0001173489 CEVA INC false --12-31 Q1 2021 300 300 0.001 0.001 5,000,000 5,000,000 0 0 0 0 0.001 0.001 45,000,000 45,000,000 23,595,160 23,595,160 22,811,090 22,260,917 784,070 1,334,243 0 1 4 0 3 1 2 2 0 Amount less than $1 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 March 31, 2021. 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 interim condensed consolidated statements of income (loss). Due to the ceiling imposed on the SAR grants, the outstanding amount equals a maximum of 131,581 shares of the Company’s common stock issuable upon exercise. 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. 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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 


 

FORM 10-Q

 

(Mark One)

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

 

 

For the quarterly period ended: March 31, 2021

 

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 Incorporation or Organization)

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

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

20850

(Address of Principal Executive Offices)

(Zip Code)

 

(240)-308-8328

(Registrants 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

 

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 definition of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one).

Large accelerated filer

 

 

Accelerated filer

 

    

 Non-accelerated filer

 

 

Smaller reporting company

 

       

Emerging growth company

 

    

 

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

 

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

Yes No ☒

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date: 22,813,421 of common stock, $0.001 par value, as of May 3, 2021.

 

 

 

 

TABLE OF CONTENTS

 

 

   

Page

PART I. 

FINANCIAL INFORMATION

 
Item 1.

Interim Condensed Consolidated Balance Sheets at March 31, 2021 (unaudited) and December 31, 2020

5

 

Interim Condensed Consolidated Statements of Loss (unaudited) for the three months ended March 31, 2021 and 2020   

6

 

Interim Condensed Consolidated Statements of Comprehensive Loss (unaudited) for the three months ended March 31, 2021 and 2020          

7

 

Interim Condensed Consolidated Statements of Changes In Stockholders’ Equity (unaudited) for the three months ended March 31, 2021 and 2020          

8

 

Interim Condensed Consolidated Statements of Cash Flows (unaudited) for the three months ended March 31, 2021 and 2020          

9

 

Notes to the Interim Condensed Consolidated Financial Statements          

10

Item 2.

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

23

Item 3.

Quantitative and Qualitative Disclosures about Market Risk          

30

Item 4.

Controls and Procedures       

31

PART II.

OTHER INFORMATION

 
Item 1.

Legal Proceedings         

31

Item 1A.

Risk Factors          

31

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds        

42

Item 3.

Defaults Upon Senior Securities          

42

Item 4.

Mine Safety Disclosures          

42

Item 5.

Other Information  

42

Item 6.

Exhibits          

43

SIGNATURES

44

 

 

 

 

FORWARD-LOOKING STATEMENTS

 

FORWARD-LOOKING STATEMENTS AND INDUSTRY DATA

 

This Quarterly 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 myriad target markets;

     
  Our belief that the licensing environment continues to be healthy with strong demand for our product portfolio,  in particular our  wireless connectivity technologies, that will expand our market reach into the 5G IoT area;
     
  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 the recent period  illustrates 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 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  proliferation of smart sensor devices, strengthen our market positions and expand our content in smartphones, drones, consumer cameras, surveillance, automotive ADAS, voice-enabled devices and industrial IoT applications;
     
  Our belief that our unique capabilities in wireless audio through the combination of our Bluetooth, audio DSP and software for voice, sound and motion sensing puts us in a strong position to capitalize on the fast-growing True Wireless Stereo (TWS) markets of earbuds, speakers, smartwatches and more;
     
  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, NB-IoT, UWB and 5G 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;

 

 

3

 

 

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;

     
 

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 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 Part II – Item 1A – “Risk Factors” of this Form 10Q.

 

This report contains market data prepared by third party research firm. Actual market results may differ from their projections.

