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PDF Solutions 10-Q 2011
pdfs_10q-063011.htm
 


UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 

FORM 10-Q

 

R
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
     
 
For the Quarterly Period ended June 30, 2011
 
     
 
or
 
     
£
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
     
 
For the transition period from                                 to                     
 

Commission File Number 000-31311

PDF SOLUTIONS, INC.
(Exact name of Registrant as Specified in its Charter)

Delaware
25-1701361
(State or Other Jurisdiction of
(I.R.S. Employer
Incorporation or Organization)
Identification No.)
   
333 West San Carlos Street, Suite 700
 
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 R 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
R 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 R

The number of shares outstanding of the Registrant’s Common Stock as of August 1, 2011 was 28,008,973.
 



 
 

 
 
TABLE OF CONTENTS

 
Page
PART I  FINANCIAL INFORMATION
 
Item 1. Financial Statements (Unaudited)
 
Condensed Consolidated Balance Sheets
3
Condensed Consolidated Statements of Operations
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
18
Item 3. Quantitative and Qualitative Disclosures About Market Risk
28
Item 4. Controls and Procedures
28
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
30
Item 4. (Removed and Reserved)
30
Item 5. Other Information
30
Item 6. Exhibits
31
SIGNATURES
32
INDEX TO EXHIBITS
33

 
2

 
 
PART I — FINANCIAL INFORMATION
 
Item 1. Financial Statements

PDF SOLUTIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(in thousands, except par value)
 
 
 
 
June 30,
2011
   
December 31,
2010 (*)
 
ASSETS
           
Current assets:
           
Cash and cash equivalents
  $ 41,712     $ 38,154  
Accounts receivable, net of allowance of $254 in both 2011 and 2010
    22,176       23,442  
Prepaid expenses and other current assets
    3,869       3,246  
Total current assets
    67,757       64,842  
Non-current investments     718       718  
Property and equipment, net
    820       797  
Intangible assets, net
    954       1,369  
Other non-current assets
    685       727  
Total assets
  $ 70,934     $ 68,453  
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current liabilities:
               
Accounts payable
  $ 1,155     $ 1,080  
Accrued compensation and related benefits
    4,749       3,964  
Accrued and other current liabilities
    3,066       2,636  
Deferred revenues
    2,824       3,021  
Billings in excess of recognized revenues
    2,010       1,802  
Current portion of debt obligations
    59       108  
Total current liabilities
    13,863       12,611  
Long-term income taxes payable
    3,397       3,668  
Other non-current liabilities
    980       1,259  
Total liabilities
    18,240       17,538  
Commitments and contingencies (Note 14)
               
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 31,904 and 31,276, respectively; shares outstanding 28,008 and 27,603, respectively
    4       4  
Additional paid-in-capital
    204,309       200,866  
Treasury stock at cost, 3,896 and 3,673 shares, respectively
    (20,667 )     (19,298 )
Accumulated deficit
    (131,242 )     (130,586 )
Accumulated other comprehensive income (loss)
    290       (71 )
Total stockholders’ equity
    52,694       50,915  
Total liabilities and stockholders’ equity
  $ 70,934     $ 68,453  
 

(*) Includes revisions to correct previously reported amounts (see Note 2)
 
See accompanying Notes to Condensed Consolidated Financial Statements (unaudited).
 
 
3

 

PDF SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share amounts)

 
 
Three Months Ended June 30,
   
Six Months Ended June 30,
 
 
 
2011
      2010(*)       2011(*)       2010(*)  
                               
Revenues:
                             
Design-to-silicon-yield solutions
  $ 13,003     $ 10,814     $ 23,570     $ 21,231  
Gainshare performance incentives
    4,157       4,538       8,607       9,373  
Total revenues
    17,160       15,352       32,177       30,604  
                                 
Costs of design-to-silicon-yield solutions:
                               
Direct costs of design-to-silicon-yield solutions
    7,263       6,487       13,701       13,467  
Amortization of acquired technology
    156       360       312       719  
Total costs of design-to-silicon-yield solutions
    7,419       6,847       14,013       14,186  
Gross profit
    9,741       8,505       18,164       16,418  
                                 
