges (credits)		$	—			$	57			$	(57	)			(100	)%

  

 

Restructuring Charges (Credits).   No restructuring charges was recorded during the six months ended June 30, 2015. For the six months ended June 30, 2014, we recorded restructuring charges of $57,000, which represented severance charges related to the October 2012 Plan.

 

		Six Months Ended
		June 30,								$				%
Interest and Other Income (Expense), Net		2015				2014				Change				Change
(In thousands, except for percentages)
Interest and other income (expense), net		$	103			$	(114	)		$	217				(190	)%

 

Interest and Other Income (Expense), Net.  Interest and other income (expense) increased $0.2 million for the six months ended June 30, 2015 compared to the six months ended June 30, 2014. The change was primarily due to foreign exchange rate movements. We anticipate interest and other income (expense), net will fluctuate in future periods as a result of our projected use of cash and fluctuations of foreign exchange rates.

 

		Six Months Ended
		June 30,								$				%
Income Tax Provision		2015				2014				Change				Change
(In thousands, except for percentages)
Income tax provision		$	5,125			$	6,069			$	(944	)			(16	)%

 

Income Tax Provision. Income tax provision decreased $0.9 million for the six months ended June 30, 2015 compared to six months ended June 30, 2014, primarily due to a decrease in level of income.

 

 

Liquidity and Capital Resources

 

Operating Activities

 

Cash flows provided by operating activities was $16.8 million for the six months ended June 30, 2015. This resulted from net income of $8.1 million, adjustment of $5.8 million for non-cash charges and a cash increase of $2.9 million reflected in the net change of operating assets and liabilities. Non-cash charges consisted primarily of stock-based compensation of $4.6 million, deferred taxes of $1.0 million, tax benefit related to stock-based compensation plan of $2.1 million, depreciation and amortization of $1.2 million, partially offset by excess tax benefit from stock-based compensation of $2.0 million and tax withholdings related to net share settlements of restricted stock awards and units of $1.0 million. Cash flow increases resulting from the net change in operating assets and liabilities primarily consisted of a $6.9 million decrease in accounts receivable, primarily driven by strong collections, a $1.8 million net increase in deferred revenue, offset by a $1.5 million decrease in accrued compensation and related benefits, driven by the payment of variable compensation during the period, and a $4.4 million decrease in prepaid expenses and other assets. The $8.7 million combined cash flow increase resulting from the decrease in accounts receivable and the increase in deferred revenue was primarily due to the timing of billing milestones and payments received.  

  

Cash flows provided by operating activities was $18.4 million for the six months ended June 30, 2014. This resulted from net income of $11.0 million, adjustment of $6.3 million for non-cash charges and cash increase of $1.1 million reflected in the net change of operating assets and liabilities. Non-cash charges consisted primarily of stock-based compensation of $4.0 million, deferred taxes of $2.2 million, tax benefit related to stock-based compensation plan of $1.7 million, depreciation and amortization of $0.9 million, partially offset by excess tax benefit from stock-based compensation of $1.5 million, purchases of treasury stock in connection with tax withholdings on restricted stock grants of $0.9 million and gain on disposal of property and equipment of $0.1 million. Cash flow increases resulting from the net change in operating assets and liabilities primarily consisted of $4.2 million decrease in accounts receivable, primarily driven by strong collections, $1.2 million net increase in deferred revenue and billing in excess of recognized revenue, offset by $1.7 million increase in prepaid expense and other assets due to timing of prepayment of third party software cost, $0.3 million decrease in accounts payable, $1.7 million decrease in accrued compensation and related benefits, driven by the payment of variable compensation during the period, and $0.6 million decrease in accrued and other liabilities. The $5.3 million combined cash flow increase resulting from the decrease in accounts receivable, the increase in deferred revenue and the decrease in billings in excess of recognized revenues was primarily due to the timing of billing milestones and payments received.  

 

 

Investing Activities

           

Cash flows used in investing activities for the six months ended June 30, 2015 of $2.4 million consisted of payments for capital expenditures, primarily test equipment.

 

Cash flows used in investing activities for the six months ended June 30, 2014 of $1.8 million consisted of $1.9 million payment for capital expenditures, primarily test equipment, offset by proceeds from the sales of property and equipment of $0.1 million.