 

4

 

PART I. FINANCIAL INFORMATION

 

 

Item 1. FINANCIAL STATEMENTS

 

INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS


U.S. dollars in thousands, except share and per share data

 

  

March 31,
2021

  

December 31,
2020

 

 

 

Unaudited

     
ASSETS        

Current assets:

        

Cash and cash equivalents

 $53,662  $21,143 

Short-term bank deposits

  8,435   20,233 

Marketable securities

  83,884   88,754 

Trade receivables (net of allowance for credit losses of $300 as of March 31, 2021 and December 31, 2020)

  24,631   31,224 

Prepaid expenses and other current assets

  8,061   6,205 

Total current assets

  178,673   167,559 

Long-term assets:

        

Bank deposits

  28,156   29,529 

Severance pay fund

  10,403   10,535 

Deferred tax assets, net

  11,931   10,826 

Property and equipment, net

  7,829   7,586 

Operating lease right-of-use assets

  8,354   9,052 

Goodwill

  51,070   51,070 

Intangible assets, net

  10,190   10,836 

Investments in non-marketable equity securities

  936   936 

Other long-term assets

  7,991   9,023 

Total long-term assets

  136,860   139,393 

Total assets

 $315,533  $306,952 
         

LIABILITIES AND STOCKHOLDERS EQUITY

        

Current liabilities:

        

Trade payables

 $818  $894 

Deferred revenues

  3,394   2,434 

Accrued expenses and other payables

  3,393   3,843 

Accrued payroll and related benefits

  26,480   18,040 

Operating lease liabilities

  2,834   2,969 

Total current liabilities

  36,919   28,180 

Long-term liabilities:

        

Accrued severance pay

  11,000   11,226 

Operating lease liabilities

  5,056   5,772 

Other accrued liabilities

  909   885 

Total long-term liabilities

  16,965   17,883 

Stockholders’ equity:

        

Preferred Stock: $0.001 par value: 5,000,000 shares authorized; none issued and outstanding

      

Common Stock: $0.001 par value: 45,000,000 shares authorized; 23,595,160 shares issued at March 31, 2021 (unaudited) and December 31, 2020. 22,811,090 and 22,260,917 shares outstanding at March 31, 2021 (unaudited) and December 31, 2020, respectively

  23   22 

Additional paid in-capital

  227,671   233,172 

Treasury stock at cost (784,070 and 1,334,243 shares of common stock at March 31, 2021 (unaudited) and December 31, 2020, respectively)

  (17,708)  (30,133)

Accumulated other comprehensive income

  93   478 

Retained earnings

  51,570   57,350 

Total stockholders’ equity

  261,649   260,889 

Total liabilities and stockholders’ equity

 $315,533  $306,952 

 

The accompanying notes are an integral part of the unaudited interim condensed consolidated financial statements.

 

5

 

 

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF LOSS (UNAUDITED)

 

U.S. dollars in thousands, except per share data


 

   

Three months ended

March 31,

 
   

2021

   

2020

 

Revenues:

               

Licensing and related revenue

  $ 14,397     $ 14,495  

Royalties

    11,005       9,120  

Total revenues

    25,402       23,615  

Cost of revenues

    2,381       2,751  

Gross profit

    23,021       20,864  

Operating expenses:

               

Research and development, net

    17,593       15,113  

Sales and marketing

    3,302       3,168  

General and administrative

    2,880       3,664  

Amortization of intangible assets

    576       582  

Total operating expenses

    24,351       22,527  

Operating loss

    (1,330 )     (1,663 )

Financial income, net

    36       831  

Loss before taxes on income

    (1,294 )     (832 )

Income tax expense

    2,336       353  

Net loss

  $ (3,630 )   $ (1,185 )
                 
                 

Basic net loss per share

  $ (0.16 )   $ (0.05 )

Diluted net loss per share

  $ (0.16 )   $ (0.05 )
                 
                 

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

               

Basic

    22,546       21,994  

Diluted

    22,546       21,994  

 

The accompanying notes are an integral part of the unaudited interim condensed consolidated financial statements.

