0001173489 CEVA INC false --12-31 FY 2020 327 300 0.001 0.001 5,000,000 5,000,000 0 0 0 0.001 0.001 45,000,000 45,000,000 23,595,160 23,595,160 21,839,369 22,260,917 1,755,791 1,334,243 0 0 0 0 0 1 1 0.5 7.5 0 0 0 0 12 1 1 12 0 0 0 0 0 5,700,000 5,700,000 5,700,000 4 4 7 0 0 0 3 1 2 3 3 3 33.33 33.33 3 3 10 5 20 1 0 2015 2016 2017 2018 2019 2020 2 10 2018 2019 2020 2017 2018 2019 2020 0 2030 Due to the ceiling imposed on the SAR grants, the outstanding amount equals a maximum of 280,427 shares of the Company's common stock issuable upon exercise. $161 and $45 net deferred taxes for the years ended December 31, 2019 and 2020, respectively, are from domestic jurisdictions. Basic and diluted earnings per share amounts of the benefit resulting from the “Technological Preferred Enterprise benefits” status The SAR units are convertible for a maximum number of shares of the Company’s common stock equal to 75% of the SAR units subject to the grant. Basic and diluted earnings per share amounts of the benefit resulting from: the "Approved Enterprise" and "Benefited Enterprise" status $ 0.01 $ 0.01 $ — the "Technological Preferred Enterprise benefits" status $ — $ — $ 0.00 Not including amortization of technology shown separately. Basic and diluted earnings per share amounts of the benefit resulting from the “Technological Preferred Enterprise benefits” status. During the first quarter of 2018, the Company entered into an agreement to acquire certain NB-IoT technologies in the amount of $2,800, of which technologies valued at $600 has not been received. Of the $2,200, $210 has not resulted in cash outflows as of December 31, 2020. In addition, the Company participated in programs sponsored by the Hong Kong government for the support of the above investment, and as a result, the Company received during 2019 an amount of $239 related to the NB-IoT technologies, which was reduced from the gross carrying amount of intangible assets. The Company recorded the amortization cost of the NB-IoT technologies in “cost of revenues” on the Company’s consolidated statements of income (loss). 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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-K

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

 
 

SECURITIES EXCHANGE ACT OF 1934

 
   
 

For the fiscal year ended December 31, 2020

 
   
 

OR

 
   

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

 
 

SECURITIES EXCHANGE ACT OF 1934

 

 

For the transition period from ____________ to ____________

 

Commission file number: 000-49842

 

CEVA, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

 

77-0556376

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

   

15245 Shady Grove Road, Suite 400, Rockville, MD 20850 

 

20850

(Address of principal executive offices)

 

(Zip Code)

 

(240) 308-8328

(Registrant’s telephone number, including area code)

 

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

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $.001 per share

CEVA

The NASDAQ Stock Market LLC

 

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes ☐               No

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.

Yes ☐               No

 

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 Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☒              No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes ☒               No ☐

 

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

Large accelerated filer ☐ Accelerated filer ☒ 
Non-accelerated filer ☐Smaller reporting company
Emerging growth company  

                

 

 

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

 

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes               No ☒

 

As of June 30, 2020, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $601,549,102 based on the closing sale price as reported on the National Association of Securities Dealers Automated Quotation System National Market System on June 30, 2020. Shares of common stock held by each officer, director, and holder of 5% or more of the outstanding common stock of the Registrant have been excluded from this calculation in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class

 

Outstanding at February 23, 2021

Common Stock, $0.001 par value per share

 

22,805,841 shares

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the registrant’s definitive Proxy Statement for its Annual Meeting of Stockholders to be held on May 27, 2021 (the “2021 Proxy Statement”) are incorporated by reference into Item 5 of Part II and Items 10, 11, 12, 13, and 14 of Part III.

 

 

 

 

 

TABLE OF CONTENTS

 

Page

PART I

Item 1.

Business

4

Item 1A.

Risk Factors

13

Item 1B.

Unresolved Staff Comments

24

Item 2.

Properties

24

Item 3.

Legal Proceedings

24

Item 4.

Mine Safety Disclosures

25

     

PART II

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

27

Item 6.

Selected Financial Data

29

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

31

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

48

Item 8.

Financial Statements and Supplementary Data

49

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

50

Item 9A.

Controls and Procedures

50

Item 9B.

Other Information

50

 

PART III

Item 10.

Directors, Executive Officers and Corporate Governance

51

Item 11.

Executive Compensation

51

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stock Holder Matters

51

Item 13.

Certain Relationships and Related Transactions, and Director Independence

51

Item 14.

Principal Accountant Fees and Services

51

 

PART IV

Item 15.

Exhibits and Financial Statement Schedules

52

Item 16.  

Form 10-K Summary

56

Financial Statements

 

F-1
     

Signatures

   

 

1

 

 

FORWARD-LOOKING STATEMENTS AND INDUSTRY DATA

 

This Annual Report contains forward-looking statements that involve risks and uncertainties, as well as assumptions that if they materialize or prove incorrect, could cause the results of CEVA to differ materially from those expressed or implied by such forward-looking statements and assumptions. All statements other than statements of historical fact are statements that could be deemed forward-looking statements. Forward-looking statements are generally written in the future tense and/or are preceded by words such as “will,” “may,” “should,” “could,” “expect,” “suggest,” “believe,” “anticipate,” “intend,” “plan,” or other similar words. Forward-looking statements include the following:

 

 

Our belief that our licensing business is robust with a diverse customer base and a myriad of target markets;

 

 

Our belief that the licensing environment continues to be healthy with strong demand for our product portfolio and that we will expand our market reach into new areas;

 

 

Our belief that the adoption of our wireless connectivity and smart sensing products beyond our incumbency in the handset baseband market continues to progress, and the concluded agreements for our connectivity and sensing products during illustrate the industry demand for our diverse IP portfolio;

 

 

Our belief that we are an incumbent player in the largest space of the semiconductor industry - mobile handsets;

 

 

Our belief that our PentaG platform for 5G handsets and 5G IoT endpoints is the most comprehensive baseband processor IP in the industry today and provides newcomers and incumbents with a low entry barrier solution to address the need for power 5G processing for smartphones, fixed wireless and a range of connected devices such as robots, cars, smart cities and other devices for industrial applications;

 

 

Our belief that our specialization and technological edge in signal processing platforms for 5G base station RAN put us in a strong position to capitalize on the growing 5G RAN across its new form factors, as well as small cells and private networks;

 

 

Our belief that the growing market potential for voice assisted devices offers an additional growth segment for us and that our highly-integrated platforms, plus our proven track record in audio/voice processing and connectivity, put us in a strong position to power audio and voice roadmaps across a new range of addressable end markets;

 

 

Our belief that our SensPro™ scalable DSP architecture enables us to address the transformation in sensor devices and expand our footprint and content in smartphones, drones, consumer cameras, surveillance, automotive ADAS, voice-enabled devices and industrial IoT applications;

 

 

Our belief that the market opportunity for AI at the edge is on top of our existing product lines and represents new licensing and royalty drivers for the company in the coming years;

 

 

Per research from Yole Développement, camera-enabled devices incorporating computer vision and AI are expected to exceed 1 billion units and devices incorporating voice AI are expected to reach 620 million units by 2022;

 

 

Our belief that the Hillcrest Labs sensor fusion business unit allows us to address an important technology piece for smart sensing;

 

 

Our belief that our Bluetooth, Wi-Fi and NB-IoT IPs allow us to expand further into IoT applications and substantially increase our value-add and overall addressable market, which is expected to be more than 9 billion devices annually by 2022 based on ABI Research and Ericsson Mobility Reports;

 

 

Our expectation of significant growth in royalty revenues derived from base station and IoT applications over the next few years, which will be comprised of a range of different products at different royalty ASPs, spanning from high volume Bluetooth to high value sensor fusion and base station RAN, and that royalty ASP of our other products will be in between the two ranges;

 

2

 

 

Our expectations regarding competition;

 

 

Our expectation that a significant portion of our future revenues will continue to be generated by a limited number of customers and that international customers will continue to account for a significant portion of our revenues for the foreseeable future;

 

 

Our anticipation that our research and development expenses will continue to increase in 2021;

 

 

Our anticipation that cost of revenues will increase in 2021 as compared to 2020 in the amount of approximately $0.5 million, due to more cost of chip sales for our Hillcrest Labs related business;

 

 

Our anticipation that our cash and cash equivalents, short-term bank deposits and marketable securities, along with cash from operations, will provide sufficient capital to fund our operations for at least the next 12 months;

 

 

Our belief that changes in interest rates within our investment portfolio will not have a material effect on our financial position on an annual or quarterly basis;

 

 

Our expectations regarding the impact of COVID-19 on our business, operations, customers and the economy; and

 

 

Our beliefs about future exchange rates, including our expectation that based on trends to date, in 2021 we will have additional exchange rate expenses as compared to 2020 in the event of the ongoing devaluation of the U.S. dollar compared to the Shekel and Euro.

 

Forward-looking statements are not guarantees of future performance and involve risks and uncertainties. The forward-looking statements contained in this report are based on information that is currently available to us and expectations and assumptions that we deem reasonable at the time the statements were made. We do not undertake any obligation to update any forward-looking statements in this report or in any of our other communications, except as required by law. All such forward-looking statements should be read as of the time the statements were made and with the recognition that these forward-looking statements may not be complete or accurate at a later date.

 

Many factors may cause actual results to differ materially from those expressed or implied by the forward-looking statements contained in this report. These factors include, but are not limited to, those risks set forth in Item 1A: Risk Factors.

 

This report contains market data prepared by third party research firms. Actual market results may differ from their projections. This report includes trademarks and registered trademarks of CEVA. Products or service names of other companies mentioned in this Annual Report on Form 10-K may be trademarks or registered trademarks of their respective owners.

 

3

 

PART I

 

ITEM 1.

BUSINESS

 

Company Overview

 

Headquartered in Rockville, Maryland, CEVA is the leading licensor of wireless connectivity and smart sensing technologies. We offer Digital Signal Processors, AI processors, wireless platforms and complementary software for sensor fusion, image enhancement, computer vision, voice input and artificial intelligence, all of which are key enabling technologies for a smarter, more connected world. We partner with semiconductor companies and OEMs worldwide to create power-efficient, intelligent and connected devices for a range of end markets, including mobile, consumer, automotive, robotics, industrial and IoT. Our ultra-low-power IPs include comprehensive platforms comprised of specialized DSPs coupled with an AI and other types of accelerators targeted for low power workloads, including 5G baseband processing, intelligent vision, voice recognition, physical layer processing and sensor fusion. We also offer high performance DSPs targeted for 5G RAN and Open RAN, Wi-Fi enterprise and residential access points, satellite communication and other multi-gigabit communications. Our portfolio also includes a wide range of application software optimized for our processors, including voice front-end processing and speech recognition, imaging and computer vision and sensor fusion. For sensor fusion, our Hillcrest Labs sensor processing technologies provide a broad range of sensor fusion software and inertial measurement unit (“IMU”) solutions for AR/VR, robotics, remote controls and IoT. For wireless IoT, we offer the industry’s most widely adopted IPs for Bluetooth (low energy and dual mode), Wi-Fi 4/5/6 (802.11n/ac/ax) and NB-IoT.

 

CEVA is a sustainable and environmentally conscious company, adhering to our Code of Business Conduct and Ethics. As such, we emphasize and focus on environmental preservation, recycling, the welfare of our employees and privacy – which we promote on a corporate level. At CEVA, we are committed to social responsibility, values of preservation and consciousness towards these purposes.

 

Our technologies are licensed to leading semiconductor and OEM companies throughout the world. These companies incorporate our IP into application-specific integrated circuits (“ASICs”) and application-specific standard products (“ASSPs”) that they manufacture, market and sell into wireless, consumer, automotive and IoT companies. Our state-of-the-art technology has shipped in more than 12 billion chips to date for a wide range of diverse end markets. One in four handsets sold worldwide is powered by CEVA. 

 

Our revenue mix comprises primarily of IP licensing fees and related revenues, and royalties generated from the shipments of products deploying our IP. Related revenues include revenues from post contract support, training and sale of development systems and chips.  

 

We were initially incorporated in Delaware on November 22, 1999 under the name DSP Cores, Inc. The current company was created through the combination of the DSP IP licensing division of DSP Group, Inc. and Parthus Technologies plc (“Parthus”) in November 2002.

 

We have 404 employees worldwide, with research and development facilities in Israel, France, the United States, Ireland and the United Kingdom, and sales and support offices throughout Asia Pacific (APAC), Sweden, France, Israel and the United States.

 

Industry Background

 

DSP Cores

 

Digital signal processing is a key underlying technology in many of today's fastest growing electronics markets. Digital signal processors (DSPs) are specialized high-speed processors that are optimized for performing repetitive arithmetic calculations on an array of data. DSPs provide the foundation for a vast majority of today's electronic products that are smart and connected, enabling the sensing and wireless communications capabilities (e.g. 5G baseband and RAN processing, computer vision, deep neural network, sound processing and analytics).

 

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Edge AI Hybrid Processors

 

Edge AI Hybrid processors are a new breed of processors targeted at cost- and power-sensitive intelligent devices that use interchangeable workloads of traditional DSP and AI inferencing algorithms to enable intelligent vision, conversational AI, sensor fusion and contextual awareness. The DSP is used to process conventional algorithms for imaging, vision, voice, sound, radar, among others, while the AI-related workloads such as classification, pattern matching, prediction and detection are handled by a combination of DSPs and AI accelerators. These edge AI hybrid processors perform all AI inferencing on the device, with no need for cloud-based processing. These processors aim to mimic the human brain, allowing them to perform cognitive tasks for a wide range of functions, including vision, sound, real-time translation, user behavior and malware detection. Edge AI processors will make their way into billions of devices in the coming years, including mobile, consumer, medical, industrial and automotive applications.

 

Short Range Wireless IPs

 

Wi-Fi and Bluetooth low energy and dual mode are key technologies for any company looking to address the Internet-of-Things (“IoT”). Moreover, many companies wish to integrate these connectivity technologies into SoC designs rather than provide connectivity through an additional chip in the system. Yet, Wi-Fi and Bluetooth standards are constantly evolving, and the many new end applications are looking to benefit from these enhancements, which put further pressure on time to market on SoC vendors. The advent of IoT has resulted in significant demand for connectivity IPs that addresses this burgeoning market, among which are smart True Wireless Stereo earbuds, sport trackers, smart watches, smart speakers, and many other consumer and IoT devices. By licensing rather than developing these technologies in-house, companies can now get access to the latest standards and profiles from CEVA without undertaking the expensive research and development costs required to develop these technologies internally.

 

Cellular IoT IPs

 

Cellular IoT, and specifically Narrowband IoT (NB-IoT) and Cat-1, are becoming key technologies for any company wishing to connect low power IoT devices over long distances, using cellular networks. By its nature, cellular is a very complex technology, with most of the industry knowledge held within a few large companies. By providing a licensable NB-IoT solution and low power DSP cores, we help companies overcome the entry barriers to the cellular IoT market without undertaking the complex and expensive R&D to develop these technologies internally.

 

Sensor Fusion

 

MEMS-based inertial and environmental sensors are used in an increasing number of devices, including smartphones, laptops, robots, TWS earbuds, smartTVs, remote controls, AR and VR headsets, drones and many other consumer and industrial devices. The software required to process the sensor data and fuse the data from multiple sensors is complex and requires unique specialization. By licensing rather than developing this sensor processing software in-house, companies can focus their efforts developing the applications that utilize the processed sensor data to create differentiated, contextually aware devices.

 

Design Gap

 

The demand for connected and smart mobile, consumer, automotive, industrial and IoT devices continues to grow. These devices require faster and low power connectivity, and a richer user experience that is aware and predictive. Semiconductor manufacturers face ever growing pressures to make smaller, feature-rich integrated circuits that are more reliable, less expensive and have greater performance. These two trends are occurring concurrently in the face of decreasing product lifecycles and constrained battery power. The advent of wireless connectivity technologies like 5G, Wi-Fi 6 and Bluetooth 5 and the diverse sensor related workloads required to make a device smart, such as advanced image enhancement, computer vision, AI inferencing, voice and audio pre- and post- processing and motion sensor fusion have further increased these pressures. While semiconductor manufacturing processes have advanced significantly to allow a substantial increase in the number of circuits placed on a single chip, resources for design capabilities have not kept pace with the advances in manufacturing processes, resulting in a growing “design gap” between the increasing manufacturing potential and the constrained design capabilities.

 

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CEVA’s Business

 

CEVA addresses the requirements of the mobile, consumer, automotive, robotics, industrial and IoT markets by designing and licensing a broad range of robust processors, platforms and software which streamline the design of solutions for developing a wide variety of application specific solutions that combine connectivity and smart sensing that involve primarily camera, microphone and IMU.

