PDF SOLUTIONS INC - Quarter Report: 2009 June (Form 10-Q)

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

 

 

Commission File Number 000-31311

 

PDF SOLUTIONS, INC.

(Exact name of Registrant as Specified in its Charter)

 

 

(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 x No o

 

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  o    No  o

 

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. (Check one):

 

 

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

 

The number of shares outstanding of the Registrant’s Common Stock as of July 31, 2009 was 26,394,159.

 

 

Table of Contents

 

TABLE OF CONTENTS

 

	Page
PART I FINANCIAL INFORMATION
Item 1. Financial Statements	3
Condensed Consolidated Balance Sheets (Unaudited)	3
Condensed Consolidated Statements of Operations (Unaudited)	4
Condensed Consolidated Statements of Cash Flows (Unaudited)	5
Notes to Condensed Consolidated Financial Statements (Unaudited)	6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3. Quantitative and Qualitative Disclosures About Market Risk	26
Item 4. Controls and Procedures	27
PART II OTHER INFORMATION
Item 1. Legal Proceedings	27
Item 1A. Risk Factors	27
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	35
Item 3. Defaults Upon Senior Securities	35
Item 4. Submission of Matters to a Vote of Security Holders	35
Item 5. Other Information	35
Item 6. Exhibits	36
SIGNATURES	37
INDEX TO EXHIBITS	38

 

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PART I — FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

PDF SOLUTIONS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

 

		June 30, 2009			December 31, 2008
		(In thousands,
		except par values)
ASSETS
Current assets:
Cash and cash equivalents		$	36,365		$	31,686
Short-term investments		2,000			9,051
Accounts receivable, net of allowance of $254 in 2009 and 2008		16,911			24,989
Prepaid expenses, deferred tax assets, and other current assets		2,586			5,147
Total current assets		57,862			70,873
Property and equipment, net		2,006			2,675
Non-current investments		718			718
Intangible assets, net		3,839			4,730
Deferred tax assets and other non-current assets		974			631
Total assets		$	65,399		$	79,627
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt		$	337		$	370
Accounts payable		1,515			1,384
Accrued compensation and related benefits		5,152			6,525
Taxes payable and other accrued liabilities		2,701			3,723
Deferred revenue		1,968			1,792
Billings in excess of recognized revenue		796			748
Total current liabilities		12,469			14,542
Long-term debt		451			512
Long-term taxes payable		3,463			3,356
Long-term other liabilities		1,562			1,447
Total liabilities		17,945			19,857
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 29,883 in 2009 and 29,339 in 2008; shares outstanding 26,394 in 2009 and 25,923 in 2008		4			4
Additional paid-in-capital		192,010			189,132
Treasury stock at cost, 3,489 shares in 2009 and 3,416 shares in 2008		(18,535		)	(18,402		)
Accumulated deficit		(126,579		)	(112,620		)
Accumulated other comprehensive income		554			1,656
Total stockholders’ equity		47,454			59,770
Total liabilities and stockholders’ equity		$	65,399		$	79,627

 

See notes to unaudited condensed consolidated financial statements

 

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PDF SOLUTIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

 

		Three Months Ended June 30,						Six Months Ended June 30,
		2009			2008			2009			2008
		(In thousands, except per share amounts)
Revenues:
Design-to-silicon-yield solutions		$	7,292		$	15,452		$	15,086		$	30,476
Gainshare performance incentives		2,291			5,662			4,687			10,985
Total revenues		9,583			21,114			19,773			41,461
Cost of design-to-silicon-yield solutions:
Direct costs of design-to-silicon-yield solutions		4,863			7,267			11,153			15,033
Amortization of acquired technology		360			631			719			1,262
Total cost of design-to-silicon-yield solutions		5,223			7,898			11,872			16,295
Gross margin		4,360			13,216			7,901			25,166
Operating expenses:
Research and development		5,069			9,134			10,858			18,210
Selling, general and administrative		4,108			5,646			8,521			11,945
Amortization of other acquired intangible assets		87			195			174			389
Restructuring charges		1,202			1,471			1,835			1,471
Total operating expenses		10,466			16,446			21,388			32,015
Loss from operations		(6,106		)	(3,230		)	(13,487		)	(6,849		)
Interest and other income (expense), net		(210		)	251			114			740
Loss before taxes		(6,316		)	(2,979		)	(13,373		)	(6,109		)
Income tax provision (benefit)		322			(1,039		)	586			(1,656		)
Net loss		$	(6,638	)	$	(1,940	)	$	(13,959	)	$	(4,453	)
Net loss per share – basic and diluted		$	(0.25	)	$	(0.07	)	$	(0.53	)	$	(0.16	)
Weighted average common shares – basic and diluted		26,328			27,608			26,210			27,724