Operating expenses:
                               
Research and development
    3,717       3,865       7,429       7,259  
Selling, general and administrative
    5,242       4,381       10,081       9,132  
Amortization of other acquired intangible assets
    51       82       102       168  
Restructuring charges (credits)
    (122 )     (33 )     (133 )     (32 )
Total operating expenses
    8,888       8,295       17,479       16,527  
                                 
Income (loss) from operations
    853       210       685       (109 )
Interest and other income (expense), net
    (32 )     404       (411 )     666  
Income  before income taxes
    821       614       274       557  
Income tax provision
    878       275       930       776  
Net income (loss)
  $ (57 )   $ 339     $ (656 )   $ (219 )
                                 
Net income (loss) per share:
                               
Basic
  $ 0.00     $ 0.01     $ (0.02 )   $ (0.01 )
Diluted
  $ 0.00     $ 0.01     $ (0.02 )   $ (0.01 )
                                 
Weighted average common shares:
                               
Basic
    28,110       27,118       27,960       27,024  
Diluted
    28,110       27,357       27,960       27,024  
 

(*) Includes revisions to correct previously reported amounts (see Note 2)

See accompanying Notes to Condensed Consolidated Financial Statements (unaudited).
 
 
4

 

PDF SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)

    Six Months Ended June 30,  
 
    2011(*)                    2010(*)   
    (In thousands)  
Operating activities:
               
Net loss
  $ (656 )   $ (219 )
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
               
Depreciation and amortization
    244       505  
Stock-based compensation expense
    2,594       2,947  
Amortization of acquired intangible assets
    414       887  
Deferred taxes
    (174 )      
Purchases of treasury stock in connection with tax withholdings on restricted stock grants
    (341 )     (355 )
Changes in operating assets and liabilities:
               
Accounts receivable
    1,266       (3,569 )
Prepaid expenses and other assets
    (385 )     240  
Accounts payable
    315       312  
Accrued compensation and related benefits
    704       (603 )
Accrued and other liabilities
    (106 )     (1,341 )
Deferred revenues
    (143 )     88  
Billings in excess of recognized revenues
    208       (1,263 )
Net cash provided by (used in) operating activities
    3,940       (2,371 )
Investing activities:
               
Purchases of property and equipment
    (238 )     (59 )
Net cash used in investing  activities
    (238 )     (59 )
Financing activities:
               
Proceeds from exercise of stock options
    421       50  
Proceeds from employee stock purchase plan
    428       411  
Purchases of treasury stock
    (1,028 )      
Principal payments on debt obligations
    (56 )     (60 )
Net cash provided by (used in) financing activities
    (235 )     401  
Effect of exchange rate changes on cash and cash equivalents
    91       (778 )
Net change in cash and cash equivalents
    3,558       (2,807 )
Cash and cash equivalents, beginning of period
    38,154       34,899  
Cash and cash equivalents, end of period
  $ 41,712     $ 32,092  
 
Supplemental disclosure of cash flow information:
               
Cash paid during the period for:
               
Income taxes
  $ 925     $ 1,086  
Interest
  $ 2     $ 5  
 

 (*) Includes revisions to correct previously reported amounts (see Note 2)

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

 
5

 
 
PDF SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. BASIS OF PRESENTATION

Basis of Presentation

The interim unaudited condensed consolidated financial statements included herein have been prepared by PDF Solutions, Inc. (“the Company”) pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”), including the instructions to the Quarterly Report on Form 10-Q and Article 10 of Regulation S-X. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. The interim unaudited condensed consolidated financial statements reflect, in the opinion of management, all adjustments necessary, to present a fair statement of results for the interim periods presented. Such adjustments consist of normal recurring adjustments and, as explained in Note 2, adjustments reflected in revised prior period condensed consolidated financial statements. 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, 2010.

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.

Significant Estimates  — The preparation of the condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) 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.