 

Given the “design gap,” as well as the increasing complexity and the unique skill set required to develop a system-on-chip, many semiconductor design and manufacturing companies increasingly choose to license proven intellectual property, such as processor cores (e.g. DSP, CPU, GPU and AI), specialized connectivity software algorithms like sensor fusion, sound, memory and physical IPs from silicon intellectual property (SIP) companies like CEVA rather than develop those technologies in-house. In addition, with more complex designs and shorter time to market, it is no longer cost efficient and becoming progressively more difficult for most semiconductor companies to develop the signal processing platform, incorporating the complex DSPs like scalar, vector, AI accelerators and related graph compiler, data connectivity modem and phy platforms. As a result, companies increasingly seek to license these IPs from CEVA or a third-party community of developers.

 

Our IP Business Model

 

Our objective is for our CEVA wireless connectivity and smart sensing platforms to become the de facto technologies across the mobile, consumer, automotive, robotics, industrial and IoT markets. To enable this goal, we license our technologies on a worldwide basis to semiconductor and OEM companies that design and manufacture products that combine CEVA-based solutions with their own differentiating technology. We believe our business model offers us some key advantages. By not focusing on manufacturing or selling silicon products, we are free to widely license our technology and free to focus most of our resources on research and development. By choosing to license our IP, manufacturers can achieve the advantage of creating their own differentiated solutions and develop their own unique product roadmaps. Through our licensing efforts, we have established a worldwide community developing CEVA-based solutions, and therefore we can leverage their strengths, customer relationships, proprietary technology advantages, and existing sales and marketing infrastructure. In addition, as our intellectual property is widely licensed and deployed, system OEM companies can obtain CEVA-based chipsets from a wide range of suppliers, thus reducing dependence on any one supplier and fostering price competition, both of which help to contain the cost of CEVA-based products.

 

We operate a licensing and royalty business model. We typically charge a license fee for access to our hardware technology and a royalty fee for each unit of silicon which incorporates our hardware or software technology. License fees are invoiced in accordance with agreed-upon contractual terms. Royalties are reported and invoiced quarterly and generally based on a fixed unit rate or a percentage of the sale price for the CEVA-based silicon product.

 

Strategy

 

We believe there is a growing demand for high performance and low power signal processing IPs and specialized AI platforms and software incorporating all the necessary hardware and software for target applications. Our IP portfolio is strategically aligned to allow us to exploit the most lucrative “design gaps” in the growing demand for smarter, connected devices. As CEVA offers expertise developing complete solutions in a number of key growth markets, including, 5G cellular baseband, wireless wearables, robots, automotive and IoT. For these markets, we offer a comprehensive portfolio of connectivity and smart sensing, which include various types of specialized DSPs and platforms for 5G, computer vision, sound, AI, Wi-Fi, Bluetooth, NB-IoT solutions, sensor fusion and sound. We believe we are well positioned to take full advantage of this growing demand. To capitalize on this industry shift, we intend to:

 

 

develop and enhance our range of DSP cores and edge AI hybrid processors with additional features, performance and capabilities;

 

 

develop and expand our short range wireless IPs and customer base, providing the newest standards and the most complete offerings to streamline our customers’ deployments;

 

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continue to develop new generation of high performance DSPs and AI accelerators to pursue opportunities and grow our footprint in the 5G handset, cellular IoT base station RAN market, automotive and headsets;

 

 

go up the ‘value chain’ by adding and charging for software for our voice our audio and IMU (Inertial Measurement Units) products

 

 

expand our presence in AI for edge SoC market by capitalizing on our AI accelerators and CDNN graph compiler software technologies;

 

 

continue to develop and enhance our range of complete and highly integrated platform solutions to deliver to our licensing partners a complete and verified system solution;

 

 

continue to prudently invest in strategic technologies that enable us to strengthen our presence in existing market or enter new addressable markets;

 

 

capitalize on our relationships and leadership within our worldwide community of semiconductor and OEM licensees who are developing CEVA-based solutions;

 

 

capitalize on our technology leadership in the development of advanced processor technologies, connectivity IPs and sensor fusion software to create and develop new, strategic relationships with OEMs and semiconductor companies to replace their internal DSPs or incumbent DSP suppliers with CEVA-based solutions; and

 

 

capitalize on our IP licensing and royalty business model which we believe is the best vehicle for a pervasive adoption of our technology and allows us to focus our resources on research and development of new licensable technologies and applications.

 

Products

 

We are the leading licensor of wireless connectivity and smart sensing platforms for semiconductor companies and OEMs serving the mobile, consumer, automotive, robotics, industrial and IoT markets. Our ultra-low-power IPs include comprehensive platforms comprised of application-specific DSPs and optimized AI accelerators for a holistic combination of classical DSP algorithm and data driven AI workloads in low power edge devices. We also offer comprehensive Bluetooth, WiFi and NB-IOT solutions to enable connectivity in wearables, smart home, medical and IoT devices. In addition, we offer a wide range of application software optimized for our processors, including voice front-end processing and speech recognition, imaging and computer vision and sensor fusion. For sensor fusion, our Hillcrest Labs sensor processing technologies provide a broad range of sensor fusion software and IMU solutions for AR/VR, robotics, remote controls, and IoT. Our categories of products include the following:

 

 

1)

Wireless communications

 

 

CEVA-XC vector DSPs for 5G handsets, gNodeB, 5G AAU and RRU systems, V2X, enterprise and residence Wi-Fi access points

 

 

PentaG - 5G NR modem platform for UE and for non-handset 5G vertical markets like Fixed-Wireless-Access, Industry 4.0, robotics, AR/VR devices that requires ultra-low-latency systems

 

 

2)

AI and computer vision

 

 

SensPro2 imaging and computer vision platforms, including DSP processors and a comprehensive software portfolio

 

 

NeuPro platforms for AI applications, including DSP and integrated accelerators

 

 

CDNN: deep neural network graph compiler that enables AI developers to automatically compile, optimize and run pre-trained networks onto embedded devices

 

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3)

Sound

 

 

CEVA-BX1, CEVA-BX2 and SenSpro2 DSPs, AI accelerators, algorithms and software for sound-enabled application, including Whispro speech recognition and ClearVox, a complete voice front-end software package for near and far-field voice-enabled devices

 

 

Deep neural network compiler and tools

 

 

4)

Sensor Fusion

 

 

MotionEngine, Sensor processing software, combining high accuracy 6-axis and 9-axis sensor fusion, dynamic sensor calibration, and many application specific features such as cursor control, gesture recognition, activity tracking, context awareness, and AR/VR stabilization

 

 

Sensor Hub DSPs, that serve as a hub for AI and DSP processing workloads associated with a wide range of sensors including camera, Radar, LiDAR, Time-of-Flight, microphones and inertial measurement units (IMUs)

 

 

5)

Multipurpose DSP/controller

 

 

CEVA-BX high level programmable, modern processors for a broad range of signal processing and control workloads

 

 

6)

Wireless IoT

 

 

RivieraWaves’ Bluetooth 5 (up to 5.2) dual mode and low energy platforms

 

 

RivieraWaves’ Wi-Fi (4/5/6 up to 4x4) platforms

 

 

Dragonfly NB2 - complete end-to-end offering for narrowband IoT (NB-IoT)

 

We deliver our DSP cores, platforms and AI processors in the form of a hardware description language definition (known as a soft core or a synthesizable core). All CEVA cores can be manufactured on any process using any physical library, and all are accompanied by a complete set of tools and an integrated development environment. An extensive third-party network supports CEVA DSP cores, platforms and AI processors with a wide range of complementing software and platforms. In addition, we provide development platforms, software development kits and software debug tools, which facilitate system design, debug and software development.

 

In order to reduce the cost, complexity, and risk in bringing products to market, CEVA has developed a suite of system platforms and solutions. These platforms and solutions combine the hardware and software elements that are essential for designers deploying CEVA’s state-of-the-art DSP cores, platforms and AI processors. Platforms typically integrate a CEVA DSP core, hardware accelerators and coprocessors, optimized software, libraries and tool chain. Our family of DSP-based platforms are targeted for baseband processing within cellular handsets, cellular IoT devices and base stations RAN, wired communications, advanced imaging, computer vision and deep neural networks, and audio, voice and sensing and Internet-of-Things related applications.

 

Customers

 

We have licensed our signal processing cores, platforms, AI processors and connectivity IPs to leading semiconductor and OEM companies throughout the world. These companies incorporate our IP into application-specific chipsets or custom-designed chipsets that they manufacture, market and sell to consumer electronics companies. We also license our technologies to OEMs directly. Included among our licensees are the following customers: Actions, Artosyn, ASR Micro, Atmosic, Autotalks, Beken, Bestechnic, Broadcom, Celeno, Ceragon, Cirrus Logic, Dialog Semiconductor, DSP Group, Espressif, FujiFilm, GCT Semi, iCatch, InPlay, Intel, iRobot, Itron, Leadcore, LG Electronics, Mediatek, Microchip, MorningCore, Nextchip, Nokia, Novatek, Nurlink, NXP, ON Semiconductor, Optek, Oticon, Panasonic, RDA, Renesas, Rockchip, Rohm, Samsung, Sanechips, Sharp, SiFive, Siflower, SigmaStar, Socionext, Sony, Sonova, STMicroelectronics, Toshiba, Unisoc, Vatics, Yamaha and ZTE.

 

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International Sales and Operations

 

Customers based in EME (Europe and Middle East) and APAC (Asia Pacific) accounted for 79% of our total revenues for 2020, 81% of our total revenues for 2019 and 89% for 2018. Information on the geographic breakdown of our revenues and location of our long-lived assets is contained in Note 12 to our consolidated financial statements, which appear elsewhere in this annual report.

 

Sales and Marketing

 

We license our technology through a direct sales force. As of December 31, 2020, we had 35 employees in sales and marketing. We have sales offices and representation in Asia Pacific (APAC) region, Sweden, Israel, France and the United States.

 

Maintaining close relationships with our customers and strengthening these relationships are central to our strategy. From time to time we develop a new signal processors, platforms, software solutions or connectivity products with close alignment with a number of tier-one industry players which signifies to the market that we are focused on viable applications that meet broad industry needs or try to get similar inputs and insight for our new developments from our marketing team. Generally, these industry leaders become licensees for these products allows us to create a roadmap for the future development of existing cores and application platforms and connectivity products, and helps us to anticipate the next potential applications for the market. We seek to use our customer relationships to deliver new products in a faster time to market.

 

We use a variety of marketing initiatives to stimulate demand and brand awareness in our target markets. These marketing efforts include contacts with industry analysts, presenting at key industry trade shows and conferences, and a comprehensive digital marketing program aimed at developing and nurturing relationships with potential customers. Our marketing group runs competitive benchmark analyses to help us maintain our competitive position.

 

Technical Support

 

We offer technical support services through our offices in Israel, Ireland, Asia Pacific (APAC) region, Sweden, France and the United States. As of December 31, 2020, we had 31 employees in technical support. Our technical support services include:

 

 

assistance with implementation, responding to customer-specific inquiries, training and, when and if they become available, distributing updates and upgrades of our products;

 

 

application support, consisting of providing general hardware and software design examples, ready-to-use software modules and guidelines to our licensees to assist them in using our technology; and

 

 

design services, consisting of creating customer-specific implementations of our signal processing IPs and application platforms.

 

We believe that our technical support services are a means to assist our licensees to embed our cores and platforms in their designs and products. Our technology is highly complex, combining sophisticated signal processing IP core architectures, integrated circuit designs and development tools. Effective customer support in helping our customers to implement our solutions enables them to shorten the time to market for their applications. Our support organization is made up of experienced engineers and professional support personnel. We conduct technical training for our licensees and their customers, and meet with them from time to time to track the implementation of our technology.

 

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Research and Development

 

Our research and development team is focused on improving and enhancing our existing products, as well as developing new products to broaden our offerings and market opportunities. These efforts are largely driven by current and anticipated customer and market needs.

 

Our research and development team, consisting of 304 engineers as of December 31, 2020, work in eight development centers located in Israel, France, the United States, Ireland and the United Kingdom. This team consists of engineers who possess significant experience in developing DSP cores and tools for 5G, computer vision, AI, connectivity products (Wi-Fi and Bluetooth), NB-IoT, and sensor processing and sensor fusion software. In addition, we engage third party contractors with specialized skills as required to support our research and development efforts.

 

We encourage our research and development personnel to maintain active roles in various international organizations that develop and maintain standards in the electronics and related industries. This involvement allows us to influence the development of new standards; keeps us informed as to important new developments regarding standards; and allows us to demonstrate our expertise to existing and potential customers who also participate in these standards-setting bodies.

 

Competition

 

The markets in which we operate are intensely competitive. They are subject to rapid change and are significantly affected by new product introductions. We compete with other suppliers of licensed signal processing IPs. We believe that the principal competitive elements in our field are signal processing IP performance, overall chip cost, power consumption, flexibility, reliability, communication and multimedia software and algorithms availability, design cycle time, tool chain, customer support, financial strength, name recognition and reputation. We believe that we compete effectively in each of these areas, but can offer no assurance that we will have the financial resources, technical expertise, and marketing or support capabilities to compete successfully in the future.

 

The markets in which we compete are dominated by large, highly competent semiconductor companies that have significant brand recognition, a large installed base and a large network of support and field application engineers. We face direct and indirect competition from:

 

 

IP vendors that offer programmable or configurable DSP cores;

 

 

IP vendors that offer vision processing units for computer vision applications;

 

 

IP vendors that offer neural network processing units for AI applications;

 

 

IP vendors that offer voice software packages, including beamforming, direction of arrival and echo cancellation;

 

 

IP vendors that offer Bluetooth and Wi-Fi connectivity IPs;

 

 

IP vendors that offer hardware-based DSP implementation as opposed to software-based DSP, which is our specialization;

 

 

internal design groups of large chip companies or OEMs that develop proprietary signal processing IP cores or engines for their own application-specific chipsets; and

 

 

internal design groups of large chip companies or OEMs that develop proprietary sensor processing and sensor fusion software for sale as part of a chip or for their own application-specific chipsets.

 

We face direct competition in the DSP and configurable core space mainly from Verisilicon, Cadence and Synopsys, which licenses DSP cores in addition to their respective semiconductor and EDA businesses. In AI processors, we face direct competition from EDA players in addition to a host of companies offering AI cores and accelerators such as ARM, (acquired by SoftBank), AImotive, Digital Media Professionals, (DMP), Imagination Technologies (acquired by Canyon Bridge). In the short-range wireless space, we face direct competition from Mindtree.

 

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In recent years, we also have faced competition from companies that offer Central Processor Unit (CPU) intellectual property. These companies’ products are used for host functions in various applications, such as in mobile and home entertainment products. These applications typically also incorporate a programmable DSP or neural network accelerator that is responsible for communication and video/audio/voice-related tasks, neural network or in some cases connectivity capabilities. CPU companies, such as ARM, Cadence, and Synopsys have added DSP acceleration, CNN acceleration and /or connectivity solutions and make use of it to provide platform solutions in the areas of baseband, video, imaging, vision, AI, audio and connectivity.

 

With respect to certain large potential customers, we also compete with internal engineering teams, which may design programmable signal processing IP core products in-house. Companies such as Mediatek, Qualcomm, Samsung, Huawei and STMicroelectronics license our designs for some applications and use their own proprietary cores for other applications. These companies also may choose to license their proprietary signal processing IP cores to third parties and, as a result, become direct competitors.

 

Aside from the in-house research and development groups, we do not compete with any individual company across the range of our market offerings. Within particular market segments, however, we do face competition to a greater or lesser extent from other industry participants. For example, in the following specific areas we compete with the companies indicated:

 

 

in the digital embedded imaging and vision market –Arm Limited, Synopsys, Cadence and Videantis, as well as GPU IP providers such as Arm Limited, Imagination Technologies and Verisilicon; and

 

 

in audio and voice applications market – Arm Limited, Cadence, Synopsys and Verisilicon.

 

Proprietary Rights

 

Our success and ability to compete are dependent on our ability to develop and maintain the proprietary aspects of our intellectual property and to operate without infringing the proprietary rights of others. We rely on a combination of patent, trademark, trade secret and copyright laws and contractual restrictions to protect the proprietary aspects of our technology. These legal protections afford only limited protection of our technology. We also seek to limit disclosure of our intellectual property and trade secrets by requiring employees and consultants with access to our proprietary information to execute confidentiality agreements with us and by restricting access to our source code and other intellectual property. Due to rapid technological change, we believe that factors such as the technological and creative skills of our personnel, new product developments and enhancements to existing products are more important than specific legal protections of our technology in establishing and maintaining a technology leadership position.

 

We have an active program to protect our proprietary technology through the filing of patents. Our patents relate to our signal processing IP cores and application-specific platform technologies. As of December 31, 2020, we hold 59 patents in the United States, five patents in Canada, 88 patents in the EME (Europe and Middle East) region and 10 patents in Asia Pacific (APAC) region, totaling 162 patents, with expiration dates between 2021 and 2038. In addition, as of December 31, 2020, we have two patent applications pending in the United States, two pending patent applications in Canada, six pending patent applications in the EME region and five pending patent applications in the APAC region, totaling 15 pending patent applications.