 

See notes to unaudited condensed consolidated financial statements

 

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PDF SOLUTIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

		Six Months Ended June 30,
		2009			2008
		(In thousands)
Operating activities:
Net loss		$	(13,959	)	$	(4,453	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization		786			1,017
Stock-based compensation expense		2,461			3,737
Amortization of acquired intangible assets		893			1,651
Tax shortfall related to stock-based compensation expense		—			(33		)
Deferred taxes		32			(2,873		)
Changes in operating assets and liabilities:
Accounts receivable, net of allowances		8,076			3,103
Prepaid expenses and other assets		2,170			(360		)
Accounts payable		213			(1,233		)
Accrued compensation and related benefits		(1,381		)	508
Taxes payable and other accrued liabilities		(799		)	282
Deferred revenues		176			367
Billings in excess of recognized revenue		49			(443		)
Net cash provided by (used in) operating activities		(1,283		)	1,270
Investing activities:
Purchases of available-for-sale securities		—			(16,805		)
Maturities and sales of available-for-sale securities		7,053			12,810
Purchases of property and equipment		(266		)	(604		)
Net cash provided by (used in) investing activities		6,787			(4,599		)
Financing activities:
Proceeds from exercise of stock options		—			63
Proceeds from Employee Stock Purchase Plan		417			—
Purchases of treasury stock		(133		)	(2,611		)
Principal payments on long-term debt		(80		)	(113		)
Net cash provided by (used in) financing activities		204			(2,661		)
Effect of exchange rate changes on cash		(1,029		)	1,162
Net increase (decrease) in cash and cash equivalents		4,679			(4,828		)
Cash and cash equivalents, beginning of period		31,686			35,315
Cash and cash equivalents, end of period		$	36,365		$	30,487
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Taxes		$	679		$	1,334
Interest		$	11		$	21

 

See notes to unaudited condensed consolidated financial statements

 

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PDF SOLUTIONS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

1. BASIS OF PRESENTATION

 

Basis of Presentation

 

The interim unaudited condensed consolidated financial statements included herein have been prepared by PDF Solutions, Inc. (“the Company”), without audit, 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, 2008.

 

We have evaluated subsequent events, as defined by Statement of Financial Accounting Standards (“SFAS”) No. 165, Subsequent Events, through the filing date of this document.

 

The preparation of the condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. A significant portion of the Company’s revenues require estimates with respect to total costs which may be incurred and revenues earned. Actual results could differ from these estimates.

 

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

 

Revenue Recognition

 

The Company derives revenue from two sources: Design-to-Silicon-Yield Solutions, which includes Services and Software Licenses, and Gainshare Performance Incentives. The Company recognizes revenue in accordance with the provisions of American Institute of Certified Public Accountants Statement of Position (“SOP”) No. 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts and SOP No. 97-2, Software Revenue Recognition, as amended.

 

Design-to-Silicon-Yield Solutions — Revenue that is derived from Design-to-Silicon-Yield solutions comes from services and software licenses. The Company recognizes revenue for each element of Design-to-Silicon-Yield solutions as follows:

 

Services — The Company generates a significant portion of its Design-to-Silicon-Yield solutions revenue from fixed-price solution implementation service contracts delivered over a specific period of time. These contracts require accurate estimation of costs to perform obligations and overall scope of each engagement. Revenue under 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 evident. Revisions in profit estimates are reflected in the period in which the conditions that require the revisions become known and can be estimated.