Revenue Recognition  — The Company derives revenue from two sources: Design-to-silicon-yield Solutions, which includes Services and Software Licenses, and Gainshare Performance Incentives.

Design-to-Silicon-Yield Solutions — Revenues that are derived from Design-to-silicon-yield solutions come 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 reliable estimation of costs to perform obligations and the overall scope of each engagement. Revenues under contracts for solution implementation services are 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.

On occasion, the Company licenses its software products that are not essential to the provision of these services as a component of its fixed-price service contract. 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.

In October 2009, the Financial Accounting Standards Board (“FASB”) amended the accounting standards for multiple-deliverable revenue arrangements to:
 
 
provide updated guidance on whether multiple deliverables exist, how the deliverables in an arrangement should be separated, and how the consideration should be allocated;
 
require an entity to allocate revenue in an arrangement using best estimate of selling prices (“BESP”) of deliverables if a vendor does not have vendor-specific objective evidence of fair value (“VSOE”) or third-party evidence of selling price (“TPE”); and
 
eliminate the use of the residual method and require an entity to allocate revenue using the relative selling price method.

 
6

 
 
The Company elected to early adopt this accounting standard on April 1, 2010 on a prospective basis for applicable transactions originating or materially modified after January 1, 2010. The Company’s adoption of this guidance does not generally change the accounting for the Company’s software transactions. It only affects certain revenue arrangements that include both solution implementation services and software products that are not essential to the provision of these services. The amount of product and service revenue recognized in a given period is affected by the Company’s judgment as to whether an arrangement includes multiple deliverables and, if so, its determination of the fair value of each deliverable. In general, VSOE does not exist for the Company’s solution implementation services and software products. Because its services and products include its unique technology, the Company is not able to determine TPE. Therefore, the Company uses BESP in its allocation of arrangement consideration. In determining BESP, the Company applies significant judgment as it weighs a variety of factors, based on the facts and circumstances of the arrangement. The Company typically arrives at a  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 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. Prior to the adoption of this new accounting standard, under these arrangements, where VSOE of fair value existed for the support and maintenance element, the support and maintenance revenue was recognized separately over the term of the supporting period and the remaining fee was recognized as services were performed using the cost-to-cost percentage of completion method of contract accounting.

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) 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 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. 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 revenue.

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 service 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.
 
2. REVISIONS TO FINANCIAL STATEMENTS
 
During the three months ended June 30, 2011, the Company identified an error relating to accounting for stock compensation under its employee stock purchase plan that affected prior periods. The cumulative impact of the error was to understate stock-based compensation expenses by $840,000. The Company also identified errors related to the first quarter of 2011 which had increased the tax provision by $100,000, decreased software license fee expense by $32,000 and increased prepaid software license fee amortization by $48,000. The Company assessed the impact of these errors, including the impact of previously disclosed out-of-period adjustments, on its prior period financial statements and concluded that these errors were not material, individually or in the aggregate, to any of those financial statements. Although the effect of these errors was not material to any previously issued financial statements, the cumulative effect of correcting the newly identified errors in the current year would have been material for the fiscal year 2011. Consequently, the Company has revised its prior period financial statements. As part of this revision, the Company also reversed other previously disclosed out-of-period adjustments, which were immaterial, and recorded them instead in the periods in which the errors originated. The Company also corrected the classification of certain amounts in the prior year related to cost of design-to-silicon-yield solutions, research and development and selling, general and administrative and corrected the classification of the short-term portion of deferred rent balance that was previously recorded in other non-current liabilities, none of which affected reported net income (loss) for any periods previously reported. These revisions have no net impact on the Company’s net cash amounts provided by (used in) operating, financing or investing activities for the any of the periods previously reported.
 
 
7

 
 
The financial statements as of June 30, 2010, and for the three and six-month periods then ended and as of December 31, 2010, included herein have been prepared in light of the revisions above. The financial statements for all other periods affected by the revisions can continue to be relied upon, and will be revised to reflect the revisions discussed above, the next time such financial statements are included in future reports for comparative purposes.
 