 

We actively pursue foreign patent protection in countries where we feel it is prudent to do so. Our policy is to apply for patents or for other appropriate statutory protection when we develop valuable new or improved technology. The status of patents involves complex legal and factual questions, and the breadth of claims allowed is uncertain. Accordingly, there are no assurances that any patent application filed by us will result in a patent being issued, or that our issued patents, and any patents that may be issued in the future, will afford us adequate protection against competitors with similar technology; nor can we be assured that patents issued to us will not be infringed or that others will not design around our technology. In addition, the laws of certain countries in which our products are or may be developed, manufactured or sold may not protect our products and intellectual property rights to the same extent as the laws of the United States. We can provide no assurance that our pending patent applications or any future applications will be approved or will not be challenged by third parties, that any issued patents will effectively protect our technology, or that patents held by third parties will not have an adverse effect on our ability to do business.

 

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The semiconductor industry is characterized by frequent litigation regarding patent and other intellectual property rights. Questions of infringement in the semiconductor field involve highly technical and subjective analyses. In addition, patent infringement claims are increasingly being asserted by patent holding companies (so-called patent “trolls”), which do not use technology and whose sole business is to enforce patents against companies, such as us, for monetary gain. Because such patent holding companies do not provide services or use technology, the assertion of our own patents by way of counter-claim may be ineffective. Litigation may in the future be necessary to enforce our patents and other intellectual property rights, to protect our trade secrets, to determine the validity and scope of the proprietary rights of others, or to defend against claims of infringement or invalidity. We cannot assure you that we would be able to prevail in any such litigation, or be able to devote the financial resources required to bring such litigation to a successful conclusion.

 

In any potential dispute involving our patents or other intellectual property, our licensees also could become the targets of litigation. We are generally bound to indemnify licensees under the terms of our license agreements. Although our indemnification obligations are generally subject to a maximum amount, these obligations could nevertheless result in substantial expenses. In addition to the time and expense required for us to indemnify our licensees, a licensee’s development, marketing and sale of products embodying our solutions could be severely disrupted or shut down as a result of litigation.

 

We also rely on trademark, copyright and trade secret laws to protect our intellectual property. We have registered trademark in the United States for our name CEVA and the related CEVA logo, and currently market our signal processing cores and other technology offerings under this trademark.

 

Human Capital Resources

 

The table below presents the number of employees of CEVA as of December 31, 2020 by function and geographic location.

 

   

Number

 

Total employees

    404  

Function

       

Research and development

    304  

Sales and marketing

    35  

Administration

    34  

Technical support

    31  

Location

       

Israel

    253  

France

    48  

Ireland

    13  

China

    19  

United States

    38  

United Kingdom

    17  

Elsewhere

    16  

 

Our employees are not represented by any collective bargaining agreements, and we have never experienced a work stoppage. We believe our employee relations are good.

 

A number of our employees are located in Israel. Certain provisions of Israeli law and the collective bargaining agreements between the Histadrut (General Federation of Labor in Israel) and the Coordination Bureau of Economic Organizations (the Israeli federation of employers’ organizations) apply to our Israeli employees.

 

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In 2004, we finalized and adopted a new Code of Business Conduct and Ethics regarding the standards of conduct of our directors, officers and employees. The code is reviewed and updated periodically by our Board or Directors and is available on our website at www.ceva-dsp.com. In 2020, we completed and published on our website our Sustainability Policy. We strive to be a responsible and respected global corporate citizen and a more sustainable company in the countries where we have operations and employees. Our policy addresses the topics of (1) data privacy and security; (2) our environmental policy; (3) resource conservation and recycling; and (4) our employees.

 

Available Information

 

Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to reports pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, are available, free of charge, on our website at www.ceva-dsp.com, as soon as reasonably practicable after such reports are electronically filed with the Securities and Exchange Commission and are also available on the SEC’s website at www.sec.gov.

 

Our website and the information contained therein or connected thereto are not intended to be incorporated into this Annual Report on Form 10-K.

 

ITEM 1A.

RISK FACTORS

 

We caution you that the following important factors, among others, could cause our actual future results to differ materially from those expressed in forward-looking statements made by or on behalf of us in filings with the Securities and Exchange Commission, press releases, communications with investors and oral statements. Any or all of our forward-looking statements in this annual report, and in any other public statements we make, may turn out to be wrong. They can be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties. Many factors mentioned in the discussion below will be important in determining future results. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. You are advised, however, to consult any further disclosures we make in our reports filed with the Securities and Exchange Commission.

 

The COVID-19 pandemic, or other outbreak of disease or similar public health threat, could materially and adversely affect our business, financial condition and results of operations.

 

The COVID-19 pandemic has resulted in government authorities implementing numerous measures to try to contain the virus, and these measures have impacted and may further impact our workforce and operations, the operations of our customers, and those of our respective vendors and suppliers. Furthermore, the outbreak has significantly increased economic and demand uncertainty and negatively impacted consumer confidence. Any shortfall in consumer spending or demand for consumer electronic products, such as due to social distancing and other restrictions, may negatively affect our business and results of operations.

 

The spread of COVID-19 also has caused us to modify our business practices, and we may take further actions as may be required by government authorities or that we determine are in the best interests of our employees, customers, and communities.  Such actions may result in further disruptions to our supply chain, operations and facilities, and workforce. We cannot assure you that such measures will be sufficient to mitigate the risks posed by COVID-19, and our ability to perform critical functions could be harmed.

 

We cannot at this time quantify or forecast the full business impact of COVID-19. The degree to which COVID-19 impacts our business, financial condition, and results of operations will depend on future developments, which are highly uncertain, and to what extent normal economic and operating conditions can resume.

 

The markets in which we operate are highly competitive, and as a result we could experience a loss of sales, lower prices and lower revenues.

 

The markets for the products in which our technology is incorporated are highly competitive. Aggressive competition could result in substantial declines in the prices that we are able to charge for our intellectual property or lose design wins to competitors. Many of our competitors are striving to increase their share of the growing signal processing IP markets and are reducing their licensing and royalty fees to attract customers. The following industry players and factors may have a significant impact on our competitiveness:

 

 

we compete directly in the signal processing cores space with Verisilicon, Cadence and Synopsys;

 

we compete with CPU IP or configurable CPU IP (offering DSP configured CPU and/or DSP acceleration and/or connectivity capabilities to their IP) providers, such as ARM (in the process of being acquired by NVidia), Synopsys and Cadence and the RISC-V open source;

 

13

 

 

we compete with internal engineering teams at companies such as Mediatek, Qualcomm, Samsung, Huawei and NXP that may design programmable DSP core products and signal processing cores in-house and therefore not license our technologies;

 

we compete in the short range wireless markets with Mindtree, Synopsys and internal engineering teams at companies such as Cypress (now part of Infineon), Silicon Labs, NXP;

 

we compete in embedded imaging and vision market with Cadence, Synopsys, Videantis, Verislicon, ARM and Verisilicon;

 

we compete in AI processor marketing with AI processor and accelerator providers, including AImotive, Arm Limited, Cadence, Synopsys, Cambricon, Digital Media Professionals (DMP), Imagination Technologies, Nvidia open source NVDLA and Verisilicon; and

●     we compete in the audio and voice applications market with Arm Limited, Cadence, Synopsys and Verisilicon.

 

In addition, we may face increased competition from smaller, niche semiconductor design companies in the future. Some of our customers also may decide to satisfy their needs through in-house design. We compete on the basis of signal processing IP performance, overall chip cost, power consumption, flexibility, reliability, communication and multimedia software availability, design cycle time, tool chain, customer support, name recognition, reputation and financial strength. Our inability to compete effectively on these bases could have a material adverse effect on our business, results of operations and financial condition.

 

Our quarterly operating results fluctuate from quarter to quarter due to a variety of factors, including our lengthy sales cycle, and may not be a meaningful indicator of future performance.

 

In some quarters our operating results could be below the expectations of securities analysts and investors, which could cause our stock price to fall. Factors that may affect our quarterly results of operations in the future include, among other things:

 

 

the gain or loss of significant licensees, partly due to our dependence on a limited number of customers generating a significant amount of quarterly revenues;

 

any delay in execution of any anticipated licensing arrangement during a particular quarter;

 

delays in revenue recognition for some license agreements based on percentage of completion of customized work or other accounting reasons;

 

the timing and volume of orders and production by our customers, as well as fluctuations in royalty revenues resulting from fluctuations in unit shipments by our licensees;

 

royalty pricing pressures and reduction in royalty rates due to an increase in volume shipments by customers, end-product price erosion and competitive pressures;

 

earnings or other financial announcements by our major customers that include shipment data or other information that implicates expectations for our future royalty revenues;

 

the mix of revenues among licensing and related revenues, and royalty revenues;

 

the timing of the introduction of new or enhanced technologies by us and our competitors, as well as the market acceptance of such technologies;

 

the discontinuation, or public announcement thereof, of product lines or market sectors that incorporate our technology by our significant customers;

 

our lengthy sales cycle and specifically in the third quarter of any fiscal year during which summer vacations slow down decision-making processes of our customers in executing contracts;

 

delays in the commercialization of end products that incorporate our technology;

 

currency fluctuations, mainly the EURO and the NIS versus the U.S. dollar;

 

fluctuations in operating expenses and gross margins associated with the introduction of, and research and development investments in, new or enhanced technologies and adjustments to operating expenses resulting from restructurings;

 

the approvals, amounts and timing of Israeli research and development government grants from the Israeli Innovation Authority of the Ministry of Economy and Industry in Israel (the “IIA”), EU grants and French research tax credits;

 

the impact of new accounting pronouncements, including the new revenue recognition rules;

 

the timing of our payment of royalties to the IIA, which is impacted by the timing and magnitude of license agreements and royalty revenues derived from technologies that were funded by grant programs of the IIA;

 

statutory changes associated with research tax benefits applicable to French technology companies;

 

our ability to scale our operations in response to changes in demand for our technologies;

 

entry into new end markets that utilize our signal processing IPs, software and platforms;

 

changes in our pricing policies and those of our competitors;

 

restructuring, asset and goodwill impairment and related charges, as well as other accounting changes or adjustments;

 

14

 

 

general political conditions, including global trade wars resulting from tariffs and business restrictions and bans imposed by government entities, like the well publicized 2018 ban associated with ZTE, as well as other regulatory actions and changes that may adversely affect the business environment;

 

general economic conditions, including the current economic conditions, and its effect on the semiconductor industry and sales of consumer products into which our technologies are incorporated;

 

delays in final product delivery due to unexpected issues introduced by our service or EDA tool providers;

 

delays in ratification of standards for Bluetooth, Wi-Fi or NB-IoT that can affect the introduction of new products;

 

constraints on chip manufacturing capacity due to high demand or shutdowns of FABs and other manufacturing facilities; and

 

reductions in demand for consumer and digital devices due to lockdowns or overall financial difficulties resulting from the ongoing COVID-19 pandemic.

 

Each of the above factors is difficult to forecast and could harm our business, financial condition and results of operations. Also, we license our technology to OEMs and semiconductor companies for incorporation into their end products for consumer markets, including handsets and consumer electronics products. The royalties we generate are reported by our customers.

 

Our royalty revenues are affected by seasonal buying patterns of consumer products sold by OEMs, partially by our direct customers and partially by semiconductor customers that incorporate our technology into their end products and the market acceptance of such end products. The first quarter in any given year is usually a sequentially down quarter for us in relation to royalty revenues as this period represents lower post-Christmas fourth quarter consumer product shipments. However, the magnitude of this first quarter decrease varies annually and has been impacted by global economic conditions, market share changes, exiting or refocusing of market sectors by our customers and the timing of introduction of new and existing handset devices powered by CEVA technology sold in any given quarter compared to the prior quarter. Furthermore, in 2020 the worldwide COVID-19 pandemic created demand for digital connectivity and consumer devices, in parallel to economic slowdowns in different countries and at different times due to shelter-in-place orders and other government restrictions. Such events may continue into 2021 and distort more traditional seasonality trends.

 

Moreover, the semiconductor and consumer electronics industries remain volatile, which makes it extremely difficult for our customers and us to accurately forecast financial results and plan for future business activities. As a result, our past operating results should not be relied upon as an indication of future performance.

 

We rely significantly on revenues derived from a limited number of customers who contribute to our royalty and license revenues.

 

We derive a significant amount of revenues from a limited number of customers. Sales to Spreadtrum, accounted for 14%, 15% and 15% of our total revenues for 2020, 2019 and 2018, respectively. Sales to Intel represented 15%, 19% and 19% of our total revenues for 2020, 2019 and 2018, respectively. With respect to our royalty revenues, four royalty paying customers each represented 10% or more of our total royalty revenues for 2020, and collectively represented 72% of our total royalty revenues for 2020. Three royalty paying customers each represented 10% or more of our total royalty revenues for 2019, and collectively represented 73% of our total royalty revenues for 2019, and three royalty paying customers each represented 10% or more of our total royalty revenues for 2018, and collectively represented 76% of our total royalty revenues for 2018. We expect that a significant portion of our future revenues will continue to be generated by a limited number of customers. The loss of any significant royalty paying customer could adversely affect our near-term future operating results. Furthermore, consolidation among our customers may negatively affect our revenue source, increase our existing customers’ negotiation leverage and make us further dependent on a limited number of customers. Moreover, the discontinuation of product lines or market sectors that incorporate our technology by our significant customers or a change in direction of their business and our inability to adapt our technology to their new business needs could have material negative implications for our future royalty revenues.

 

Our business is dependent on licensing revenues, which may vary period to period.

 

License agreements for our signal processing IP cores and platforms have not historically provided for substantial ongoing license payments so past licensing revenues may not be indicative of the amount of such revenues in any future period. We believe that there is a similar risk with RivieraWaves’ operations associated with Bluetooth and Wi-Fi connectivity technologies. Significant portions of our anticipated future revenues, therefore, will likely depend upon our success in attracting new customers or expanding our relationships with existing customers. However, revenues recognized from licensing arrangements vary significantly from period to period, depending on the number and size of deals closed during a quarter, and is difficult to predict. In addition, as we expand our business into the non-handset baseband markets, our licensing deals may be smaller but greater in volume which may further fluctuate our licensing revenues quarter to quarter. Our ability to succeed in our licensing efforts will depend on a variety of factors, including the performance, quality, breadth and depth of our current and future products as well as our sales and marketing skills. In addition, some of our licensees may in the future decide to satisfy their needs through in-house design and production. Our failure to obtain future licensing customers would impede our future revenue growth and could materially harm our business.

 

15

 

Royalty rates could decrease for existing and future license agreements, which could materially adversely affect our operating results.

 

Royalty payments to us under existing and future license agreements could be lower than currently anticipated for a variety of reasons. Average selling prices for semiconductor products generally decrease over time during the lifespan of a product. In addition, there is increasing downward pricing pressures in the semiconductor industry on end products incorporating our technology, especially end products for the handsets and consumer electronics markets. As a result, notwithstanding the existence of a license agreement, our customers may demand that royalty rates for our products be lower than our historic royalty rates. We have in the past and may be pressured in the future to renegotiate existing license agreements with our customers. In addition, certain of our license agreements provide that royalty rates may decrease in connection with the sale of larger quantities of products incorporating our technology. Furthermore, our competitors may lower the royalty rates for their comparable products to win market share which may force us to lower our royalty rates as well. As a consequence of the above referenced factors, as well as unforeseen factors in the future, the royalty rates we receive for use of our technology could decrease, thereby decreasing future anticipated revenues and cash flow. Royalty revenues were approximately 48%, 45% and 48% of our total revenues for 2020, 2019 and 2018, respectively. Therefore, a significant decrease in our royalty revenues could materially adversely affect our operating results.

 

Moreover, royalty rates may be negatively affected by macroeconomic trends (including the recent COVID-19 pandemic and its global impact) or changes in products mix. Furthermore, consolidation among our customers may increase the leverage of our existing customers to extract concessions from us in royalty rates. Moreover, changes in products mix such as an increase in lower royalty bearing products shipped in high volume like low-cost feature phones and Bluetooth-based products in lieu of higher royalty bearing products like LTE phones could lower our royalty revenues.

 

We generate a significant amount of our total revenues, especially royalty revenues, from the handset baseband market (for mobile handsets and for other modem connected devices) and our business and operating results may be materially adversely affected if we do not continue to succeed in these highly competitive markets.

 

A significant portion of our revenues in general, and in particular our royalty revenues, are derived from baseband for handsets. Any adverse change in our ability to compete and maintain our competitive position in the handset baseband market, including through the introduction by competitors of enhanced technologies that attract customers that target those markets, would harm our business, financial condition and results of operations. Moreover, the handset baseband market is extremely competitive and is facing intense pricing pressures, and we expect that competition and pricing pressures will only increase. Furthermore, it can be very volatile with regards to volume shipments of different phones, standards and connected devices due to inventory build out or consumer demand changes or geographical macroeconomics, pricing changes, product discontinuations due to technical issues and timing of introduction of new phones and products. Our existing OEM or semiconductor customers also may fail to introduce new handset devices that attract consumers, lose a significant design opportunity for a new product introduction or encounter significant delays in developing, manufacturing or shipping new or enhanced products in those markets or find alternative technological solutions and suppliers. The inability of our customers to compete would result in lower shipments of products powered by our technologies which in turn would have a material adverse effect on our business, financial condition and results of operations. As an example, Intel, one of our customers, did not have its products selected for inclusion in Apple’s new 5G smartphone series, and thereafter announced the sale of its 5G smartphone modem business to Apple. A customer’s loss of a design opportunity may have an adverse effect on our royalty revenues from such customer, which in turn will also have an adverse effect on our overall results of operations and market share. Our royalty revenues will be negatively impacted if we fail to offset any loss of royalty revenues from, for example, our customers’ products being incorporated Apple’s new 5G smartphone series with royalty revenues from other emerging products incorporating our technologies. Since a significant portion of our revenues is derived from the handset baseband market, adverse conditions in this market would have a material adverse effect on our business, financial condition and results of operations.