 

On occasion, the Company has licensed its software products as a component of its fixed-price services 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 over the license term. Under these arrangements, where vendor-specific objective evidence of fair value (“VSOE”) exists for the support and maintenance element, the support and maintenance revenue is recognized separately over the term of the supporting period. The remaining fee is recognized as services are performed using the cost-to-cost percentage of completion method of contract accounting. VSOE for maintenance, in these instances, is generally established based upon a negotiated renewal rate. Under arrangements where software products are licensed as a component of its fixed-price service contract and where VSOE does not exist to allocate a portion of the total fixed-price to the undelivered elements, revenue is recognized for the total fixed-price as the lesser of either the percentage of completion method of contract accounting or ratably over the longer of either the term of the agreement or the support period. Costs incurred under these arrangements are deferred and recognized in proportion to revenue recognized under these arrangements.

 

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Revenue from related support and maintenance services is recognized ratably over the term of the support and maintenance contract, generally one year, while revenue from consulting, installation and training services is recognized as the services are performed. When bundled with software licenses in multiple element arrangements, support and maintenance, consulting (other than for its fixed-price solution implementations), installation, and training revenue is allocated to each element of a transaction based upon its fair value as determined by the Company’s VSOE. VSOE for maintenance is generally established based upon negotiated renewal rates while VSOE for consulting, installation, and training services is established based upon the Company’s customary pricing for such services when sold separately. When VSOE does not exist to allocate a portion of the total fee to the undelivered elements, revenue is recognized ratably over the longest period of the undelivered elements.

 

Software Licenses — The Company also licenses its software products separately from its integrated solution implementations. For software license arrangements that do not require significant modification or customization of the underlying software, software license revenue is recognized under the residual method when (1) persuasive evidence of an arrangement exists, (2) delivery has occurred, (3) the fee is fixed or determinable, (4) collectibility 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 its fixed price solution implementations), installation, and training, revenue is allocated to each element of a transaction based upon its fair value as determined by the Company’s VSOE and such services are recorded as services revenue. VSOE for maintenance is generally established based upon negotiated renewal rates while VSOE for consulting, installation, and training services is established based upon the Company’s customary pricing for such services when sold separately. When VSOE does not exist to allocate a portion of the total fee to the undelivered elements, revenue is recognized ratably over the longest period of the undelivered elements, and such revenue is recorded as services. Revenue for software licenses with extended payment terms is not recognized in excess of amounts due. For software license arrangements that require significant modification or customization of the underlying software, the software license revenue is recognized as services are performed using the cost-to-cost percentage of completion method of contract accounting, and such revenue is recorded as services.

 

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

 

Software Development Costs — Costs for the development of new software products and substantial enhancements to existing software products are expensed as incurred until technological feasibility has been established, at which time any additional costs would be capitalized in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 86, Computer Software to be Sold, Leased or Otherwise Marketed. Because the Company believes its current process for developing software is essentially completed concurrently with the establishment of technological feasibility, no costs have been capitalized to date.

 

2. RECENT ACCOUNTING PRONOUNCEMENTS AND ACCOUNTING CHANGES

 

Effective April 1, 2009, the Company adopted the provisions of the Financial Accounting Standard Board’s (“FASB’s”) SFAS No. 165, Subsequent Events (“SFAS 165”).  SFAS 165 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. SFAS 165 requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date, that is, whether that date represents the date the financial statements were issued or were available to be issued. The adoption of SFAS 165 did not have a material impact on the Company’s financial results and position.

 

Effective April 1, 2009, the Company adopted the provisions of the FASB’s Staff Position (“FSP”) FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly (“FSP 157-4”). FSP 157-4 provides guidance for estimating fair value in accordance with SFAS No. 157, when the volume and level of activity for the asset or liability have significantly decreased. This FSP also includes guidance on identifying circumstances that indicate a transaction is not orderly.  The adoption of FSP 157-4 did not have a material impact on the Company’s financial results and position.