The following tables show the financial statement effect of the revisions for all periods affected:

   
Three
Months
Ended
    Year Ended     Three Months Ended     Year Ended  
   
March 31,
2011
   
December, 31
2010
    December 31, 2010     September 30, 2010    
June 30,
2010
   
March 31,
2010
   
December 31, 2009
 
   
(In thousands, except per share amount)
 
As previously reported:
Consolidated Statements of Operations:
                                                       
Revenues:
                                                       
Design-to-silicon-yield solutions
  $ 10,567     $ 43,080     $ 11,352     $ 10,498     $ 10,814     $ 10,417     $ 32,662  
Gainshare performance incentives
    4,450       18,570       4,866       4,330       4,538       4,835       15,776  
Total revenues
    15,017       61,650       16,218       14,828       15,352       15,252       48,438  
Cost of design-to-silicon-yield solutions:
                                                       
Direct costs of design-to-silicon-yield solutions
  $ 5,793     $ 24,389     $ 6,348     $ 5,790     $ 5,928     $ 6,322     $ 22,779  
Amortization and impairment of acquired technology
    156       1,285       207       360       360       359       1,439  
Total cost of design-to-silicon-yield solutions
    5,949       25,674       6,555       6,150       6,288       6,681       24,218  
Gross profit
    9,068       35,976       9,663       8,678       9,064       8,571       24,220  
Operating expenses:
                                                       
Research and development
    4,349       17,187       4,599       4,291       4,335       3,962       19,773  
Selling, general and administrative
    4,745       15,989       3,689       3,228       4,492       4,579       16,561  
Amortization of other acquired intangible assets
    51       295       57       70       82       86       349  
Restructuring charges
    (11 )     885       543       375       (33 )     1       4,512  
Total operating expenses
    9,134       34,356       8,888       7,964       8,876       8,628       41,195  
Income (loss) from operations
    (66 )     1,620       775       714       188       (57 )     (16,975 )
Interest and other income, net
    (359 )           (30 )     (636 )     404       262       237  
Income (loss) before taxes
    (425 )     1,620       745       78       592       205       (16,738 )
Income tax provision
    152       1,393       589       28       275       501       753  
Net income (loss)
  $ (577 )   $ 227     $ 156     $ 50     $ 317     $ (296 )   $ (17,491 )
Net income (loss) per share:
                                                       
Basic
  $ (0.02 )   $ 0.01     $ 0.01     $ 0.00     $ 0.01     $ (0.01 )   $ (0.66 )
Diluted
  $ (0.02 )   $ 0.01     $ 0.01     $ 0.00     $ 0.01     $ (0.01 )   $ (0.66 )
                                                         
Weighted average common shares:
                                                       
Basic
    27,810       27,257       27,566       27,413       27,118       26,929       26,377  
Diluted
    27,810       27,471       27,767       27,581       27,357       26,929       26,377  
                                                         
 
Consolidated Balance Sheets:
 
March 31,
2011
    December 31, 2010     September 30, 2010    
June 30,
2010
   
March 31,
2010
   
December 31, 2009
 
    (In thousands)    
Prepaid expenses and other assets      $ 3,967     $ 3,246     $ 3,665     $ 2,826     $ 3,438     $ 3,029  
Accrued compensation and related benefits
    3,927       3,964       3,722       3,704       3,565       4,438  
Accrued and other current liabilities
    2,849       2,400       2,306       2,575       2,946       3,502  
Other non-current liabilities
    1,406       1,495       1,436       1,547       1,636       1,704  
Long-term income tax payable
    3,262       3,668       2,948       3,181       3,035       3,218  
Additional paid-in-capital
    201,865       200,144       198,943       197,517       195,996       194,081  
Accumulated deficit
    (130,461 )     (129,884 )     (130,040 )     (130,090 )     (130,407 )     (130,111 )
Accumulated other comprehensive income (loss)
    339       (51 )     464       (148 )     334       628  
 
 
8

 
 