 

In order to sustain the future growth of our business, we must penetrate new markets and our new products must achieve widespread market acceptance but such additional revenue opportunities may not be implemented and may not be achieved.

 

In order to expand our business and increase our revenues, we must penetrate new markets and introduce new products, including additional non-baseband related products. We have invested significant resources in pursuing potential opportunities for revenue growth and diversify our revenue streams. Our continued success will depend significantly on our ability to accurately anticipate changes in industry standards and to continue to appropriately fund development efforts to enhance our existing products or introduce new products in a timely manner to keep pace with technological developments. However, there are no assurances that we will develop products relevant for the marketplace or gain significant market share in those competitive markets. Moreover, if any of our competitors implement new technologies before us, those competitors may be able to provide products that are more effective or at lower prices, which could adversely impact our sales and impact our market share. Our inability to penetrate new markets and increase our market share in those markets or lack of customer acceptance of our new products may harm our business and potential growth.

 

16

 

Because our IP solutions are components of end products, if semiconductor companies and electronic equipment manufacturers do not incorporate our solutions into their end products or if the end products of our customers do not achieve market acceptance, we may not be able to generate adequate sales of our products.

 

We do not sell our IP solutions directly to end-users; we license our technology primarily to semiconductor companies and electronic equipment manufacturers, who then incorporate our technology into the products they sell. As a result, we rely on our customers to incorporate our technology into their end products at the design stage. Once a company incorporates a competitor’s technology into its end product, it becomes significantly more difficult for us to sell our technology to that company because changing suppliers involves significant cost, time, effort and risk for the company. As a result, we may incur significant expenditures on the development of a new technology without any assurance that our existing or potential customers will select our technology for incorporation into their own product and without this “design win,” it becomes significantly difficult to sell our IP solutions. Moreover, even after a customer agrees to incorporate our technology into its end products, the design cycle is long and may be delayed due to factors beyond our control, which may result in the end product incorporating our technology not reaching the market until long after the initial “design win” with such customer. From initial product design-in to volume production, many factors could impact the timing and/or amount of sales actually realized from the design-in. These factors include, but are not limited to, changes in the competitive position of our technology, our customers’ financial stability, and our customers' ability to ship products according to our customers’ schedule. Moreover, current economic conditions may further prolong a customer’s decision-making process and design cycle.

 

Further, because we do not control the business practices of our customers, we do not influence the degree to which they promote our technology or set the prices at which they sell products incorporating our technology. We cannot assure you that our customers will devote satisfactory efforts to promote their end products which incorporate our IP solutions.

 

In addition, our royalties from licenses and therefore the growth of our business, are dependent upon the success of our customers in introducing products incorporating our technology and the success of those products in the marketplace. The primary customers for our products are semiconductor design and manufacturing companies, system OEMs and electronic equipment manufacturers, particularly in the telecommunications field. All of the industries we license into are highly competitive, cyclical and have been subject to significant economic downturns at various times. These downturns are characterized by production overcapacity and reduced revenues, which at times may encourage semiconductor companies or electronic product manufacturers to reduce their expenditure on our technology. If we do not retain our current customers and continue to attract new customers, our business may be harmed.

 

We depend on market acceptance of third-party semiconductor intellectual property.

 

The semiconductor intellectual property (SIP) industry is a relatively small and emerging industry. Our future growth will depend on the level of market acceptance of our third-party licensable intellectual property model, the variety of intellectual property offerings available on the market, and a shift in customer preference away from in-house development of proprietary signal processing IP towards licensing open signal processing IP cores and platforms. Furthermore, the third-party licensable intellectual property model is highly dependent on the market adoption of new services and products, such as low cost smartphones in emerging markets, LTE-based smartphones, mobile broadband, small cell base stations and the increased use of advanced audio, voice, computational photography and embedded vision in mobile, automotive and consumer products, as well as in IoT and connectivity applications in general in which we participate. Such market adoption is important because the increased cost associated with ownership and maintenance of the more complex architectures needed for the advanced services and products may motivate companies to license third-party intellectual property rather than design them in-house.

 

The trends that would enable our growth are largely beyond our control. Semiconductor customers also may choose to adopt a multi-chip, off-the-shelf chip solution versus licensing or using highly-integrated chipsets that embed our technologies. If the above referenced market shifts do not materialize or third-party SIP does not achieve market acceptance, our business, results of operations and financial condition could be materially harmed.

 

17

 

Because we have significant international operations, we may be subject to political, economic and other conditions relating to our international operations that could increase our operating expenses and disrupt our revenues and business.

 

Approximately 79% of our total revenues for 2020, 81% for 2019 and 89% for 2018 were derived from customers located outside of the United States. We expect that international customers will continue to account for a significant portion of our revenues for the foreseeable future. As a result, the occurrence of any negative international political, economic or geographic events could result in significant revenue shortfalls. These shortfalls could cause our business, financial condition and results of operations to be harmed. Some of the risks of doing business internationally include:

 

 

unexpected changes in regulatory requirements;

 

fluctuations in the exchange rate for the U.S. dollar;

 

imposition of tariffs and other barriers and restrictions, including trade tensions such as U.S.-China trade tensions;

 

potential negative international community’s reaction to the U.S. Tax Cuts and Jobs Act;

 

burdens of complying with a variety of foreign laws, treaties and technical standards;

 

uncertainty of laws and enforcement in certain countries relating to the protection of intellectual property;

 

multiple and possibly overlapping tax structures and potentially adverse tax consequences;

 

political and economic instability, including terrorist attacks and protectionist polices; and

 

changes in diplomatic and trade relationships.

 

Revenues from customers located in the Asia Pacific region account for a substantial portion of our total revenues. We expect that revenue from international sales generally, and sales to the Asia Pacific region specifically, will continue to be a material part of our total revenues. Therefore, any financial crisis, trade negotiations or disputes or other major event causing business disruption in international jurisdictions generally, and in specific countries in the Asia Pacific region in particular, could negatively affect our future revenues and results of operations. For example, in 2018, the U.S. Department of Commerce’s Bureau of Industry and Security’s initial ban on exports of U.S. products to Chinese telecommunications OEM ZTE disrupted ZTE’s operations, which caused delays with our engagements with ZTE and negatively impacted our royalty revenues. Actions of any nature with respect to such customers may reduce our revenues from them and adversely affect our business and financial results.

 

New tariffs and other trade measures could adversely affect our consolidated results of operations, financial position and cash flows.

 

General trade tensions between the U.S. and China have been escalating since 2018, and are not fully resolved yet. Trade tensions between the U.S. and China have resulted in significant tariff increases, sanctions against specified entities, and the broadening of restrictions and license requirements for specified uses of products. The ongoing geopolitical and economic uncertainty between the U.S. and China, and the unknown impact of current and future U.S. and Chinese trade regulations, may cause disruptions in the semiconductor industry and its supply chain, decreased demand from customers for the ultimate products using our IP solutions, or other disruptions which may, directly or indirectly, materially harm our business, financial condition and results of operations. While tariffs and other retaliatory trade measures imposed by other countries on U.S. goods have not yet had a significant impact on our business or results of operations, we cannot predict further developments, and such existing or future tariffs could have a material adverse effect on our consolidated results of operations, financial position and cash flows. Furthermore, further changes in U.S. trade policy could trigger retaliatory actions by affected countries, which could impose restrictions on our ability to do business in or with affected countries or prohibit, reduce or discourage purchases of our products by foreign customers and higher prices for our products in foreign markets. For example, there are risks that the Chinese government may, among other things, require the use of local suppliers, compel companies that do business in China to partner with local companies to conduct business and provide incentives to government-backed local customers to buy from local suppliers. Changes in, and responses to, U.S. trade policy could reduce the competitiveness of our products and cause our sales and revenues to drop, which could materially and adversely impact our business and results of operations.

 

We depend on a limited number of key personnel who would be difficult to replace.

 

Our success depends to a significant extent upon certain of our key employees and senior management, the loss of which could materially harm our business. Competition for skilled employees in our field is intense. We cannot assure you that in the future we will be successful in attracting and retaining the required personnel.

 

The sales cycle for our IP solutions is lengthy, which makes forecasting of our customer orders and revenues difficult.

 

The sales cycle for our IP solutions is lengthy, often lasting three to nine months. Our customers generally conduct significant technical evaluations, including customer trials, of our technology as well as competing technologies prior to making a purchasing decision. In addition, purchasing decisions also may be delayed because of a customer’s internal budget approval process. Furthermore, given the current market conditions, we have less ability to predict the timing of our customers’ purchasing cycle and potential unexpected delays in such a cycle. Because of the lengthy sales cycle and potential delays, our dependence on a limited number of customers to generate a significant amount of revenues for a particular period and the size of customer orders, if orders forecasted for a specific customer for a particular period do not occur in that period, our revenues and operating results for that particular quarter could suffer. Moreover, a portion of our expenses related to an anticipated order is fixed and difficult to reduce or change, which may further impact our operating results for a particular period.

 

18

 

Because our IP solutions are complex, the detection of errors in our products may be delayed, and if we deliver products with defects, our credibility will be harmed, the sales and market acceptance of our products may decrease and product liability claims may be made against us.

 

Our IP solutions are complex and may contain errors, defects and bugs when introduced. If we deliver products with errors, defects or bugs, our credibility and the market acceptance and sales of our products could be significantly harmed. Furthermore, the nature of our products may also delay the detection of any such error or defect. If our products contain errors, defects and bugs, then we may be required to expend significant capital and resources to alleviate these problems. This could result in the diversion of technical and other resources from our other development efforts. Any actual or perceived problems or delays may also adversely affect our ability to attract or retain customers. Furthermore, the existence of any defects, errors or failure in our products could lead to product liability claims or lawsuits against us or against our customers. A successful product liability claim could result in substantial cost and divert management’s attention and resources, which would have a negative impact on our financial condition and results of operations.

 

Our success will depend on our ability to successfully manage our geographically dispersed operations.

 

Most of our research and development staff is located in Israel. We also have research and development teams in France, Ireland, the United Kingdom and United States (following our acquisition of the Hillcrest Labs business from InterDigital in July 2019). Accordingly, our ability to compete successfully will depend in part on the ability of a limited number of key executives located in geographically dispersed offices to manage our research and development staff and integrate them into our operations to effectively address the needs of our customers and respond to changes in our markets. If we are unable to effectively manage and integrate our remote operations, our business may be materially harmed.

 

Our operations in Israel may be adversely affected by instability in the Middle East region.

 

One of our principal research and development facilities is located in Israel, and most of our executive officers and some of our directors are residents of Israel. Although substantially all of our sales currently are being made to customers outside Israel, we are nonetheless directly influenced by the political, economic and military conditions affecting Israel. Any major hostilities involving Israel could significantly harm our business, operating results and financial condition.

 

In addition, certain of our employees are currently obligated to perform annual reserve duty in the Israel Defense Forces and are subject to being called to active military duty at any time. Although we have operated effectively under these requirements since our inception, we cannot predict the effect of these obligations on the company in the future. Our operations could be disrupted by the absence, for a significant period, of one or more of our key employees due to military service.

 

Terrorist attacks, acts of war or military actions and/or other civil unrest may adversely affect the territories in which we operate, and our business, financial condition and operating results.

 

Terrorist attacks and attempted terrorist attacks, military responses to terrorist attacks, other military actions, or governmental action in response to or in anticipation of a terrorist attack, or civil unrest, may adversely affect prevailing economic conditions, resulting in work stoppages, reduced consumer spending or reduced demand for end products that incorporate our technologies. These developments subject our worldwide operations to increased risks and, depending on their magnitude, could reduce net sales and therefore could have a material adverse effect on our business, financial condition and operating results.

 

Our research and development expenses may increase if the grants we currently receive from the Israeli government are reduced or withheld.

 

We currently receive research grants mainly from programs of the IIA. We recorded an aggregate of $3,042,000, $5,843,000 and $3,510,000 in 2020, 2019 and 2018, respectively. The amounts in 2020 are lower compared to 2019 as some CEVA-requested programs were not approved by the IIA and as a result of a general change of fund allocations by the IIA. While we will endeavor to win part of these amounts in the coming years, we can provide no assurance that such efforts will be successful. To be eligible for these grants, we must meet certain development conditions and comply with periodic reporting obligations. Although we have met such conditions in the past, should we fail to meet such conditions in the future our research grants may be repayable, reduced or withheld. The repayment or reduction of such research grants may increase our research and development expenses which in turn may reduce our operating income. Also, the timing of such payments from the IIA may vary from year to year and quarter to quarter, and we have no control on the timing of such payment.

 

19

 

The nature of our business requires the application of complex revenue recognition rules. Significant changes in U.S. generally accepted accounting principles, or GAAP, including the adoption of the new revenue recognition rules, could materially affect our financial position and results of operations.

 

We prepare our financial statements in accordance with GAAP, which is subject to interpretation or changes by the Financial Accounting Standards Board, or FASB, the SEC, and other various bodies formed to promulgate and interpret appropriate accounting principles. New accounting pronouncements and changes in accounting principles have occurred in the past and are expected to occur in the future, which may have a significant effect on our financial results. For example, pursuant to the new revenue recognition rules, effective as of January 1, 2018, an entity recognizes sales and usage-based royalties as revenue only when the later of the following events occurs: (1) the subsequent sale or usage occurs or (2) the performance obligation to which some or all of the sales-based or usage-based royalty allocated has been satisfied (or partially satisfied). Recognizing royalty revenue on a lag time basis is not permitted. As a result, the royalties we generate from customers is based on royalty of units shipped during the quarter as estimated by our customers, not a quarter in arrears that we previously report. Adoption of this standard and any difficulties in implementation of changes in accounting principles, including uncertainty associated with royalty revenues for the quarter based on estimates provided by our customer, could cause us to fail to meet our financial reporting obligations, which could result in regulatory discipline and harm investors’ confidence in us.

 

The Israeli tax benefits that we currently receive and the government programs in which we participate require us to meet certain conditions and may be terminated or reduced in the future, which could increase our tax expenses.

 

We enjoy certain tax benefits in Israel, particularly as a result of the “Approved Enterprise” and the “Benefited Enterprise” status of our facilities and programs through 2019, and the “Technological Preferred Enterprise” status of our facilities and programs since 2020. To maintain our eligibility for these tax benefits, we must continue to meet certain conditions, relating principally to adherence to the investment program filed with the Investment Center of the Israeli Ministry of Industry and Trade and to periodic reporting obligations. Should we fail to meet such conditions, these benefits would be cancelled and we would be subject to corporate tax in Israel at the standard corporate rate (23% in 2020) and could be required to refund tax benefits already received. Additionally, if we increase our activities outside of Israel, for example, by acquisitions, our increased activities may not be eligible for inclusion in Israeli tax benefit programs. The termination or reduction of certain programs and tax benefits or a requirement to refund tax benefits already received may seriously harm our business, operating results and financial condition.

 

We may have exposure to additional tax liabilities as a result of our foreign operations.

 

We are subject to income taxes in the United States and various foreign jurisdictions. In addition to our significant operations in Israel, we have operations in Ireland, France, the United Kingdom, China and Japan. Significant judgment is required in determining our worldwide provision for income taxes and other tax liabilities. In the ordinary course of a global business, there are many intercompany transactions and calculations where the ultimate tax determination is uncertain. We are regularly under audit by tax authorities. Our intercompany transfer pricing may be reviewed by the U.S. Internal Revenue Service and by foreign tax jurisdictions. Although we believe that our tax estimates are reasonable, due to the complexity of our corporate structure, the multiple intercompany transactions and the various tax regimes, we cannot assure you that a tax audit or tax dispute to which we may be subject will result in a favorable outcome for us. If taxing authorities do not accept our tax positions and impose higher tax rates on our foreign operations, our overall tax expenses could increase.

 

Our failure to maintain certain research tax benefits applicable to French technology companies may adversely affect the results of operations of our RivieraWaves operations.

 

Pursuant to our acquisition of the RivieraWaves operations, we will benefit from certain research tax credits applicable to French technology companies, including, for example, the Crédit Impôt Recherche (“CIR”). The CIR is a French tax credit aimed at stimulating research activities. The CIR can be offset against French corporate income tax due and the portion in excess (if any) may be refunded every three years. The French Parliament can decide to eliminate, or reduce the scope or the rate of, the CIR benefit, at any time or challenge our eligibility or calculations for such tax credits, all of which may have an adverse impact on our results of operations and future cash flows.