 

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Effective April 1, 2009, the Company adopted the provisions of FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments (“FSP 115-2 and 124-2”).  FSP 115-2 and 124-2 amends the other-than-temporary impairment guidance for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments in the financial statements. The adoption of  FSP 115-2 and 124-2 did not have a material impact on the Company’s financial results and position.

 

Effective April 1, 2009, the Company adopted the provisions of FSP FAS 107, Disclosures about Fair Value of Financial Instruments (“FSP 107”). FSP 107 requires disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements.  This FSP also amends the Accounting Principals Board Opinion No. 28, Interim Financial Reporting, to require those disclosures in summarized financial information at interim reporting periods.  The adoption of FSP 107 had no impact on the Company’s financial results and position.

 

Effective January 1, 2009, the Company adopted the provisions of the FASB’s SFAS No. 141 (revised 2007), Business Combinations (“SFAS No. 141R”).  SFAS No. 141R establishes principles and requirements for how an acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree, and the goodwill acquired. SFAS No. 141R also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. The adoption of SFAS No. 141R did not have an effect on the Company’s financial results and position.

 

3. INVESTMENTS

 

The following tables summarize the Company’s investments (in thousands):

 

					June 30, 2009
		Amortized Costs			Unrealized Holding Gains			Unrealized Holding Losses			Fair Value
Agency obligations		$	1,996		$	4		$	—		$	2,000
Auction-rate securities		1,000			—			(282		)	718
		$	2,996		$	4		$	(282	)	$	2,718
Included in short term investments											$	2,000
Included in non-current investments											718
Total											$	2,718

 

					December 31, 2008
		Amortized Costs			Unrealized Holding Gains			Unrealized Holding Losses			Fair Value
Commercial paper		$	2,043		$	4		$	—		$	2,047
Agency obligations		6,544			68						6,612
Auction-rate securities		1,000			—			(282		)	718
Corporate Securities		400			—			(8		)	392
		$	9,987		$	72		$	(290	)	$	9,769
Included in short-term investments											$	9,051
Included in non-current investments											718
Total											$	9,769

 

As of June 30, 2009 and December 31, 2008, all securities, other than auction-rate securities held by the Company, had a maturity of one year or less. Please refer to Note 12 “Fair Value” for further discussion of auction-rate securities.

 

4. ACCOUNTS RECEIVABLE

 

Accounts receivable include amounts that are unbilled at the end of the period. Unbilled accounts receivable are determined on an individual contract basis and were approximately $8.0 million and $10.5 million as of June 30, 2009 and December 31, 2008, respectively.

 

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5. GOODWILL AND ACQUIRED INTANGIBLE ASSETS

 

SFAS No. 142, Goodwill and other Intangible Assets, requires goodwill to be tested for impairment on an annual basis (or more frequently if indicators of impairment exist) and requires purchased intangible assets other than goodwill to be amortized over their useful lives unless these lives are determined to be indefinite. The Company completed its annual impairment test in the fourth quarter of 2008 and the Company observed impairment indicators during the fourth quarter of 2008 including the trading of common stock below the Company’s book value and a further deterioration in the semiconductor industry, brought on by the deteriorating global economic environment. The Company also evaluated its acquired intangible assets for impairment. As a result of the impairment analyses, the Company recorded an impairment charge of $64.0 million related to goodwill and $6.3 million relating to its acquired intangible assets during the fourth quarter of 2008.  During the six months ended June 30, 2009, there were no indicators of impairment related to the Company’s intangible assets.