                Three Months Ended        
   
Three Months Ended March 31,
2011
   
Year Ended December, 31
2010
   
December 31,
2010
   
September 30,
2010
   
June 30,
2010
   
March 31,
2010
   
Year Ended December 31,
2009
 
   
(In thousands, except per share amount)
 
Revisions:
Consolidated Statements of Operations:
                                                       
Total cost of design-to-silicon-yield solutions (1)(2)(8)
  $ 645     $ 2,510     $ 656     $ 637     $ 559     $ 658     $ 2,308  
Operating expenses:
                                                       
Research and development(1)(8)
    (637 )     (2,232 )     (602 )     (592 )     (471 )     (567 )     (1,867 )
Selling, general and administrative(1)(3)(8)
    94       13       (209 )     161       (110 )     171       (10 )
Restructuring charges(4)
                72       (72 )                  
Total operating expenses
    (543 )     (2,219 )     (739 )     (503 )     (581 )     (396 )     (1,877 )
Income (loss) from operations
    (102 )     (291 )     83       (134 )     22       (262 )     (431 )
Interest and other income (expenses),net(5)
    (20 )     20       20                          
Income (loss) before taxes
    (122 )     (271 )     103       (134 )     22       (262 )     (431 )
Income tax provision (benefit)(6)
    (100 )     (67 )     (67 )                       67  
Net income (loss)(1)(2)(3)(4)(5)(6)
  $ (22 )   $ (204 )   $ 170     $ (134 )   $ 22     $ (262 )   $ (498 )
 
    March 31,
2011
   
December 31,
2010
   
September 30,
2010
   
June 30,
2010
   
March 31,
2010
    December 31,
2009
 
    (In thousands)    
Consolidated Balance Sheets:
Prepaid expenses and other current assets(2)(6)
  $ 48     $     $ (67 )   $ (67 )   $ (26 )   $ 16  
Accrued compensation and related benefits(3)
                76       60       45       30  
Accrued and other current liabilities(2)(3)(4)(9)
    276       236       157       221       209       42  
Other non-current liabilities(9)
    (244 )     (236 )     (229 )     (221 )     (209 )     (197 )
Long-term income tax payable(7)
                475       304       236       256  
Additional paid-in-capital(1)
    840       722       801       611       689       639  
Accumulated deficit(1)(2)(3)(4)(5)(6)
    (724 )     (702 )     (872 )     (738 )     (760 )     (498 )
Accumulated other comprehensive income (loss)(6)(7)
    (100 )     (20 )     (475 )     (304 )     (236 )     (256 )
 


 
(1)
In the second quarter of 2011, the Company identified an error related to prior period expense for stock-based compensation for the Employee Stock Purchase Plan. The effect of the error is to increase compensation expense by $12,000, $201,000, $40,000, $44,000, $55,000, $50,000 and $639,000 for the first quarter of 2011, full fiscal year of 2010, fourth quarter of 2010, third quarter of 2010, second quarter of 2010, first quarter of 2010 and full fiscal year of 2009, respectively. In addition, in the first quarter of 2011, the Company recorded an out-of-period adjustment to reduce stock-based compensation expense of $106,000 that should have been recorded as $133,000 decrease in expense for the second quarter of 2010, $146,000 increase in expense for the third quarter of 2010 and $119,000 decrease in expense for the fourth quarter in 2010. The effect of correcting these errors is as follows:

                Three Months Ended        
    Three Months Ended March 31, 2011    
Year Ended December, 31
2010
   
December 31,
2010
   
September 30,
2010
   
June 30,
2010
   
March 31,
2010
   
Year Ended December 31,
2009
 
   
(In thousands)
 
                                                     
Cost of design-to-silicon-yield solutions
  $ 6     $ 65     $ 12     $ 17     $ 16     $ 20     $ 187  
Research and development
    4       57       20       12       13       12       201  
Selling, general and administrative
    108       (39 )     (111 )     161       (107 )     18       251  
Total
  $ 118     $ 83     $ (79 )   $ 190     $ (78 )   $ 50     $ 639  
 
(2)
In the first and second quarter of 2010, the Company recorded an increase in software license amortization expense of $42,000 and $41,000, respectively. The total amount of $83,000 should have been recorded as a decrease in expense in the fourth quarter of 2009. The Company also reduced $48,000 of amortization expense in the first quarter of 2011, resulting in an increase in prepaid expense and other current assets balance. In addition, the Company accrued $32,000 for software license fee in the first quarter of 2011 resulting in an increase in accrued and other current liabilities.
 