 

We are exposed to fluctuations in currency exchange rates.

 

A significant portion of our business is conducted outside the United States. Although most of our revenues are transacted in U.S. dollars, we may be exposed to currency exchange fluctuations in the future as business practices evolve and we are forced to transact business in local currencies. Moreover, the majority of our expenses are denominated in foreign currencies, mainly New Israeli Shekel (NIS) and the EURO, which subjects us to the risks of foreign currency fluctuations. Based on trends to date, we expect that in 2021 we will have additional exchange rate expenses as compared to 2020 in the event of the ongoing devaluation of the U.S. dollar compared to the Shekel and Euro. Our primary expenses paid in currencies other than the U.S. dollar are employee salaries. Increases in the volatility of the exchange rates of currencies other than the U.S. dollar versus the U.S. dollar could have an adverse effect on the expenses and liabilities that we incur in currencies other than the U.S. dollar when remeasured into U.S. dollars for financial reporting purposes. We have instituted a foreign cash flow hedging program to minimize the effects of currency fluctuations. However, hedging transactions may not successfully mitigate losses caused by currency fluctuations, and our hedging positions may be partial or may not exist at all in the future. We also review our monthly expected non-U.S. dollar denominated expenditure and look to hold equivalent non-U.S. dollar cash balances to mitigate currency fluctuations. However, in some cases, we expect to continue to experience the effect of exchange rate currency fluctuations on an annual and quarterly basis. For example, our EURO cash balances increase significantly on a quarterly basis beyond our EURO liabilities from the CIR, which is generally refunded every three years.

 

20

 

We are exposed to the credit risk of our customers, which could result in material losses.

 

As we diversify and expand our addressable market, we will enter into licensing arrangements with first time customers with whom we don’t have full visible of their creditworthiness. Furthermore, we have increased business activities in the Asia Pacific region. As a result, our future credit risk exposure may increase. Although we monitor and attempt to mitigate credit risks, there can be no assurance that our efforts will be effective. Although any losses to date relating to credit exposure of our customers have not been material, future losses, if incurred, could harm our business and have a material adverse effect on our operating results and financial condition.

 

Our product development efforts are time-consuming and expensive and may not generate an acceptable return, if any.

 

Our product development efforts require us to incur substantial research and development expense. Our research and development expenses were approximately $62.0 million, $52.8 million and $47.8 million for 2020, 2019 and 2018, respectively. We may not be able to achieve an acceptable return, if any, on our research and development efforts.

 

The development of our products is highly complex. We occasionally have experienced delays in completing the development and introduction of new products and product enhancements, and we could experience delays in the future. Unanticipated problems in developing products could also divert substantial engineering resources, which may impair our ability to develop new products and enhancements and could substantially increase our costs. Furthermore, we may expend significant amounts on research and development programs that may not ultimately result in commercially successful products. Our research and development expense levels have increased steadily in the past few years. As a result of these and other factors, we may be unable to develop and introduce new products successfully and in a cost-effective and timely manner, and any new products we develop and offer may never achieve market acceptance. Any failure to successfully develop future products would have a material adverse effect on our business, financial condition and results of operations.

 

If we are unable to meet the changing needs of our end-users or address evolving market demands, our business may be harmed.

 

The markets for signal processing IPs are characterized by rapidly changing technology, emerging markets and new and developing end-user needs, and requiring significant expenditure for research and development. We cannot assure you that we will be able to introduce systems and solutions that reflect prevailing industry standards, on a timely basis, meet the specific technical requirements of our end-users or avoid significant losses due to rapid decreases in market prices of our products, and our failure to do so may seriously harm our business.

 

We may seek to expand our business in ways that could result in diversion of resources and extra expenses.

 

We may in the future pursue acquisitions of businesses, products and technologies, establish joint venture arrangements, make minority equity investments or enhance our existing CEVAnet partner eco-system to expand our business. We are unable to predict whether or when any prospective acquisition, equity investment or joint venture will be completed. The process of negotiating potential acquisitions, joint ventures or equity investments, as well as the integration of acquired or jointly developed businesses, technologies or products may be prolonged due to unforeseen difficulties and may require a disproportionate amount of our resources and management’s attention. We cannot assure you that we will be able to successfully identify suitable acquisition or investment candidates, complete acquisitions or investments, or integrate acquired businesses or joint ventures with our operations. If we were to make any acquisition or investment or enter into a joint venture, we may not receive the intended benefits of the acquisition, investment or joint venture or such an acquisition, investment or joint venture may not achieve comparable levels of revenues, profitability or productivity as our existing business or otherwise perform as expected. The expansion of our CEVAnet partner eco-system also may not achieve the anticipated benefits. The occurrence of any of these events could harm our business, financial condition or results of operations. Future acquisitions, investments or joint ventures may require substantial capital resources, which may require us to seek additional debt or equity financing.

 

Future acquisitions, joint ventures or minority equity investments by us could result in the following, any of which could seriously harm our results of operations or the price of our stock:

 

 

issuance of equity securities that would dilute our current stockholders’ percentages of ownership;

 

large one-time write-offs or equity investment impairment write-offs;

 

incurrence of debt and contingent liabilities;

 

21

 

 

difficulties in the assimilation and integration of operations, personnel, technologies, products and information systems of the acquired companies;

 

inability to realize cost efficiencies or synergies, thereby incurring higher operating expenditures as a result of the acquisition;

 

diversion of management’s attention from other business concerns;

 

contractual disputes;

 

risks of entering geographic and business markets in which we have no or only limited prior experience; and

 

potential loss of key employees of acquired organizations.

 

We may not be able to adequately protect our intellectual property.

 

Our success and ability to compete depend in large part upon the protection of our proprietary technologies. We rely on a combination of patent, copyright, trademark, trade secret, mask work and other intellectual property rights, confidentiality procedures and licensing arrangements to establish and protect our proprietary rights. These agreements and measures may not be sufficient to protect our technology from third-party infringement or protect us from the claims of others. As a result, we face risks associated with our patent position, including the potential need to engage in significant legal proceedings to enforce our patents, the possibility that the validity or enforceability of our patents may be denied, the possibility that third parties will be able to compete against us without infringing our patents and the possibility that our products may infringe patent rights of third parties.

 

Our trade names or trademarks may be registered or utilized by third parties in countries other than those in which we have registered them, impairing our ability to enter and compete in those markets. If we were forced to change any of our brand names, we could lose a significant amount of our brand identity.

 

Our business will suffer if we are sued for infringement of the intellectual property rights of third parties or if we cannot obtain licenses to these rights on commercially acceptable terms.

 

We are subject to the risk of adverse claims and litigation alleging infringement of the intellectual property rights of others. There are a large number of patents held by others, including our competitors, pertaining to the broad areas in which we are active. We have not, and cannot reasonably, investigate all such patents. From time to time, we have become aware of patents in our technology areas and have sought legal counsel regarding the validity of such patents and their impact on how we operate our business, and we will continue to seek such counsel when appropriate in the future. In addition, patent infringement claims are increasingly being asserted by patent holding companies (so-called patent “trolls”), which do not use technology and whose sole business is to enforce patents against companies, such as us, for monetary gain. Because such patent holding companies do not provide services or use technology, the assertion of our own patents by way of counter-claim may be ineffective. Infringement claims may require us to enter into license arrangements or result in protracted and costly litigation, regardless of the merits of these claims. Any necessary licenses may not be available or, if available, may not be obtainable on commercially reasonable terms. If we cannot obtain necessary licenses on commercially reasonable terms, we may be forced to stop licensing our technology, and our business would be seriously harmed.

 

The future growth of our business depends in part on our ability to license to system OEMs and small-to-medium-sized semiconductor companies directly and to expand our sales geographically.

 

Historically, a substantial portion of our licensing revenues has been derived in any given period from a relatively small number of licensees. Because of the substantial license fees we charge, our customers tend to be large semiconductor companies or vertically integrated system OEMs. Part of our current growth strategy is to broaden the adoption of our products by small and mid-size companies by offering different versions of our products targeted at these companies. If we are unable to develop and market effectively our intellectual property through these models, our revenues will continue to be dependent on a smaller number of licensees and a less geographically dispersed pattern of licensees, which could materially harm our business and results of operations.

 

Our operating results are affected by the highly cyclical nature of and general economic conditions in the semiconductor industry.

 

We operate within the semiconductor industry, which experiences significant fluctuations in sales and profitability. Downturns in the semiconductor industry are characterized by diminished product demand, excess customer inventories, accelerated erosion of prices and excess production capacity. Various market data suggests that the semiconductor industry may be facing such a negative cycle presently, especially in the global handset market. The semiconductor industry has faced significant global supply chain issues as a result of the impact of the COVID-19 pandemic and the related imposition of government restrictions on staffing and facility operations, supply chain shortages, and other disruptions. Numerous factors, such as the ongoing pandemic or further trade tensions between the U.S. and China, may prolong or deepen these challenges faced by the industry. Volatility or declines in the semiconductor industry could cause substantial fluctuations or declines in our revenues and results of operations.

 

22

 

If we determine that our goodwill and intangible assets have become impaired, we may incur impairment charges, which would negatively impact our operating results.

 

Goodwill represents the excess of cost over the fair value of net assets acquired in business combinations. Under accounting principles generally accepted in the United States of America, we assess potential impairment of our goodwill and intangible assets at least annually, as well as on an interim basis to the extent that factors or indicators become apparent that could reduce the fair value of any of our businesses below book value. Impairment may result from significant changes in the manner of use of the acquired asset, negative industry or economic trends and significant underperformance relative to historic or projected operating results. If we determine that our goodwill and intangible assets have become impaired, we may incur impairment charges, which could negatively impact our operating results.

 

Cybersecurity threats or other security breaches could compromise sensitive information belonging to us or our customers and could harm our business and our reputation.

 

We store sensitive data, including intellectual property, proprietary business information and our customer and employee information. Despite our security measures, our information technology and infrastructure may be vulnerable to attacks by hackers or breached due to employee error, malfeasance or other disruptions that could result in unauthorized disclosure or loss of sensitive data. Because the techniques used to obtain unauthorized access to networks, or to sabotage systems, change frequently and generally are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. Furthermore, in the operation of our business we also use third-party vendors that store certain sensitive data. Any security breach of our own or a third-party vendor’s systems could cause us to be non-compliant with applicable laws or regulations, subject us to legal claims or proceedings, disrupt our operations, damage our reputation, and cause a loss of confidence in our products and services, any of which could adversely affect our business.

 

Our corporate tax rate may increase, which could adversely impact our cash flow, financial condition and results of operations.

 

We have significant operations in Israel, as well operations in the Republic of Ireland and France. A substantial portion of our taxable income historically has been generated in Israel, and starting in 2020, also in France. Currently, our Israeli and Irish subsidiaries are taxed at rates lower than the U.S. tax rates. Our French entity tax rate is 28% and higher than current U.S. tax rates. If our Israeli and Irish subsidiaries were no longer to qualify for these lower tax rates or if the applicable tax laws were rescinded or changed, our operating results could be materially adversely affected. Moreover, if U.S. or other authorities were to change applicable tax laws or successfully challenge the manner in which our subsidiaries’ profits are currently recognized, our overall tax expenses could increase, and our business, cash flow, financial condition and results of operations could be materially adversely affected. Also our taxes on the Irish interest income may be double taxed both in Ireland and in the U.S. due to U.S. tax regulations and Irish tax restrictions on net operating losses to offset interest income. In addition, our Israeli interest income also may be taxed both in Israel and the U.S due to different Controlled Foreign Corporation rules.

 

The anti-takeover provisions in our certificate of incorporation and bylaws could prevent or discourage a third party from acquiring us.

 

Our certificate of incorporation and bylaws contain provisions that may prevent or discourage a third party from acquiring us, even if the acquisition would be beneficial to our stockholders. Our board of directors also has the authority to fix the rights and preferences of shares of our preferred stock and to issue such shares without a stockholder vote. Our bylaws also place limitations on the authority to call a special meeting of stockholders. We have advance notice procedures for stockholders desiring to nominate candidates for election as directors or to bring matters before an annual meeting of stockholders. In addition, these factors may also adversely affect the market price of our common stock, and the voting and other rights of the holders of our common stock.

 

Our stock price may be volatile so you may not be able to resell your shares of our common stock at or above the price you paid for them.

 

Announcements of developments related to our business, announcements by competitors, quarterly fluctuations in our financial results, changes in the general conditions of the highly dynamic industry in which we compete or the national economies in which we do business, and other factors could cause the price of our common stock to fluctuate, perhaps substantially. For example, if we fail to achieve our near term financial guidance or longer term 2022 strategic goals announced at our analysts day in January 2019, or fail to show overall business growth and expansion, our stock price may significantly decline. In addition, in recent years, the stock market has experienced extreme price fluctuations, which have often been unrelated to the operating performance of affected companies. These factors and fluctuations could have a material adverse effect on the market price of our common stock.

 

23

 

ITEM 1B.

UNRESOLVED STAFF COMMENTS

 

None.

 

ITEM 2.

PROPERTIES

 

Our headquarters are located in Rockville, Maryland and we have principal offices in Herzliya, Israel, Sophia Antipolis, France and Dublin, Ireland.

 

We lease buildings for our executive offices, and engineering, sales, marketing, administrative and support operations and design centers. The following table summarizes information with respect to the principal facilities leased by us as of December 31, 2020:

 

Location

Term
(Years)

Expiration

Area
(Sq. Feet)

Principal Activities

Rockville, MD, U.S.

7

2028

9,913

Headquarters; research and development; administration

         

Herzliya, Israel (1)

5

2025

53,971

Research and development; administration; sales and marketing

         

Mountain View, CA, U.S.

8

2023

3,769

Sales and marketing; administration

         

Dublin, Ireland

10

2026

1,755

Research and development; administration

         

Cork, Ireland

5

2021

2,780

Research and development

         

Belfast, UK (2)

15

2034

2,600

Research and development

         

Bristol, UK (3)

10

2029

2,554

Research and development

         

Sophia Antipolis, France

12

2024

7,535

Research and development; administration; sales and marketing

         

Shanghai, China

3

2021

3,438

Sales and marketing

         

Tokyo, Japan

3

2022

1,713

Sales and marketing

 

 

(1)

Break clause in the lease exercisable in 2023.

 

(2)

Break clause in the lease exercisable upon payment of one year rent.

 

(3)

Break clause in the lease exercisable in 2024.

 

ITEM 3.

LEGAL PROCEEDINGS

 

From time to time, we are involved in litigation relating to claims arising out of our operations in the normal course of business. We are not a party to any legal proceedings, the adverse outcome of which, in management’s opinion, would have a material adverse effect on our results of operations or financial position

 

24

 

ITEM 4.

MINE SAFETY DISCLOSURES

 

Not applicable.

 

25

 

EXECUTIVE OFFICERS OF THE REGISTRANT

 

Below are the names, ages and principal recent business experience of our current executive officers. All such persons have been appointed by our board of directors to serve until their successors are elected and qualified or until their earlier resignation or removal.

 

Gideon Wertheizer, age 64, has served as our Chief Executive Officer since May 2005. He joined our board of directors in January 2010. Mr. Wertheizer has 37 years of experience in the semiconductor and Silicon Intellectual Property (SIP) industries. He previously served as the Executive Vice President and General Manager of the DSP business unit at CEVA. Prior to joining CEVA in November 2002, Mr. Wertheizer held various executive positions at DSP Group, Inc., including such roles as Executive VP - Strategic Business Development, Vice President for Marketing and Vice President of VLSI design. Mr. Wertheizer holds a BsC for electrical engineering from Ben Gurion University in Israel and executive MBA from Bradford University in the United Kingdom.

 

Yaniv Arieli, age 52, has served as our Chief Financial Officer since May 2005. Prior to his current position, Mr. Arieli served as President of U.S. Operations and Director of Investor Relations of DSP Group beginning in August 2002 and Vice President of Finance, Chief Financial Officer and Secretary of DSP Group’s DSP Cores Licensing Division prior to that time. Before joining DSP Group in 1997, Mr. Arieli served as an account manager and certified public accountant at Kesselman & Kesselman, a member of PricewaterhouseCoopers, a leading accounting firm. Mr. Arieli is a CPA and holds a B.A. in Accounting and Economics from Haifa University in Israel and an M.B.A. from Newport University and is also a member of the National Investor Relation Institute.

 

Issachar Ohana, age 55, has served as our Vice President, Worldwide Sales, since November 2002 and our Executive Vice President, Worldwide Sales, since July 2006. Prior to joining CEVA in November 2002, Mr. Ohana was with DSP Group beginning in August 1994 as a VLSI design engineer. He was appointed Project Manager of DSP Group’s research and development in July 1995, Director of Core Licensing in August 1998, and Vice President—Sales of the Core Licensing Division in May 2000. Mr. Ohana holds a B.Sc. in Electrical and Computer Engineering from Ben Gurion University in Israel and an MBA from Bradford University in the United Kingdom.