 

Financing Activities

 

      Cash flows provided by financing activities of $1.8 million for the six months ended June 30, 2015, consisted primarily of $4.8 million of proceeds from the exercise of stock options, $0.7 million of proceeds from our Employee Stock Purchase Plan, $2.0 million of excess tax benefit from stock-based compensation, offset by $5.6 million of cash used to repurchase 319,712 shares of our common stock at an average price of $17.43 per share.

 

     Cash flows provided by financing activities of $1.0 million for the six months ended June 30, 2014, consisted primarily of $2.4 million of proceeds from the exercise of stock options, $0.6 million of proceeds from our Employee Stock Purchase Plan, $1.5 million of excess tax benefit from stock-based compensation, offset by $3.5 million of cash used to repurchase shares of our common stock.

 

Liquidity

 

As of June 30, 2015, our working capital, defined as total current assets less total current liabilities, was $156.5 million, compared with $147.0 million as of December 31, 2014. Cash and cash equivalents were $131.7 million as of June 30, 2015, compared to $115.5 million as of December 31, 2014.  As of June 30, 2015 and December 31, 2014, cash and cash equivalents held by our foreign subsidiaries were $2.5 million and $2.0 million, respectively. We anticipate that our overall expenses, as well as planned capital expenditures, may constitute a material use of our cash resources. In addition, we may use cash resources to continue to fund our R&D efforts, repurchase common stock or fund potential investments in, or acquisitions of complementary products, technologies or businesses. 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 at least the next twelve months.  

 

Off-Balance Sheet Agreements 

 

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

  

 

 We indemnify certain customers from third-party claims of intellectual property infringement relating to the use of our products. Historically, costs related to these guarantees of indemnification have not been significant. We are unable to estimate the maximum potential impact of these guarantees on our future results of operations.

 

Contractual Obligations

 

The following table summarizes our known contractual obligations (in thousands) as of June 30, 2015:

 

		Payments Due by Period
Contractual Obligations (1)		2015 (remaining six months)				2016				2017				2018				2019				Thereafter				Total
Operating lease obligations		$	924			$	1,780			$	1,426			$	808			$	73			$	81			$	5,092

 

---

 

(1)

The contractual obligation table above excludes liabilities for uncertain tax positions of $2.4 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 June 30, 2015, we had cash and cash equivalents of $131.7 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 June 30, 2015, 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 June 30, 2015, we had one outstanding forward contract with a notional amount of $6.9 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 June 30, 2015, in connection with the filing of this Quarterly Report on Form 10-Q. Based on that evaluation as of June 30, 2015, 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. 

   

 

 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 June 30, 2015, 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 June 30, 2015.

 

 

Item 1A. Risk Factors

 

Item 1A, “Risk Factors,” on pages 24 through 30 of the Company’s Quarterly Report on Form 10-Q for the three months ended March 31, 2015, provides information on the significant risks associated with our business. There has been no subsequent material changes to these risks.  

 

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

 

The table below sets forth the information with respect to purchases made by or on behalf of the Company or any “affiliated purchaser” (as the term is defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934) of our common stock during the three months ended June 30, 2015 (in thousands except per share amounts):

 

 

ISSUER PURCHASES OF EQUITY SECURITIES

 

 

 

Period		Total Number of Shares Purchased (1)				Average Price Paid Per Share				Total Number of Shares Purchased as Part of Publicly Announced Programs (1)				Approximate Dollar Value of Shares that May Yet Be Purchased Under Programs(1)
Month #4 (April 1, 2015 through April 30, 2015)			—			$	—				—			$	21,396
Month #5 (May 1, 2015 through May 31, 2015)			83			$	16.42				83			$	20,037
Month #6 (June 1, 2015 through June 30, 2015)			37			$	16.40				37			$	19,429
Total			120			$	16.42				120

 

---

 

(1)

On October 21, 2014, the Board of Directors adopted a program 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.

 

 

Item 3. Defaults Upon Senior Securities

 

None.

  

 

Item 4. Mine Safety Disclosures

 

None. 

 

Item 5. Other Information

 

None. 

 

  

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.

  

 

 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: August 3, 2015	By:	/s/ JOHN K. KIBARIAN
		John K. Kibarian
		President and Chief Executive Officer
		(principal executive officer)

 

 

Date: August 3, 2015	By:	/s/ GREGORY C. WALKER
		Gregory C. Walker
		Vice President, Finance and Chief Financial Officer
		(principal financial and accounting officer)

     

  

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.

 

 

34