 

The following table provides information relating to the intangible assets and goodwill as of June 30, 2009 and December 31, 2008 (in thousands):

 

Acquired Identifiable Intangibles		Amortization Period (Years)		December 31, 2008 Net Carrying Amount			Amortization			Foreign Currency Translation			June 30, 2009 Net Carrying Amount
Acquired technology		4 - 5		$	3,608		$	(719	)	$	—		$	2,889
Brand name		4		129			(36		)	—			93
Customer relationships and backlog		1 - 6		489			(66		)	—			423
Patent and applications		7		400			(37		)	—			363
Other acquired intangibles		4		104			(35		)	2			71
Total				$	4,730		$	(893	)	$	2		$	3,839

 

		Amortization Period (Years)		December 31, 2007 Net Carrying Amount			Acquisitions			Purchase Price Adjustments			Amortization			Foreign Currency Translation			Impairment			December 31, 2008 Net Carrying Amount
Goodwill		N/A		$	65,170		$	147		$	(216	)	$	—		$	(1,102	)	$	(63,999	)	$	—
Acquired identifiable intangibles:
Acquired technology		4-5		$	9,184		$	420		$	—		$	(2,576	)	$	—		$	(3,420	)	$	3,608
Brand name		4		361			—			—			(128		)	—			(104		)	129
Customer relationships and backlog		1-6		1,812			1,230			—			(509		)	—			(2,044		)	489
Patents and applications		7		1,283			—			—			(200		)	—			(683		)	400
Other acquired intangibles		4		178			—			—			(72		)	(2		)	—			104
Total				$	12,818		$	1,650		$	—		$	(3,485	)	$	(2	)	$	(6,251	)	$	4,730

 

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

 

Year Ending December 31,		Amount
2009 (remaining six-month period)		$	891
2010		1,578
2011		830
2012		435
2013		74
2014 and thereafter		31
Total		$	3,839

 

6. STOCKHOLDERS’ EQUITY

 

The Company accounts for stock-based compensation in accordance with SFAS No. 123 (revised 2004), Share-Based Payment. Stock-based compensation expenses before taxes related to the Company’s employee stock purchase plan and stock-option plans were allocated as follows (in thousands):

 

		Three Months Ended June 30,						Six Months Ended June 30,
		2009			2008			2009			2008
Cost of design-to-silicon yield-solutions		$	444		$	400		$	833		$	930
Research and development		404			711			752			1,306
Selling, general and administrative		477			643			876			1,501
Stock-based compensation expenses		$	1,325		$	1,754		$	2,461		$	3,737

 

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The Company estimated the fair value of share-based payments using the Black-Scholes-Merton option-pricing model with the following weighted average assumptions and weighted average fair values:

 

Stock Plans:

 

		Three Months Ended June 30,					Six Months Ended June 30,
		2009		2008			2009			2008
Expected life (in years)		5.16		5.77			5.16			5.77
Volatility		61.7	%	59.2		%	61.3		%	58.7		%
Risk-free interest rate		3.16	%	3.23		%	2.03		%	3.07		%
Expected dividend		—		—			—			—
Weighted average fair value per share of options granted during the period		—		$	3.07		$	0.57		$	3.45

 

There were no stock option grants during the three months ended June 30, 2009.

 

Employee Stock Purchase Plan:

 

		Three Months Ended June 30,						Six Months Ended June 30,
		2009			2008			2009			2008
Expected life (in years)		1.25			1.33			1.25			1.33
Volatility		80.1		%	54.9		%	79.9		%	54.9		%
Risk-free interest rate		1.22		%	3.10		%	1.25		%	3.10		%
Expected dividend		—			—			—			—
Weighted average fair value per share of employee stock issued during the period		$	0. 73		$	3.60		$	0. 77		$	3.60

 

On June 30, 2009, the Company has in effect the following stock-based compensation plans:

 

Stock Plans — During 2001, the Company terminated the 1996 and 1997 Stock Plans as to future option grants, and adopted the 2001 Stock Plan. Under the 2001 Stock Plan, on January 1 of each year, starting with year 2002, the number of shares in the reserve will increase by the lesser of (1) 3,000,000 shares, (2) 5% of the outstanding common stock on the last day of the immediately preceding year, or (3) the number of shares determined by the board of directors. Under the 2001 Stock Plan, the Company may grant stock purchase rights and stock options to purchase shares of common stock to employees, directors and consultants. The exercise price for stock options must generally be at prices not less than the fair market value at the date of grant for incentive stock options and not less than 85% of fair market value for non-statutory stock options. Stock options generally expire ten years from the date of grant and become vested and exercisable ratably over a four-year period.