 

Michael Boukaya, age 46, has served as our Chief Operating Officer since April 2019. Prior to this position, Mr. Boukaya served as our Vice President and General Manager of the wireless business unit since 2014. Previously, Mr. Boukaya served as VP and Chief Architect with overall responsibility for the research and development of next generation DSP cores, wireless platform architectures and multimedia processors. Before joining CEVA, he was with DSP Group, Inc., holding different engineering and research and development management positions. Mr. Boukaya holds a B.Sc. in Electronic Engineering from the Technion Technology Institute, graduated from Executive Program of Stanford Graduate School of Business, and holds several patents on DSP technology.

 

26

 

PART II

 

ITEM 5.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Our common stock began trading on The NASDAQ Global Market on November 1, 2002. Our common stock currently trades under the ticker symbol “CEVA” on NASDAQ. As of February 20, 2021, there were approximately 560 holders of record, which we believe represents approximately 31,269 beneficial holders.

 

Equity Compensation Plan Information

 

Information as of December 31, 2020 regarding options, SARs, RSUs and PSUs granted under our stock plans and remaining available for issuance under those plans will be contained in the definitive 2021 Proxy Statement for the 2021 annual meeting of stockholders to be held on May 6, 2021 and incorporated herein by reference.

 

Issuer Purchases of Equity Securities

 

There were no repurchases of our common stock during the three months ended December 31, 2020.

 

2021 Annual Meeting of Stockholders

 

We anticipate that the 2021 annual meeting of our stockholders will be held on May 6, 2021.

 

Dividends

 

We have historically not paid dividends and have no foreseeable plans to pay dividends.

 

27

 

Stock Performance Graph

 

Notwithstanding anything to the contrary set forth in any of the Company’s previous or future filings under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, that might incorporate this proxy statement or future filings made by the Company under those statutes, the below Stock Performance Graph shall not be deemed filed with the United States Securities and Exchange Commission and shall not be deemed incorporated by reference into any of those prior filings or into any future filings made by the Company under those statutes.

 

grapha.jpg

 

   

    12/31/15

   

    12/31/16

   

    12/31/17

   

    12/31/18

   

    12/31/19

   

    12/31/20

 

CEVA, Inc.

    100.00       143.62       197.56       94.57       115.42       194.80  

NASDAQ Composite

    100.00       108.87       141.13       137.12       187.44       271.64  

S&P 500

    100.00       111.96       136.40       130.42       171.49       203.04  

 

The stock performance graph above compares the percentage change in cumulative stockholder return on the common stock of our company for the period from December 31, 2015, through December 31, 2020, with the cumulative total return on The NASDAQ Global Market (U.S.) Composite Index and the S&P 500 Index.

 

This graph assumes the investment of $100 in our common stock (at the closing price of our common stock on December 31, 2015), the NASDAQ Global Market (U.S.) Composite Index and the S&P 500 Index on December 31, 2015, and assumes dividends, if any, are reinvested.

 

Comparisons in the graph above are based upon historical data and are not indicative of, nor intended to forecast, future performance of our common stock.

 

28

 

ITEM 6.

SELECTED FINANCIAL DATA

 

The following selected financial data should be read in conjunction with, and are qualified by reference to, our consolidated financial statements and the related notes, as well as our “Management’s Discussion and Analysis of Financial Condition and Results of Operations for the fiscal year ended December 31, 2020,” both appearing elsewhere in this annual report.

 

   

2016

   

2017

   

2018

   

2019

   

2020

 
   

(in thousands)

 

Consolidated Statements of Income Data:

                                       

Revenues:

                                       

Licensing and related revenue

  $ 31,874     $ 42,899     $ 40,446     $ 47,890     $ 52,513  

Royalties

    40,779       44,608       37,431       39,262       47,813  

Total revenues

    72,653       87,507       77,877       87,152       100,326  

Cost of revenues

    6,086       6,953       7,951       10,106       10,749  

Gross profit

    66,567       80,554       69,926       77,046       89,577  

Operating expenses:

                                       

Research and development, net

    30,838       40,385       47,755       52,843       62,010  

Sales and marketing

    11,540       12,572       12,161       12,363       11,907  

General and administrative

    8,567       10,488       10,354       11,841       14,116  

Amortization of intangible assets

    1,236       1,236       901       1,923       2,307  

Total operating expenses

    52,181       64,681       71,171       78,970       90,340  

Operating income (loss)

    14,386       15,873       (1,245 )     (1,924 )     (763 )

Financial income, net

    2,039       3,026       3,418       3,291       3,284  

Revaluation of investment in non-marketable equity securities

                (870 )            

Income before taxes on income

    16,425       18,899       1,303       1,367       2,521  

Taxes on income

    3,325       1,871       729       1,339       4,900  

Net income (loss)

  $ 13,100     $ 17,028     $ 574     $ 28     $ (2,379 )

Basic net income (loss) per share

  $ 0.63     $ 0.78     $ 0.03     $ 0.00     $ (0.11 )

Diluted net income (loss) per share

  $ 0.61     $ 0.75     $ 0.03     $ 0.00     $ (0.11 )

 

 

   

2016

   

2017

   

2018

   

2019

   

2020

 
   

(in thousands)

 

Consolidated Balance Sheet Data:

                                       

Working capital

  $ 122,117     $ 136,281     $ 155,536     $ 152,174     $ 139,379  

Total assets

    242,495       276,812       277,263       297,021       306,952  

Total long-term liabilities

    8,349       9,347       9,632       19,486       17,883  

Total stockholders’ equity

  $ 211,551     $ 244,670     $ 245,879     $ 251,157     $ 260,889  

 

29

 

QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

 

   

Three months ended

 
   

March

31,

   

June

30,

   

September

30,

   

December

31,

   

March

31,

   

June

30,

   

September

30,

   

December

31,

 
   

2019

   

2020

 

Revenues:

                                                               

Licensing and related revenue

  $ 11,011     $ 10,804     $ 11,269     $ 14,806     $ 14,495     $ 13,530     $ 12,420     $ 12,068  

Royalties

    5,958       7,596       12,202       13,506       9,120       10,076       12,540       16,077  

Total revenues

    16,969       18,400       23,471       28,312       23,615       23,606       24,960       28,145  

Cost of revenues

    2,023       2,493       2,767       2,823       2,751       3,005       2,503       2,490  

Gross profit

    14,946       15,907       20,704       25,489       20,864       20,601       22,457       25,655  

Operating expenses:

                                                               

Research and development, net

    12,330       12,390       13,873       14,250       15,113       14,979       15,603       16,315  

Sales and marketing

    3,021       2,956       2,832       3,554       3,168       2,893       2,711       3,135  

General and administrative

    2,317       2,534       3,509       3,481       3,664       3,663       3,566       3,223  

Amortization of intangible assets

    210       210       757       746       582       575       575       575  

Total operating expenses

    17,878       18,090       20,971       22,031       22,527       22,110       22,455       23,248  

Operating income (loss)

    (2,932 )     (2,183 )     (267 )     3,458       (1,663 )     (1,509 )     2       2,407  

Financial income, net

    800       896       603       992       831       838       1,020       595  

Income (loss) before taxes on income

    (2,132 )     (1,287 )     336       4,450       (832 )     (671 )     1,022       3,002  

Taxes on income (tax benefit)

    165       225       (439 )     1,388       353       419       1,761       2,367  

Net income (loss)

  $ (2,297 )   $ (1,512 )   $ 775     $ 3,062     $ (1,185 )   $ (1,090 )   $ (739 )   $ 635  
                                                                 

Basic net income (loss) per share

  $ (0.10 )   $ (0.07 )   $ 0.04     $ 0.14     $ (0.05 )   $ (0.05 )   $ (0.03 )   $ 0.03  

Diluted net income (loss) per share

  $ (0.10 )   $ (0.07 )   $ 0.03     $ 0.14     $ (0.05 )   $ (0.05 )   $ (0.03 )   $ 0.03  

Weighted average shares used to compute net income (loss) per share (in thousands):

                                                               

Basic

    21,917       21,936       21,953       21,920       21,994       22,017       22,163       22,249  

Diluted

    21,917       21,936       22,404       22,373       21,994       22,017       22,163       22,911  

 

30

 

ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

You should read the following discussion together with the consolidated financial statements and related notes appearing elsewhere in this annual report. This discussion contains forward-looking statements that involve risks and uncertainties. Actual results may differ materially from those included in such forward-looking statements. Factors that could cause actual results to differ materially include those set forth under “Risk Factors,” as well as those otherwise discussed in this section and elsewhere in this annual report. See “Forward-Looking Statements and Industry Data.”

 

BUSINESS OVERVIEW

 

The following discussion and analysis is intended to provide an investor with a narrative of our financial results and an evaluation of our financial condition and results of operations. The discussion should be read in conjunction with our consolidated financial statements and notes thereto for the year ended December 31, 2020, both appearing elsewhere in this annual report.

 

Headquartered in Rockville, Maryland, CEVA is the leading licensor of wireless connectivity and smart sensing technologies. We offer Digital Signal Processors, AI processors, wireless platforms and complementary software for sensor fusion, image enhancement, computer vision, voice input and artificial intelligence, all of which are key enabling technologies for a smarter, more connected world. These IP products are licensed to customers who embed them into their system-on-chip (SoC) and microcontroller designs to create power-efficient, intelligent and connected devices. Our customers include many of the world’s leading semiconductor and original equipment manufacturer (OEM) companies targeting a wide variety of IoT end markets, including mobile, PC, consumer, automotive, robotics, industrial and medical.

 

Our ultra-low-power IPs are enabled by our own DSPs and controllers and are deployed in devices for smart sensing and connectivity workloads. Our smart sensing portfolio includes advanced technologies for cameras, microphones, sensor hubs and inertial measurement units (IMU). Our camera platforms incorporate DSP cores, coprocessors and software technologies for AI, computer vision and imaging. Our microphone technologies incorporate DSP cores and software technologies for noise cancellation, echo cancellation and voice recognition. Our sensor hub DSPs serve as a hub for AI and DSP processing workloads associated with a wide range of sensors including camera, Radar, LiDAR, Time-of-Flight, microphones and inertial measurement units (IMUs). Our IMU technologies include processor agnostic software supporting sensor processing of accelerometers, gyroscopes, magnetometers, optical flow, as well as environmental sensors in devices. Our connectivity portfolio includes LTE and 5G mobile broadband platforms for handsets and base station RAN, NB-IoT for low bit rate cellular and Bluetooth and Wi-Fi technologies for wireless IoT.

 

CEVA is a sustainable and environmentally conscious company, adhering to our Code of Business Conduct and Ethics. As such, we emphasize and focus on environmental preservation, recycling, the welfare of our employees and privacy – which we promote on a corporate level. At CEVA, we are committed to social responsibility, values of preservation and consciousness towards these purposes.

 

We believe that our licensing business is robust with a diverse customer base and a myriad of target markets. Our state-of-the-art technology has shipped in more than 12 billion chips to date for a wide range of end markets. Every second, more than forty devices sold worldwide are powered by CEVA.

 

We believe the adoption of our wireless connectivity and smart sensing products beyond our incumbency in the handset baseband market continues to progress. Reflecting this trend, during 2020, we concluded fifty-five licensing deals, the majority of which were for these applications. We continue to experience strong demand for our products and expand our market reach into new areas. In the fourth quarter, we signed twenty-one licensing agreements, including a strategic agreement for our connectivity technologies with a tier 1 smartphone OEM. We also concluded agreements broadly across our connectivity and sensing products, illustrating the industry demand for our diverse IP portfolio.

 

We believe the following key elements represent significant growth drivers for the company:

 

 

CEVA is an incumbent player in the largest space of the semiconductor industry – mobile handsets. Our customers use our technologies for baseband and voice processing. Our key customers currently have a strong foothold in low-tier LTE smartphones and feature phones markets which continue to experience strong momentum.

 

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The royalty we derive from premium-tier smartphones is higher on average than that of mid and low-tier smartphones due to more DSP content that bears a higher royalty average selling price (“ASP”). Looking ahead, we believe our PentaG platform for 5G handsets and 5G IoT endpoints is the most comprehensive baseband processor IP in the industry today and provides newcomers and incumbents with a low entry barrier solution to address the need for power 5G processing for smartphones, fixed wireless and a range of connected devices such as robots, cars, smart cities and other devices for industrial applications.

 

 

Our specialization and technological edge in signal processing platforms for 5G base station RAN, including Remote Radio Units (RRU), Active Antenna Units (AAU), Base Band Units (BBU) and Distributed Units (DU) put us in a strong position to capitalize on the growing 5G RAN across its new form factors such as V-RAN, C-RAN and O-RAN, as well as small cells and private networks.

 

 

Our broad Bluetooth, Wi-Fi and NB-IoT IPs allow us to expand further into the high volume IoT applications and substantially increase our value-add. Our addressable market size for Bluetooth, Wi-Fi and NB-IoT is expected to be more than 9 billion devices annually by 2022 based on ABI Research and Ericsson Mobility Reports.

 

 

The growing market potential for voice assisted devices, as voice is becoming a primary user interface for IoT applications, including handsets, smart speaker, True Wireless Stereo (TWS) earbuds, AR &VR headsets, smartTVs, smart home and consumer devices, offers an additional growth segment for us. To better address this market, our WhisPro speech recognition technology and ClearVox voice input software are offered in conjunction with our audio/voice DSPs. These highly-integrated platforms, plus our proven track record in audio/voice processing and connectivity with more than 7 billion audio chips shipped to date, put us in a strong position to power audio and voice roadmaps across this new range of addressable end markets.

 

 

Our second generation SensPro2 sensor hub DSP family provides highly compelling offerings for any sensor-enabled device and application such as smartphones, automotive safety (ADAS), autonomous driving (AD), drones, robotics, security and surveillance, augmented reality (AR) and virtual reality (VR), Natural Language Processing (NLP) and voice recognition. Per research from Yole Développement, camera-enabled devices incorporating computer vision and AI are expected to exceed 1 billion units, and devices incorporating voice AI are expected to reach 620 million units by 2022. This new DSP architecture enables us to address the transformation in devices enabled by these applications, and expand our footprint and content in smartphones, drones, consumer cameras, surveillance, automotive ADAS, voice-enabled devices and industrial IoT applications. We signed our first customers in 2020 for this new processor family, which are targeting automotive applications.

 

 

Neural networks are increasingly being deployed in a wide range of camera-based devices in order to make these devices “smarter.” To address this significant and lucrative opportunity, our NeuPro-S™ a second-generation family of AI processors for deep learning at the edge, brings the power of deep learning to the device, without relying on connectivity to the cloud. We believe this market opportunity for AI at the edge is on top of our existing product lines and represents new licensing and royalty drivers for the company in the coming years.

 

 

Our Hillcrest Labs sensor fusion business unit allows us to address an important technology for smart sensing, in addition to our existing portfolio for camera-based computer vision and AI processing, and microphone-based sound processing. MEMS-based inertial and environmental sensors are used in an increasing number of devices, including robotics, smartphones, laptops, tablets, TWS earbuds, headsets, remote controls and many other consumer and industrial devices. Hillcrest Labs’ innovative and proven MotionEngine™ software supports a broad range of merchant sensor chips and is licensed to OEMs and semiconductor companies that can run the software on CEVA DSPs or a variety of RISC CPUs. The MotionEngine software expands and complements CEVA’s smart sensing technology. Hillcrest Labs’ technology has already shipped in more than 150 million devices, indicative of its market traction and excellence. Along with our SensPro sensor fusion processors, our licensees can now benefit from our capabilities as a complete, one-stop-shop for processing all classes and types of sensors.

 

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As a result of our diversification strategy beyond baseband for handsets, and our progress in addressing those new markets under the base station and IoT umbrella, we experienced significant growth in royalty revenues derived from base station and IoT product category (formerly referred to as non-handset products), up by 72% in 2020 to $22.3 million, generated from a record 750 million royalty-bearing devices. We expect royalty growth to continue in this product category for the next few years. These devices are comprised of a range of different products at different royalty ASPs, spanning from high volume Bluetooth to high value sensor fusion and base station RAN. The royalty ASP of our other products will be in between the two ranges.

 

COVID-19

 

Throughout the COVID-19 outbreak, we have continued our operations while taking a number of precautionary health and safety measures to safeguard our employees at the same time as maintaining business continuity.  We have also provided training courses for working and managing from home, lectures and remote well-being activities to keep moral and motivation high, and communication meetings and business updates from time to time. We are monitoring and assessing orders issued by applicable governments to ensure compliance with evolving COVID-19 guidelines.

 

Despite the ongoing pandemic, we are encouraged by the persistent design activities of our customers and interests in our products. We are focused on continuing to expand our business to capitalize on the momentum we gained last year. We are further encouraged by recent indicators relating to our base station and IoT product category. During 2020, the world encountered new trends and different seasonality than what we have experienced in prior years. Some consumer electronics products sold well and some new technologies were widely adopted due to social distancing and other restrictions. Nonetheless, prolonged measures to contain the spread of coronavirus pose uncertainty for economic activities. In particular, in emerging markets where our primary exposure is in low tier handsets, COVID-19 has had a negative impact. While the impact from COVID-19 on our financial results for the year ended December 31, 2020 was not material as set forth in the below section discussing the results of operations, we are currently unable to determine or predict the nature, duration or scope of the overall impact the pandemic will have on our business, results of operations, liquidity or capital resources for the year 2021. For example, as of the date of this filing, while we see positive activity in our licensing and pipeline of deals, customers in the semiconductor space from whom we collect royalties are experiencing more pressure on their operations due to, among other reasons, longer manufacturing lead times as a result of COVID-19 related disruptions.  We will continue to closely monitor the effects of the ongoing pandemic on our operations, employees and customers.