(3)
In the fourth quarter of 2010, the Company recorded additional sabbatical accrual of $76,000 that should have been recorded as $30,000 increase of expense in the fourth quarter of 2009, $15,000 increase of expense in the first quarter of 2010, $15,000 increase of expense in the second quarter of 2010 and $16,000 increase of expense in the third quarter of 2010. In addition, in the first quarter of 2010, the Company reversed an accrual for fringe benefits of $155,000 which should have been reversed in the prior year.
 
(4)
In the fourth quarter of 2010, the Company reversed a restructuring accrual for $72,000 which should have been reversed in the third quarter of 2010.
 
(5)
In the first quarter of 2011, the Company reduced foreign currency loss of $20,000 which should have been reduced in the fourth quarter of 2010.
 
(6)
In the second quarter of 2011, the Company identified an out-of-period error related to an overstatement of the tax provision of $100,000 for the first quarter of 2011. In the fourth quarter of 2010, the Company recorded an increase to income tax provision of $67,000 to correct a prepaid expenses and other current assets balance that was related to the fourth quarter of 2009. There are no adjustments to income tax relating to the pre-tax adjustments described in (1) to (5) above.
 
(7)
In the fourth quarter of 2010, the Company adjusted its liability amount for uncertain tax position related to its foreign subsidiary, which included recording the cumulative out-of-period amount in such quarter. The effect of the error is an increase to long-term income tax payable and a decrease of accumulated other comprehensive income (loss) by $475,000, $304,000, $236,000 and $256,000 third quarter of 2011, second quarter of 2010, first quarter of 2011 and full fiscal year of 2009, respectively. The adjustment has no impact to the Consolidated Statement of Operations in any of the periods previously reported.
 
 
9

 
 
 
(8)
In the second quarter of 2011, the Company identified a misclassification of certain amounts in the prior periods related to cost of design-to-silicon-yield solutions, research and development and selling, general and administrative. The correction of classification has no impact to the net income (loss) in any of the periods previously reported. The effect of correcting the misclassification is as follows:

                Three Months Ended         
    Three Months Ended March 31, 2011     Year Ended December, 31
2010
    December 31,
2010
   
September 30,
2010
   
June 30,
2010
   
March 31,
2010
    Year Ended December 31,
2009
 
   
(In thousands)
 
                                                     
Cost of design-to-silicon-yield solutions
  $ 655     $ 2,362     $ 644     $ 620     $ 502     $ 596     $ 2,204  
Research and development
    (641 )     (2,289 )     (622 )     (604 )     (484 )     (579 )     (2,068 )
Selling, general and administrative
    (14 )     (73 )     (22 )     (16 )     (18 )     (17 )     (136 )
                                                         
 
(9)
In the second quarter of 2011, the Company identified a misclassification of certain amounts in the prior periods related to deferred rent. The short-term portion of the deferred rent balance that was previously presented as other non-current liabilities should have been presented as accrued and other current liabilities. The reclassification has no impact to the Consolidated Statement of Operations in any of the periods previously reported.