 

Stock option activity under the Company’s plan during the six months ended June 30, 2009 was as follows:

 

		Number of Options (in thousands)		Weighted Average Exercise Price per Share			Weighted Average Remaining Contractual Term (years)		Aggregate Intrinsic Value (in thousands)
Outstanding, January 1, 2009		4,412		$	8.93
Granted		30		1.16
Exercised		—		—
Canceled		(104	)	8.39
Expired		(89	)	9.84
Outstanding, June 30, 2009		4,249		8.87			6.70		$	87
Vested and expected to vest		4,014		8.95			6.59		$	77
Exercisable at June 30, 2009		2,743		9.49			5.71		$	46

 

The aggregate intrinsic value in the table above represents the total intrinsic value based on the Company’s closing stock price of $2.55 as of June 30, 2009, which would have been received by the option holders had all “in-the-money” option holders exercised their options as of that date. No stock options were exercised during the six months ended June 30, 2009.

 

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As of June 30, 2009, there was $5.4 million of total unrecognized compensation cost related to nonvested stock options. That cost is expected to be recognized over a weighted average period of 2.3 years. The total fair value of shares vested during the three months ended June 30, 2009 was $1.6 million.

 

Nonvested shares (restricted stock units) activity during the six months ended June 30, 2009 were as follows:

 

		Shares (in thousands)		Weighted Average Grant Date Fair Value
Nonvested, January 1, 2009		852		$	8.64
Granted		—		—
Vested		(215	)	1.17
Forfeited		(49	)	8.59
Nonvested, June 30, 2009		588		9.88

 

As of June 30, 2009, there was $3.4 million of total unrecognized compensation cost related to nonvested restricted stock units. That cost is expected to be recognized over a weighted average period of 3.1 years. The total compensation expense related to shares vested during the six months ended June 30, 2009 was $927,000.

 

Employee Stock Purchase Plan — In July 2001, the Company adopted an Employee Stock Purchase Plan (“Purchase Plan”), under which eligible employees can contribute up to 10% of their compensation, as defined in the Purchase Plan, towards the purchase of shares of PDF common stock at a price of 85% of the lower of the fair market value at the beginning of the offering period or the end of each six-month offering period. Under the Purchase Plan, on January 1 of each year, starting with 2002, the number of shares reserved for issuance will automatically increase by the lesser of (1) 675,000 shares, (2) 2% of the Company’s outstanding common stock on the last day of the immediately preceding year, or (3) the number of shares determined by the board of directors. For the six months ended June 30, 2009, the Purchase Plan compensation expense was $110,000.

 

Stock Repurchase Program — On March 26, 2003, the Company’s Board of Directors approved a share repurchase program to purchase up to $10.0 million of its outstanding common stock. The program was completed in August 2007 with 988,000 shares repurchased at the average price of $10.12 per share. On October 29, 2007, the Board of Directors approved a new program to repurchase up to an additional $10.0 million of the Company’s common stock on the open market. The right to repurchase stock under this program will expire on October 29, 2010. As of June 30, 2009, 2.5 million shares have been repurchased at the average price of $3.41 per share under this program and $1.5 million remained available for future repurchases.

 

7. RESTRUCTURING

 

In 2008, the Company announced two restructuring plans to better allocate its resources to improve its operational results in light of current market conditions, one on April 29, 2008 and the other on October 28, 2008.

 

For the plan announced on April 29, 2008, the Company recorded restructuring charges of $1.5 million during the three months ended June 30, 2008, which primarily consisted of employee severance costs of $1.4 million. All severance costs and related fees were paid out and the activities were completed as of March 31, 2009.