 

CRITICAL ACCOUNTING POLICIES, ESTIMATES AND ASSUMPTIONS

 

Our consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States (U.S. GAAP). These accounting principles require us to make certain estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions upon which we rely are reasonable based upon information available to us at the time that these estimates, judgments and assumptions are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements, as well as the reported amounts of revenues and expenses during the periods presented. To the extent there are material differences between these estimates, judgments or assumptions and actual results, our financial statements will be affected. The significant accounting policies that we believe are the most critical to aid in fully understanding and evaluating our reported financial results include the following:

 

 

revenue recognition;

 

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business combinations and valuation of goodwill and other acquired intangible assets;

 

 

income taxes;

 

 

equity-based compensation; and

 

 

impairment of marketable securities.

 

In many cases, the accounting treatment of a particular transaction is specifically dictated by U.S. GAAP and does not require management’s judgment in its application. There are also areas in which management’s judgment in selecting among available alternatives would not produce a materially different result.

 

Revenue Recognition

 

Significant management judgments and estimates must be made and used in connection with the recognition of revenue in any accounting period. Material differences in the amount of revenue in any given period may result if these judgments or estimates prove to be incorrect or if management’s estimates change on the basis of development of business or market conditions. Management’s judgments and estimates have been applied consistently and have been reliable historically.

 

Effective as of January 1, 2018, we have followed the provisions of Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”). The guidance provides a unified model to determine how revenue is recognized. See Note 2 to our Consolidated Financial Statements for the year ended December 31, 2020 for further information regarding revenue recognition.

 

The following is a description of principal activities from which we generate revenue. Revenues are recognized when control of the promised goods or services are transferred to the customers in an amount that reflects the consideration that we expect to receive in exchange for those goods or services.

 

We determine revenue recognition through the following steps:

 

 

identification of the contract with a customer;

 

 

identification of the performance obligations in the contract;

 

 

determination of the transaction price;

 

 

allocation of the transaction price to the performance obligations in the contract; and

 

 

recognition of revenue when, or as, we satisfy a performance obligation.

 

We enter into contracts that can include various combinations of products and services, as detailed below, which are generally capable of being distinct and accounted for as separate performance obligations.

 

We generate our revenues from (1) licensing intellectual properties, which in certain circumstances are modified for customer-specific requirements, (2) royalty revenues and (3) other revenues, which include revenues from support, training and sale of development systems and chips. We license our IP to semiconductor companies throughout the world. These semiconductor companies then manufacture, market and sell custom-designed chipsets to OEMs of a variety of consumer electronics products. We also license our technology directly to OEMs, which are considered end users.

 

We account for our IP license revenues and related services, which provide our customers with rights to use our IP, in accordance with ASC 606. A license may be perpetual or time limited in its application. In accordance with ASC 606, we recognize revenue from IP license at the time of delivery when the customer accepts control of the IP, as the IP is functional without professional services, updates and technical support. We have concluded that our IP license is distinct as the customer can benefit from the software on its own.

 

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Most of our contracts with customers contain multiple performance obligations. For these contracts, we account for individual performance obligations separately, if they are distinct. The transaction price is allocated to the separate performance obligations on a relative standalone selling price basis. Stand-alone selling prices of IP license are typically estimated using the residual approach. Stand-alone selling prices of services are typically estimated based on observable transactions when these services are sold on a standalone basis.

 

When contracts involve a significant financing component, we adjust the promised amount of consideration for the effects of the time value of money if the timing of payments agreed to by the parties to the contract (either explicitly or implicitly) provide the customer with a significant benefit of financing, unless the financing period is under one year and only after the products or services were provided, which is a practical expediency permitted under ASC 606.

 

Revenues from contracts that involve significant customization of our IP to customer-specific specifications are performance obligations we generally account for as performance obligations satisfied over time. Our performance does not create an asset with alternative use, and we have an enforceable right to payment. We recognize revenue on such contracts using cost based input methods, which recognize revenue and gross profit as work is performed based on a ratio between actual costs incurred compared to the total estimated costs for the contract. Provisions for estimated losses on uncompleted contracts are made during the period in which such losses are first determined, in the amount of the estimated loss on the entire contract.

 

Revenues that are derived from the sale of a licensee’s products that incorporate our IP are classified as royalty revenues. Royalty revenues are recognized during the quarter in which the sale of the product incorporating our IP occurs. Royalties are calculated either as a percentage of the revenues received by our licensees on sales of products incorporating our IP or on a per unit basis, as specified in the agreements with the licensees. We receive the actual sales data from our customers after the quarter ends and accounts for it as unbilled receivables. When we do not receive actual sales data from the customer prior to the finalization of its financial statements, royalty revenues are recognized based on our estimation of the customer’s sales during the quarter. We may engage a third party to perform royalty audits of our licensees, and if these audits indicate any over- or under-reported royalties, we account for the results when the audits are resolved.

 

In addition to license fees, contracts with customers generally contain an agreement to provide for training and post contract support, which consists of telephone or e-mail support, correction of errors (bug fixing) and unspecified updates and upgrades. Fees for post contract support, which takes place after delivery to the customer, are specified in the contract and are generally mandatory for the first year. After the mandatory period, the customer may extend the support agreement on similar terms on an annual basis. We consider the post contract support performance obligation as a distinct performance obligation that is satisfied over time, and as such, we recognize revenue for post contract support on a straight-line basis over the period for which technical support is contractually agreed to be provided to the licensee, typically 12 months. Training services are considered performance obligations satisfied over-time, and as such, revenues from training services are recognized as the training is performed.

 

Revenues from the sale of development systems and chips are recognized when control of the promised goods or services are transferred to the customers.

 

We capitalize sales commission as costs of obtaining a contract when they are incremental and, if they are expected to be recovered, amortized in a manner consistent with the pattern of transfer of the good or service to which the asset relates. If the expected amortization period is one year or less, the commission fee is expensed when incurred.

 

Business Combinations and Valuation of Goodwill and Other Acquired Intangible Assets

 

We allocate the fair value of purchase price consideration to the tangible assets acquired, liabilities assumed and intangible assets acquired based on their estimated fair values. The excess of the fair value of purchase price consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. Such valuations require management to make significant estimates and assumptions, especially with respect to intangible assets. Significant estimates in valuing certain intangible assets include, but are not limited to, future expected cash flows from acquired customers, acquired technology, and trade names from a market participant perspective, useful lives, and discount rates. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates.

 

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We review goodwill for impairment at least annually or more frequently if events or changes in circumstances indicate that the carrying value of goodwill may not be recoverable in accordance with ASC 350 “Intangibles – Goodwill and other” (“ASC 350”). ASC 350 allows an entity to first assess qualitative factors to determine whether it is necessary to perform the quantitative goodwill impairment test. If the qualitative assessment does not result in a more likely than not indication of impairment, no further impairment testing is required. If an entity elects not to use this option, or if an entity determines that it is more likely than not that the fair value of a reporting unit is less than its carrying value, then the entity prepares a quantitative analysis to determine whether the carrying value of a reporting unit exceeds its estimated fair value. If the carrying value of a reporting unit exceeds its estimated fair value, the entity recognizes an impairment of goodwill for the amount of this excess, in accordance with the guidance in FASB Accounting Standards Update ("ASU") No. 2017-04, Intangibles - Goodwill and Other (Topic 350), Simplifying the Test for Goodwill Impairment. For each of the three years for the period ended December 31, 2020, no impairment of goodwill has been identified.

 

Acquired finite-lived intangible assets are amortized over their estimated useful lives. We evaluate the recoverability of our intangible assets for possible impairment whenever events or circumstances indicate that the carrying amount of such assets may not be recoverable. Recoverability of these assets is measured by a comparison of the carrying amounts to the future undiscounted cash flows the assets are expected to generate. If such assets are considered to be impaired, the impairment to be recognized equals the amount by which the carrying value of the assets exceeds its fair market value. We have not recorded any such impairment charge during the years presented.

 

In addition to the recoverability assessment, we routinely review the remaining estimated useful lives of our finite-lived intangible assets. If we reduce the estimated useful life assumption for any asset, the remaining unamortized balance would be amortized over the revised estimated useful life.

 

Income Taxes

 

We are subject to income taxes mainly in Israel, France, the U.S. and Ireland. Significant judgment is required in evaluating our uncertain tax positions and determining our provision for income taxes. We recognize income taxes under the liability method. Tax benefits are recognized from uncertain tax positions only if we believe that it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. Although we believe we have adequately reserved for our uncertain tax positions, no assurance can be given that the final tax outcome of these matters will not be different. We adjust these reserves when facts and circumstances change, such as the closing of a tax audit, the refinement of an estimate or changes in tax laws. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will impact the provision for income taxes in the period in which such determination is made. The provision for income taxes includes the effects of any reserves that are considered appropriate, as well as the related net interest and penalties.

 

We recognize deferred tax assets and liabilities for future tax consequences arising from differences between the carrying amounts of existing assets and liabilities under GAAP and their respective tax bases, and for net operating loss carryforwards and tax credit carryforwards. We regularly review our deferred tax assets for recoverability and record a valuation allowance if it is more likely than not that some portion or all of the deferred tax assets will not be realized. To make this judgment, we make predictions of the amounts and category of taxable income from various sources and weigh all available positive and negative evidence about these possible sources of taxable income.

 

Accounting for tax positions requires judgments, including estimating reserves for potential uncertainties. We also assess our ability to utilize tax attributes, including those in the form of carry-forwards for which the benefits have already been reflected in the financial statements. While we believe the resulting tax balances as of December 31, 2019 and 2020 are appropriately accounted for, the ultimate outcome of such matters could result in favorable or unfavorable adjustments to our consolidated financial statements and such adjustments could be material. See Note 14 to our Consolidated Financial Statements for the year ended December 31, 2020 for further information regarding income taxes. We have filed or are in the process of filing local and foreign tax returns that are subject to audit by the respective tax authorities. The amount of income tax we pay is subject to ongoing audits by the tax authorities, which often result in proposed assessments. We believe that we adequately provided for any reasonably foreseeable outcomes related to tax audits and settlement. However, our future results may include favorable or unfavorable adjustments to our estimated tax liabilities in the period the assessments are made or resolved, audits are closed or when statute of limitations on potential assessments expire.

 

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We are subject to taxation in the United States, as well as a number of foreign jurisdictions.  In December 2017, the United States enacted U.S. tax reform. The legislation implements many new U.S. domestic and international tax provisions. Some aspects of U.S. tax reform still remain unclear, and although additional clarifying guidance has been issued (by the Internal Revenue Services, and the U.S. Treasury Department), there are still some areas that may not be clarified for some time. Also, many of U.S. states have not yet updated their laws to take into account the new federal legislation. As a result, there may be further impact of the new laws on our future results of operations and financial condition. It is possible that U.S. tax reform, or interpretations under it, could change and could have an adverse effect on us, and such effect could be material.

 

We have elected to account for global intangible low-taxed income (“GILTI”) as a current-period expense when incurred. Legislation and clarifying guidance are expected to continue to be issued by the U.S. Treasury Department and various states in 2021, which could have a material adverse impact on the value of our U.S. deferred tax assets, result in significant changes to currently computed income tax liabilities for past and current tax periods, and increase our future U.S. tax expense.

 

Equity-Based Compensation

 

We account for equity-based compensation in accordance with FASB ASC No. 718, “Stock Compensation” which requires the recognition of compensation expenses based on estimated fair values for all equity-based awards made to employees and non-employee directors. Equity-based compensation primarily includes restricted stock unit (“RSUs”), as well as options, stock appreciation right (“SAR”), performance-based stock units (“PSUs”) and employee stock purchase plan awards.

 

We elect the straight-line recognition method for awards subject to graded vesting based only on a service condition and the accelerated method for awards that are subject to performance or market. The fair value of each RSU and PSU (excluding PSUs based on market condition awards) is the market value as determined by the closing price of the common stock on the grant date. We estimate the fair value of PSU based on market condition awards on the date of grant using the Monte Carlo simulation model.

 

Impairment of Marketable Securities

 

Marketable securities consist mainly of corporate bonds. We determine the appropriate classification of marketable securities at the time of purchase and re-evaluate such designation at each balance sheet date. In accordance with FASB ASC No. 320, “Investments Debt and Equity Securities,” we classify marketable securities as available-for-sale. Available-for-sale securities are stated at fair value, with unrealized gains and losses reported in accumulated other comprehensive income (loss), a separate component of stockholders’ equity, net of taxes. Realized gains and losses on sales of marketable securities, as determined on a specific identification basis, are included in financial income, net. The amortized cost of marketable securities is adjusted for amortization of premium and accretion of discount to maturity, both of which, together with interest, are included in financial income, net. We have classified all marketable securities as short-term, even though the stated maturity date may be one year or more beyond the current balance sheet date, because it is probable that we will sell these securities prior to maturity to meet liquidity needs or as part of risk versus reward objectives.

 

Starting on January 1, 2020, as a result of the adoption of ASC 326, available-for-sale debt securities with an amortized cost basis in excess of estimated fair value are assessed to determine what amount of that difference, if any, is caused by expected credit losses. Expected credit losses on available-for-sale debt securities are recognized in financial income, net, on our consolidated statements of income (loss), and any remaining unrealized losses, net of taxes, are included in accumulated other comprehensive income (loss) in stockholders' equity. The amount of credit losses recorded for the twelve months ended December 31, 2020 was not material. We have not recorded any impairment charge for unrealized losses during the period presented. We determine realized gains or losses on sale of marketable securities using a specific identification method, and records such gains or losses as interest and other income (expense), net.

 

Prior to 2020, we recognized an impairment charge when a decline in the fair value of our investments in debt securities below the cost basis of such securities was considered to be other-than-temporary. The determination of credit losses requires significant judgment and actual results may be materially different from our estimates. Factors considered in making such a determination include the duration and severity of the impairment, the reason for the decline in value and the potential recovery period. For securities that were deemed other-than-temporarily impaired, the amount of impairment was recognized in the statement of income (loss) and was limited to the amount related to credit losses, while impairment related to other factors was recognized in other comprehensive income (loss).

 

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During the years ended December 31, 2018, 2019 and 2020, no other-than temporary impairment were recorded related to our marketable securities.

 

Recently Adopted Accounting Pronouncement

 

On January 1, 2020, we adopted Accounting Standards Update (“ASU”) No. 2016-13, “Financial Instruments – Credit Losses on Financial Instruments” (“ASU 2016-13”), which requires that expected credit losses relating to financial assets be measured on an amortized cost basis and available-for-sale debt securities be recorded through an allowance for credit losses. ASU 2016-13 limits the amount of credit losses to be recognized for available-for-sale debt securities to the amount by which carrying value exceeds fair value and also requires the reversal of previously recognized credit losses if fair value increases. The adoption did not have a material impact on our consolidated financial statements.

 

In January 2017, the FASB issued ASU No. 2017-04, “Intangibles: Goodwill and Other: Simplifying the Test for Goodwill Impairment.” To simplify the subsequent measurement of goodwill, the amendments eliminate Step 2 from the goodwill impairment test. The annual, or interim, goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. In addition, the income tax effects of tax deductible goodwill on the carrying amount of the reporting unit should be considered when measuring the goodwill impairment loss, if applicable. The amendments also eliminate the requirements for any reporting unit with a zero or negative carrying amount to perform Step 2 of the goodwill impairment test. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the qualitative impairment test is necessary. The amendments should be applied on a prospective basis. The nature of and reason for the change in accounting principle should be disclosed upon transition. We adopted ASU 2017-04 as of January 1, 2020. The adoption of the new guidance did not have a material impact on our consolidated financial statements.

 

Recently Issued Accounting Pronouncement

 

In December 2019, the FASB issued Accounting Standard Update No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (ASU 2019-12), which simplifies the accounting for income taxes. ASU 2019-12 is effective for annual reporting periods, and interim periods within those years, beginning after December 15, 2020. We are currently evaluating the impact of the new guidance on our consolidated financial statements.