                Three Months Ended         
    Three Months Ended March 31, 2011     Year Ended December, 31
2010
    December 31,
2010
   
September 30,
2010
   
June 30,
2010
   
March 31,
2010
    Year Ended December 31,
2009
 
   
(In thousands, except per share amount)
 
As revised:
Consolidated Statements of Operations:
                                                       
Revenues:
                                                       
Design-to-silicon-yield solutions
  $ 10,567     $ 43,080     $ 11,352     $ 10,498     $ 10,814     $ 10,417     $ 32,662  
Gainshare performance incentives
    4,450       18,570       4,866       4,330       4,538       4,835       15,776  
Total revenues
    15,017       61,650       16,218       14,828       15,352       15,252       48,438  
Cost of design-to-silicon-yield solutions:
                                                       
Direct costs of design-to-silicon-yield solutions
  $ 6,438       26,900       7,004       6,427       6,487       6,980       25,087  
Amortization and impairment of acquired technology
    156       1,285       207       360       360       359       1,439  
Total cost of design-to-silicon-yield solutions
    6,594       28,185       7,211       6,787       6,847       7,339       26,526  
Gross profit
    8,423       33,465       9,007       8,041       8,505       7,913       21,912  
Operating expenses:
                                                       
Research and development
    3,712       14,954       3,997       3,699       3,865       3,394       17,906  
Selling, general and administrative
    4,839       16,002       3,480       3,389       4,381       4,751       16,551  
Amortization of other acquired intangible assets
    51       295       57       70       82       86       349  
Restructuring charges
    (11 )     885       615       303       (33 )     1       4,512  
Total operating expenses
    8,592       32,136       8,149       7,461       8,295       8,232       39,318  
Income (loss) from operations
    (168 )     1,329       858       580       210       (319 )     (17,406 )
Interest and other income, net
    (379 )     20       (10 )     (636 )     404       262       237  
Income (loss) before taxes
    (547 )     1,349       848       (56 )     614       (57 )     (17,169 )
Income tax provision
    52       1,326       522       28       275       501       820  
Net income (loss)
  $ (599 )   $ 23     $ 326     $ (84 )   $ 339     $ (558 )   $ (17,989 )
Net income (loss) per share:
                                                       
Basic
  $ (0.02 )   $ 0.00     $ 0.01     $ 0.00     $ 0.01     $ (0.02 )   $ (0.67 )
Diluted
  $ (0.02 )   $ 0.00     $ 0.01     $ 0.00     $ 0.01     $ (0.02 )   $ (0.67 )
                                                         
Weighted average common shares:
                                                       
Basic
    27,810       27,257       27,566       27,413       27,118       26,929       26,377  
Diluted
    27,810       27,471       27,767       27,413       27,357       26,929       26,377  
 
   
March 31,
2011
    December 31,
2010
   
September 30,
2010
    June 30,
2010
    March 31,
2010
    December 31,
2009
 
    (In thousands)    
Consolidated Balance Sheets:
Prepaid expenses and other current assets
  $ 4,015     $ 3,246     $ 3,598     $ 2,759     $ 3,412     $ 3,045  
Accrued compensation and related benefits
    3,927       3,964       3,798       3,764       3,610       4,468  
Accrued and other current liabilities
    3,125       2,636       2,463       2,796       3,155       3,544  
Other non-current liabilities
    1,162       1,259       1,207       1,326       1 ,427       1,507  
Long-term income tax payable
    3,262       3,668       3,423       3,485       3,271       3,474  
Additional paid-in-capital
    202,705       200,866       199,744       198,128       196,685       194,720  
Accumulated deficit
    (131,185 )     (130,586 )     (130,912 )     (130,828 )     (131,167 )     (130,609 )
Accumulated other comprehensive income (loss)
    239       (71 )     (11 )     (452 )     98       372  
 
 
10

 

3. RECENT ACCOUNTING PRONOUNCEMENTS

In June 2011, the Financial Accounting Standards Board (“FASB”) amended its guidance on the presentation of Comprehensive Income. Under the amendments, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. The amendments eliminate the option to present the components of other comprehensive income as part of the statement of changes in stockholders' equity. The amendments do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. The amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011 with early adoption permitted. The amendments do not require any transition disclosures. The guidance is effective for the Company’s fiscal year 2012. The adoption of this standard is not expected to have a material impact on the Company’s financial position or results of operations.