 

For the plan announced on October 28, 2008, the Company recorded restructuring charges of $3.8 million, primarily consisting of employee severance costs of $2.7 million and facility exit costs of $985,000. Of the $3.8 million, $1.8 million was recorded during the six months ended June 30, 2009, which primarily consisted of employee severance costs. The following table summarizes the activities of these restructuring liabilities (in thousands):

 

Restructuring Announced on October 28, 2008		Severance			Facility Exit			Professional and Other Fees			Total
Balance, January 1, 2009		$	860		$	1,108		$	31		$	1,999
Restructuring charges		1,755			—			80			1,835
Payments		(1,650		)	(224		)	(85		)	(1,959		)
Balance, June 30, 2009		$	965		$	884		$	26		$	1,875

 

As of June 30, 2009, of the remaining accrual of $1.9 million, $1.4 million was included in accrued liabilities and $501,000 was included in long-term other liabilities. Accrued severance of $965,000 and accrued professional and other fees of $26,000 are expected to be paid out in the three months ending September 30, 2009. Accrued facility exit costs will be paid in accordance with the lease payment schedule through 2013.

 

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8. INCOME TAXES

 

The Company accounts for temporary differences between the book and tax basis of assets and liabilities by recording deferred tax assets and liabilities in accordance with SFAS No. 109, Accounting for Income Taxes, and Financial Interpretation No. 48, Accounting for Uncertainty in Income Taxes — An Interpretation of FASB Statement No. 109 (“FIN No. 48”). The Company must assess the likelihood that its deferred tax assets will be recovered from future taxable income and, to the extent the Company believes that recovery is not likely, the Company must establish a valuation allowance. Changes in the Company’s net deferred tax assets and valuation allowance, in a period are recorded through the income tax provision in the condensed consolidated statements of operations.

 

In accordance with FIN No. 48, the Company classifies its liabilities related to unrecognized tax benefits as long-term. The Company includes interest and penalties related to unrecognized tax benefits within the Company’s income tax provision (benefit). As of June 30, 2009 and December 31, 2008, the Company had $684,000 and $562,000, respectively, accrued for payment of interest and penalties related to unrecognized tax benefits.

 

The Company’s total amount of unrecognized tax benefits as of June 30, 2009 was $8.5 million, of which $2.9 million, if recognized, would affect the Company’s effective tax rate. The Company’s total amount of unrecognized tax benefits as of December 31, 2008 was $8.2 million, of which $2.8 million, if recognized, would affect the Company’s effective tax rate. As of June 30, 2009, the Company has recognized a net amount of $3.5 million as long-term taxes payable for unrecognized tax benefits in its consolidated balance sheets. The Company does not expect the change in unrecognized tax benefits over the next twelve months to materially impact its results of operations and financial position.

 

The Company conducts business globally and, as a result, files numerous consolidated and separate income tax returns in the U.S. federal, various state and foreign jurisdictions. Because the Company used some of the tax attributes carried forward from previous years to tax years that are still open, statutes of limitation remain open for all tax years to the extent of the attributes carried forward into tax year 2001 for federal tax purposes and tax year 2002 for California tax purposes. With few exceptions, the Company is no longer subject to income tax examinations in its major foreign subsidiaries’ jurisdictions for years before 2004.

 

9. NET LOSS PER SHARE

 

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

 

		Three Months Ended June 30,						Six Months Ended June 30,
		2009			2008			2009			2008
Net loss		$	(6,638	)	$	(1,940	)	$	(13,959	)	$	(4,453	)
Denominator for basic calculation:
Weighted average common shares outstanding- basic		26,328			27,608			26,210			27,724
Dilutive items
Stock options outstanding		—			—			—			—
Denominator for diluted computation		26,328			27,608			26,210			27,724
Net loss per share — basic and diluted		$	(0.25	)	$	(0.07	)	$	(0.53	)	$	(0.16	)

 

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10. COMPREHENSIVE LOSS

 

The components of comprehensive loss are as follows (in thousands):

 

		Three Months Ended June 30,						Six Months Ended June 30,
		2009			2008			2009			2008
Net loss		$	(6,638	)	$	(1,940	)	$	(13,959	)	$	(4,453	)
Unrealized loss on investments, net of income tax effects		(24		)	(43		)	(61		)	(85		)
Foreign currency translation adjustments, net of income tax effects		226			106			(1,041		)	2,064
Comprehensive loss		$	(6,436	)	$	(1,877	)	$	(15,061	)	$	(2,474	)

 

11. CUSTOMER AND GEOGRAPHIC INFORMATION

 

SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, establishes standards for reporting information about operating segments. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or group, in deciding how to allocate resources and in assessing performance.