 

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RESULTS OF OPERATIONS

 

The following table presents line items from our consolidated statements of income (loss) as percentages of our total revenues for the periods indicated:

 

   

2018

   

2019

   

2020

 

Consolidated Statements of Income (Loss) Data:

                       

Revenues:

                       

Licensing and related revenue

    51.9 %     54.9 %     52.3 %

Royalties

    48.1 %     45.1 %     47.7 %

Total revenues

    100.0 %     100.0 %     100.0 %

Cost of revenues

    10.2 %     11.6 %     10.7 %

Gross profit

    89.8 %     88.4 %     89.3 %

Operating expenses:

                       

Research and development, net

    61.3 %     60.6 %     61.8 %

Sales and marketing

    15.6 %     14.2 %     11.9 %

General and administrative

    13.3 %     13.6 %     14.1 %

Amortization of intangible assets

    1.2 %     2.2 %     2.3 %

Total operating expenses

    91.4 %     90.6 %     90.1 %

Operating loss

    (1.6 )%     (2.2 )%     (0.8 )%

Financial income, net

    4.4 %     3.8 %     3.3 %

Revaluation of investment in non-marketable equity securities

    (1.1 )%            

Income before taxes on income

    1.7 %     1.6 %     2.5 %

Taxes on income

    1.0 %     1.5 %     4.9 %

Net income (loss)

    0.7 %     0.1 %     (2.4 )%

 

Discussion and Analysis

 

Below we provide information on the significant line items in our consolidated statements of income (loss) for each of the past three fiscal years, including the percentage changes year-on-year, as well as an analysis of the principal drivers of change in these line items from year-to-year.

 

Revenues

 

Total Revenues

 

   

2018

   

2019

   

2020

 

Total revenues (in millions)

  $ 77.9     $ 87.2     $ 100.3  

Change year-on-year

          11.9 %     15.1 %

 

We derive a significant amount of revenues from a limited number of customers. Sales to Spreadtrum represented 14%, 15% and 15% of our total revenues for 2020, 2019 and 2018, respectively. Sales to Intel represented 15%, 19% and 19% of our total revenues for 2020, 2019 and 2018, respectively. Generally, the identity of our other customers representing 10% or more of our total revenues varies from period to period, especially with respect to our licensing customers as we generate licensing revenues generally from new customers on a quarterly basis.  With respect to our royalty revenues, four royalty paying customers each represented 10% or more of our total royalty revenues for 2020, and collectively represented 72% of our total royalty revenues for 2020. Three royalty paying customers each represented 10% or more of our total royalty revenues for 2019, and collectively represented 73% of our total royalty revenues for 2019. Three royalty paying customers each represented 10% or more of our total royalty revenues for 2018, and collectively represented 76% of our total royalty revenues for 2018. We expect that a significant portion of our future revenues will continue to be generated by a limited number of customers. The concentration of our customers is explainable in part by consolidation in the semiconductor industry. The loss of any significant customer could adversely affect our near-term future operating results.

 

The following table sets forth the products and services as percentages of our total revenues in each of the periods set forth below:

 

   

Year ended December 31,

 
   

2018

   

2019

   

2020

 
                         

Connectivity products (baseband for handset and other devices, Bluetooth, Wi-Fi, NB-IoT, and SATA/SAS)

    84 %     81 %     78 %

Smart sensing products (AI, sensor fusion, audio/sound and imaging and vision)

    16 %     19 %     22 %

 

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We expect to continue to generate a significant portion of our revenues for 2020 from the above products and services.

 

Licensing and related revenue

 

   

2018

   

2019

   

2020

 

Licensing and related revenue (in millions)

  $ 40.4     $ 47.9     $ 52.5  

Change year-on-year

          18.4 %     9.7 %

 

Total 2020 licensing and related revenue reached a new all-time record high, due to diversification of technologies, markets, new and recurring customers and overall sales execution. The increase in licensing and related revenues from 2019 to 2020 principally reflected an increase in Bluetooth and base station licensing deals, partially offset by decreased revenues from licensing of handset baseband and vision products. The increase in licensing and related revenues from 2018 to 2019 principally reflected an increase in vision and handset baseband licensing deals, partially offset by decreased revenues from licensing of Bluetooth products.

 

For 2021, we look to continue to be at the forefront of the digital transformation and capitalize on our core technologies and customer diversity to grow our market share and maximize our return from growing industries, in particular 5G RAN, Wi-Fi, TWS earbuds and automotive. These industries present multi-year growth opportunities for our connectivity, sensing and AI technologies, and we believe we are well positioned to take advantage of such growth.

 

Our licensing business hit another record high number of license agreements signed, reaching 55 agreements signed, of which 17 were first-time customers. The licensing environment continues to be healthy with strong demand for our product portfolio.

 

Licensing and related revenue accounted for 52.3% of our total revenues for 2020, compared with 54.9% and 51.9% of our total revenues for 2019 and 2018, respectively.

 

Royalty Revenues

 

   

2018

   

2019

   

2020

 

Royalty revenues (in millions)

  $ 37.4     $ 39.3     $ 47.8  

Change year-on-year

          4.9 %     21.8 %

 

We generate royalty revenues from our customers who ship units of chips incorporating our technologies. Our royalty revenues represent what our customers shipped during any quarter, or our best estimates for such shipments. The royalty rate is based either on a certain percent of the chipset price or a fixed amount per chipset based on volume discounts.

 

Based on internal data and Strategy Analytics’ provisional worldwide shipment data, CEVA’s worldwide market share of handset baseband chips that incorporate our technologies represented approximately 26%, 26% and 25% of the worldwide baseband volume in 2020, 2019 and 2018, respectively, and accounted for approximately 53%, 67% and 77% of our total royalty revenues for 2020, 2019 and 2018, respectively.

 

Our 2020 royalty revenue reached to a new record high. The main growth driver was attributed to base station and IoT product categories, which increased 72% in revenue comparing a year ago, reaching a new high of $22.3 million. We also believe that this growth trend will continue into 2021, although we cannot assess its magnitude and timing.

 

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Total shipments in 2020 increased 27% year-over-year to over 1.3 billion units, up from 1 billion in 2019. Total shipment volume in 2018 was 929 million. Annual shipments of base station & IoT customers reached a new record of 750 million units in 2020. 2019 non-handset baseband unit shipments were up 25% year-over-year to 469 million units.

 

The five largest royalty-paying customers accounted for 76% of our total royalty revenues for 2020, compared to 84% of our total royalty revenues for 2019 and 86% of our total royalty revenues for 2018.

 

Geographic Revenue Analysis

 

   

2018

   

2019

   

2020

 
                                                 
   

(in millions, except percentages)

 

United States

  $ 8.3       10.7 %   $ 16.6       19.0 %   $ 20.8       20.8 %

Europe, Middle East (EME) (3)

  $ 17.4       22.3 %   $ 21.5       24.7 %   $ 12.0       11.9 %

Asia Pacific (APAC) (1) (2)

  $ 52.2       67.0 %   $ 49.0       56.3 %   $ 67.5       67.3 %
                                                 
                                                 

(1) China

  $ 33.7       43.2 %   $ 33.2       38.1 %   $ 51.7       51.6 %

(2) S. Korea

  $ 8.0       10.3 %      *)        *)        *)        *)  

(3) Germany

  $ 13.9       17.8 %   $ 16.1       18.5 %      *)        *)  

 

*) Less than 10%

 

A majority of our revenues during the past three years have originated in the APAC region, with China representing the largest revenue share of countries in the APAC region. The increase in revenues in absolute dollars and percentage terms in APAC was due to strong licensing execution and higher royalties from our base station and IoT product lines. The decrease in revenues in absolute dollars and percentage in the APAC region from 2018 to 2019 was due to lower licensing revenues, partially offset by higher handset baseband royalties following a gradual recovery in the cellular industry, and strong contribution of non-handset baseband products, especially contribution from our new sensor fusion business.

 

The increase in revenues in absolute dollars and percentage terms in the United States from 2019 to 2020 reflected mainly higher royalties from one customer that moved its billing process from EME to the United States, which also explained the decrease in EME revenues in absolute dollars and percentage terms. The increase in revenues in absolute dollars and percentage terms in the United States from 2018 to 2019 reflected improved licensing and related revenues, reaching an all-time highs. The increase in revenues in absolute dollars and percentage in the EME region from 2018 to 2019 primarily reflected higher royalty revenues due to a share gain at a large U.S. handset OEM and customer shipment ramps in non-handset baseband products, offset by lower licensing revenues.

 

Cost of Revenues

 

   

2018

   

2019

   

2020

 

Cost of revenues (in millions)

  $ 8.0     $ 10.1     $ 10.7  

Change year-on-year

          27.1 %     6.4 %

 

Cost of revenues accounted for 10.7% of our total revenues for 2020, compared to 11.6% of our total revenues for 2019 and 10.2% of our total revenues for 2018. The absolute dollar increase in cost of revenues for 2020 as compared to 2019 principally reflected higher salaries and related costs (partially due to salary and related costs associated with the Hillcrest Labs employees being included in the results for the first half of 2020, which costs were not incurred for the first half of 2019), higher payments to the Israeli Innovation Authority of the Ministry of Economy and Industry in Israel (the “IIA”), higher materials related to the Hillcrest Labs business and higher amortization cost related to acquired assets (Immervision technologies), partially offset by lower customization work for our licensees, lower third-party IP costs associated with the NB-IoT product line and lesser travel due to COVID-19. The absolute dollar increase in cost of revenues for 2019 as compared to 2018 principally reflected higher customization work for our licensees, and higher salaries and related costs.

 

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Cost of revenues includes labor-related costs and, where applicable, costs related to overhead, subcontractors, materials, travel, royalty expenses payments to the IIA, amortization of acquired assets and non-cash equity-based compensation expenses. Non-cash equity-based compensation expenses included in cost of revenues for the years 2020, 2019 and 2018 were $639,000, $630,000 and $588,000, respectively. Royalty expenses relate to royalties payable to the IIA that amount to 3%-3.5% of the actual sales of certain of our products, the development of which previously included grants from the IIA. The obligation to pay these royalties is contingent on actual sales of these products. Amortization of acquired assets related to the purchase of a license of NB-IoT technologies in the first quarter of 2018 and to a strategic technology investment in Immervision in the third quarter of 2019. Our amortization charges were $0.7 million, $0.4 million and $0.3 million for 2020, 2019 and 2018, respectively.

 

We anticipate that our cost of revenues will increase in 2021 as compared to 2020 in the amount of approximately $0.5 million, due to more cost of chip sales for our Hillcrest Labs related business.

 

Operating Expenses

 

   

2018

   

2019

   

2020

 
   

(in millions)

 

Research and development, net

  $ 47.8     $ 52.8     $ 62.0  

Sales and marketing

  $ 12.2     $ 12.4     $ 11.9  

General and administration

  $ 10.3     $ 11.8     $ 14.1  

Amortization of intangible assets

  $ 0.9     $ 1.9     $ 2.3  
                         

Total operating expenses

  $ 71.2     $ 78.9     $ 90.3  

Change year-on-year

          11.0 %     14.4 %

 

The increase in total operating expenses for 2020 as compared to 2019 principally reflected (1) higher salary and employee-related costs, mainly due to higher headcount, and the inclusion of salary and related costs associated with the Hillcrest Labs employees for the first half of 2020, which costs were not incurred for the first half of 2019 as the acquisition of the Hillcrest Labs business was consummated in July 2019, (2) lower research grants received from the IIA, and (3) higher non-cash equity-based compensation expenses. The increase in total operating expenses for 2019 as compared to 2018 principally reflected (1) higher salary and employee-related costs, mainly due to higher headcount, and first time salary and related costs associated with the Hillcrest Labs employees, (2) higher professional services cost and a lease write-off related to the acquisition of the Hillcrest Labs business, (3) higher amortization of intangible assets associated with the acquisition of the Hillcrest Labs business and technology investment in Immervision during the third quarter of 2019, and (4) higher research and development project-related costs, partially offset by higher research grants received (mainly from the IIA).

 

Research and Development Expenses, Net

 

   

2018

   

2019

   

2020

 

Research and development expenses, net (in millions)

  $ 47.8     $ 52.8     $ 62.0  

Change year-on-year

          10.7 %     17.3 %

 

The net increase in research and development expenses for 2020 as compared to 2019 principally reflected (1) higher salary and employee-related costs, mainly due to higher headcount, and the inclusion of salary and related costs associated with the Hillcrest Labs employees for the first half of 2020, which costs were not incurred for the first half of 2019 as the acquisition of the Hillcrest Labs business was consummated in July 2019, (2) lower research grants received, mainly from the IIA, and (3) higher non-cash equity-based compensation expenses, partially offset by higher Crédit Impôt Recherche (“CIR”) granted. The net increase in research and development expenses for 2019 as compared to 2018 principally reflected (1) higher salary and employee-related costs, mainly due to higher headcount, and first time salary and related costs associated with the Hillcrest Labs employees, and (2) higher project related expenses, partially offset by higher research grants received, mainly from the IIA. The average number of research and development personnel in 2020 was 298, compared to 273 in 2019 and 238 in 2018. The number of research and development personnel was 304 at December 31, 2020 as compared to 289 in 2019 and 254 in 2018.

 

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We anticipate that our research and development expenses cost will continue to increase in 2021. The increase will be approximately $6 million, approximately half of which $3 million, is associated with the devaluation of the U.S. dollar compared to other currencies that we use, as well as additional disciplined investments in research and development projects.

 

Research and development expenses, net of related government grants and French research tax benefits applicable to CIR, were 61.8% of our total revenues for 2020, as compared with 60.6% for 2019 and 61.3% for 2018. We recorded research grants under funding programs of $2,844,000 in 2020, compared with $5,643,000 in 2019 and $3,352,000 in 2018. We recorded CIR benefits of $3,287,000, $2,312,000 and $2,065,000 for 2020, 2019 and 2018, respectively.

 

Research and development expenses consist primarily of salaries and associated costs, facilities expenses associated with research and development activities, project-related expenses connected with the development of our intellectual property which are expensed as incurred, and non-cash equity-based compensation expenses. Non-cash equity-based compensation expenses included in research and development expenses, net for the years 2020, 2019 and 2018 were $6,874,000, $5,857,000 and $5,141,000, respectively. Research and development expenses are net of related government research grants and research tax benefits applicable to CIR. We view research and development as a principal strategic investment and have continued our commitment to invest heavily in this area, which represents the largest of our ongoing operating expenses. We will need to continue to invest in research and development and such expenses may increase in the future to keep pace with new trends in our industry.

 

Sales and Marketing Expenses

 

   

2018

   

2019

   

2020

 

Sales and marketing expenses (in millions)

  $ 12.2     $ 12.4     $ 11.9  

Change year-on-year

          1.7 %     (3.7 )%

 

The decrease in sales and marketing expenses for 2020 as compared to 2019 principally reflected lesser travel and physical marketing activities and events (like trade shows), but more digital related activities at lesser costs, due to COVID-19, partially offset by higher non-cash equity-based compensation expenses. The slight increase in sales and marketing expenses for 2019 as compared to 2018 principally reflected higher commission expenses, offset by lower salary and employee related costs.

 

Sales and marketing expenses as a percentage of our total revenues were 11.9% for 2020, as compared with 14.2% for 2019 and 15.6% for 2018. The total number of sales and marketing personnel was 35 in 2020, as compared with 33 in 2019 and 32 in 2018. Sales and marketing expenses consist primarily of salaries, commissions, travel and other costs associated with sales and marketing activities, as well as advertising, trade show participation, public relations and other marketing costs and non-cash equity-based compensation expenses. Non-cash equity-based compensation expenses included in sales and marketing expenses for the years 2020, 2019 and 2018 were $2,038,000, $1,495,000 and $1,587,000, respectively.

 

General and Administrative Expenses

 

   

2018

   

2019

   

2020

 

General and administrative expenses (in millions)

  $ 10.3     $ 11.8     $ 14.1  

Change year-on-year

          14.4 %     19.2 %

 

The increase in general and administrative expenses for 2020 as compared to 2019 principally reflected higher allowance for credit losses and higher non-cash equity-based compensation expenses. The increase in general and administrative expenses for 2019 as compared to 2018 principally reflected higher professional services cost and a lease write-off related to the acquisition of the Hillcrest Labs business, as well as higher salaries and employee related costs.

 

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General and administrative expenses as a percentage of our total revenues were 14.1% for 2020, as compared with 13.6% for 2019 and 13.3% for 2018. The total number of general and administrative personnel was 34 in 2020, as compared with 32 in 2019 and 32 in 2018. General and administrative expenses consist primarily of fees for directors, salaries for management and administrative employees, accounting and legal fees, expenses related to investor relations and facilities expenses associated with general and administrative activities and non-cash equity-based compensation expenses. Non-cash equity-based compensation expenses included in general and administrative expenses for the years 2020, 2019 and 2018 were $4,085,000, $2,736,000 and $3,051,000, respectively.

 

Amortization of Intangible Assets

 

Our amortization charges were $2.3 million, $1.9 million and $0.9 million for 2020, 2019 and 2018 respectively. The charges in 2018 were incurred in connection with the amortization of intangible assets associated with the acquisition of RivieraWaves. The amortization charges in 2019 were incurred in connection with the amortization of intangible assets associated with (1) the acquisition of RivieraWaves in July 2014, which was fully amortized in 2019 (2) the acquisition of the Hillcrest Labs business in July 2019, and (3) a technology investment in Immervision in August 2019. The amortization charges in 2020 were incurred in connection with the amortization of intangible assets associated with (1) the acquisition of the Hillcrest Labs business, and (2) a technology investment in Immervision. As of December 31, 2020, the net amount of intangible assets associated with the acquisitions was $9.7 million.

 

Financial Income, net

 

   

2018

   

2019

   

2020

 
   

(in millions)

 

Financial income, net

  $ 3.42     $ 3.29     $ 3.28