In April 2010, the Financial Accounting Standards Board (“FASB”) amended its guidance on share-based payment awards with an exercise price denominated in the currency of a market in which the underlying equity security trades. The amendment clarifies that an employee share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity securities trades shall not be considered to contain a condition that is not a market performance, or service condition. Therefore, an entity would not classify such an award as a liability if it is otherwise qualifies as equity. This amendment is effective for fiscal years and interim periods within those fiscal years beginning on or after December 15, 2010.  The guidance is effective for the Company’s interim period commencing January 1, 2011. The adoption of this guidance did not have a material impact on the Company’s financial position or results of operations.

In January 2010, the FASB amended its guidance on fair value measurements. This guidance requires a reporting entity to disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers. This guidance also requires disclosure of activity in Level 3 fair value measurements. The new disclosures and clarifications of the existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances and settlements in the roll forward activity in Level 3 fair value measurements. Those disclosures are effective for fiscal year beginning after December 15, 2010, and the interim periods within those fiscal years. The Company adopted the guidance related to Level 1 and Level 2 fair value measurements on January 1, 2010. The guidance for Level 3 fair value measurements and disclosures is effective for the Company’s interim period commencing January 1, 2011. The adoption of this standard did not have a material impact on the Company’s financial position or results of operations.

4. INVESTMENTS

The following table summarizes the Company’s investments at both June 30, 2011 and December 31, 2010 (in thousands):

   
Amortized
Cost
   
Unrealized
Holding
Gains
   
Unrealized
Holding
Losses
   
Fair
Value
 
Auction-rate securities
  $ 1,000     $     $ (282 )   $ 718  

As of June 30, 2011 and December 31, 2010, the Company’s investments consisted entirely of auction-rate securities. Please refer to Note 13 “Fair Value” for further discussion of auction-rate securities.

5. 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 $7.0 million and $6.0 million as of June 30, 2011 and December 31, 2010, respectively.

6. INTANGIBLE ASSETS

Intangible assets are amortized over their useful lives unless these lives are determined to be indefinite. During the three months ended June 30, 2011, there were no indicators of impairment related to the Company’s intangible assets.

 
11

 
 
The following table provides information relating to the intangible assets as of June 30, 2011 and December 31, 2010 (in thousands):
 
Acquired Identifiable Intangible
 
Amortization
Period
(Years)
   
June 30, 2011
Gross Carrying
Amount
   
Accumulated Amortization
   
June 30, 2011
Net Carrying
Amount
 
Acquired technology                                                                            
    4-5     $ 11,800     $ (11,226 )   $ 574  
Brand name                                                                            
    4       510       (510 )      
Customer relationships and backlog                                                                            
    1-6       3,420       (3,255 )     165  
Patents and applications                                                                            
    7       1,400       (1,185 )     215  
Other acquired intangibles                                                                            
    4       255       (255 )      
Total                                                                         
          $ 17,385     $ (16,431 )   $ 954  

Acquired Identifiable Intangible
 
Amortization
Period
(Years)
   
December 31, 2010
Gross Carrying
Amount
   
Accumulated Amortization
   
December 31, 2010
Net Carrying
Amount
 
Acquired technology                                                                            
    4-5     $ 11,800     $ (10,915 )   $ 885  
Brand name                                                                            
    4       510       (510 )      
Customer relationships and backlog                                                                            
    1-6       3,420       (3,188 )     232  
Patents and applications                                                                            
    7       1,400       (1,148 )     252  
Other acquired intangibles                                                                            
    4       255       (255 )      
Total                                                                         
          $ 17,385     $ (16,016 )   $ 1,369  

For the three months ended June 30, 2011 and 2010, intangible asset amortization expense was $207,000 and $442,000, respectively. For the six months ended June 30, 2011 and 2010, intangible asset amortization expense was $414,000 and $887,000, respectively.

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

Year Ending December 31,
 
Amount
 
2011 (remaining six-month period)
  $ 415  
2012
    435  
2013
    74  
2014
    30  
Total
  $ 954  

7. STOCKHOLDERS’ EQUITY>

Stock-based compensation is estimated at the grant date based on the award’s fair value and is recognized on a straight-line basis over the vesting periods of the applicable stock purchase rights and stock options, generally four years. 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,