 

The Company’s chief operating decision maker, the Chief Executive Officer, reviews discrete financial information presented on a consolidated basis for purposes of making operating decisions and assessing financial performance. Accordingly the Company considers itself to be in one operating segment, specifically the licensing and implementation of yield improvement solutions for integrated circuit manufacturers.

 

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

 

		Three Months Ended June 30,				Six Months Ended June 30,
Customer		2009		2008		2009		2008
A		22	%	14	%	26	%	15	%
B		12	%	*	%	10	%	*	%
C		*	%	17	%	*	%	17	%
D		*	%	11	%	*	%	*	%

 

*  represents less than 10%

 

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

 

Customer		June 30, 2009		December 31, 2008
A		19	%	17	%
C		12	%	13	%
E		12	%	11	%
F		11	%	*	%
G		11	%	*	%
D		*	%	12	%

 

*  represents less than 10%

 

Revenues from customers by geographic area are as follows (in thousands):

 

		Three Months Ended June 30,						Six Months Ended June 30,
		2009			2008			2009			2008
Asia		$	5,586		$	12,135		$	11,044		$	22,534
United States		2,978			5,156			7,044			10,764
Europe		1,019			3,823			1,685			8,163
Total		$	9,583		$	21,114		$	19,773		$	41,461

 

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As of June 30, 2009 and December 31, 2008, long-lived assets related to PDF Solutions S.A.S. (formerly Si Automation S.A.), located in France, totaled $218,000 and $336,000, respectively. The majority of the Company’s remaining long-lived assets are in the United States.

 

12. FAIR VALUE

 

Under SFAS No. 157, fair value is defined as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. SFAS No. 157 refers to the multiple assumptions used to value financial instruments as inputs, and establishes hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs reflect assumptions market participants would use in pricing an asset or liability based on market data obtained from independent sources while unobservable inputs reflect a reporting entity’s pricing based upon its own market assumptions. These inputs are ranked according to a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels.

 

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

 

The following table represents the Company’s assets measured at fair value on a recurring basis as of June 30, 2009 and the basis for that measurement (in thousands):

 

Assets		Total			Quoted Prices in Active Markets for Identical Assets (Level 1)			Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
Money market mutual funds		$	30,996		$	30,996		$	—		$	—
Agency obligations		2,000			—			2,000			—
Auction-rate securities		718			—			—			718
Total		$	33,714		$	30,996		$	2,000		$	718

 

The Company holds investments in auction-rate securities (“ARS”), which are variable rate debt instruments whose interest rates are reset through a “dutch” auction process at regular intervals, typically every 28 days. All ARS are backed by pools of student loans guaranteed by governmental agencies and private entities, and were rated AAA/Aaa at the date of acquisition. The liquidity and fair value of these securities has been reduced by the uncertainty in the credit markets and the exposure of these securities to the financial condition of bond insurance companies, as evidenced by the rating downgrade of MBIA (bond insurer on one of the Company’s ARS) from Aaa to A2, by Moody’s Investor Services on June 19, 2008. All ARS have failed to sell at auction since February 2008, and as a result, their interest rates were reset to the maximum LIBOR + 150 basis points. The only activity associated with these instruments since February 2008 was the repurchase of $500,000 of ARS at par by issuers. As a result of these auction failures, there was limited active market with observable prices for these securities as of June 30, 2009; therefore, the Company computed the fair value of these securities based on a discounted cash flow model, using significant level 3 inputs, to take into account the lack of liquidity. The Company does not believe that the student loans backing these securities, the principal of these assets, is at risk. Furthermore, the Company intends to hold these securities until the credit markets recover and these securities resume pricing at or near par and it is not more likely than not that the Company will be required to sell the securities before recovery of the principal. As a result, the Company recorded a temporary impairment to other comprehensive income and classified these securities as non-current investments. The valuation may be revised in future periods as market conditions evolve.

 

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