 

6

 

 

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (UNAUDITED)

 

U.S. dollars in thousands


 

   

Three months ended

March 31,

 
   

2021

   

2020

 
                 

Net loss:

  $ (3,630 )   $ (1,185 )

Other comprehensive loss before tax:

               

Available-for-sale securities:

               

Changes in unrealized gains (losses)

    (457 )     (778 )

Reclassification adjustments for losses included in net loss

          2  

Net change

    (457 )     (776 )

Cash flow hedges:

               

Changes in unrealized gains (losses)

    (50 )     201  

Reclassification adjustments for losses included in net loss

    22        

Net change

    (28 )     201  

Other comprehensive loss before tax

    (485 )     (575 )

Income tax benefit related to components of other comprehensive loss

    (100 )     (132 )

Other comprehensive loss, net of taxes

    (385 )     (443 )

Comprehensive loss

  $ (4,015 )   $ (1,628 )

 

The accompanying notes are an integral part of the unaudited interim condensed consolidated financial statements.

 

7

 

 

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY (UNAUDITED)

 

U.S. dollars in thousands, except share data


 

    Common stock                                          

Three months ended March 31, 2021

 

Number of shares outstanding

   

Amount

    Additional
paid-in
capital
   

Treasury

stock

    Accumulated other comprehensive income (loss)     Retained
earnings
    Total
stockholders
equity
 

Balance as of January 1, 2021

    22,260,917     $ 22     $ 233,172     $ (30,133 )   $ 478     $ 57,350     $ 260,889  

Net loss

                                  (3,630 )     (3,630 )

Other comprehensive loss

                            (385 )           (385 )

Equity-based compensation

                3,198                         3,198  

Issuance of treasury stock upon exercise of stock-based awards

    550,173       1       (8,699 )     12,425             (2,150 )     1,577  

Balance as of March 31, 2021

    22,811,090     $ 23     $ 227,671     $ (17,708 )   $ 93     $ 51,570     $ 261,649  

 

   

Common stock

                                         

Three months ended March 31, 2020

 

Number of shares outstanding

   

Amount

    Additional
paid-in
capital
   

Treasury

stock

    Accumulated other comprehensive income (loss)     Retained
earnings
    Total
stockholders
equity
 

Balance as of January 1, 2020

    21,839,369     $ 22     $ 228,005     $ (39,390 )   $ 94     $ 62,426     $ 251,157  

Net loss

                                  (1,185 )     (1,185 )

Other comprehensive loss

                            (443 )           (443 )

Equity-based compensation

                3,107                         3,107  

Purchase of treasury stock

    (202,392 )                 (4,780 )                 (4,780 )

Issuance of treasury stock upon exercise of stock-based awards

    362,683       (*)     (5,529 )     8,137             (1,192 )     1,416  

Balance as of March 31, 2020

    21,999,660     $ 22     $ 225,583     $ (36,033 )   $ (349 )   $ 60,049     $ 249,272  

 

(*)         Amount less than $1.

 

The accompanying notes are an integral part of the interim condensed consolidated financial statements.

 

8

 

 

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

U.S. dollars in thousands


 

   

Three months ended
March 31,

 
   

2021

   

2020

 

Cash flows from operating activities:

               

Net loss

  $ (3,630 )   $ (1,185 )

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

               

Depreciation

    821       809  

Amortization of intangible assets

    646       653  

Equity-based compensation

    3,198       3,107  

Realized loss, net on sale of available-for-sale marketable securities

          2  

Amortization of premiums on available-for-sale marketable securities

    127       105  

Unrealized foreign exchange (gain) loss

    391       (74 )

Changes in operating assets and liabilities:

               

Trade receivables

    6,583       3,375  

Prepaid expenses and other assets

    (1,288 )     (1,595 )

Operating lease right-of-use assets

    698       458  

Accrued interest on bank deposits

    156       439  

Deferred tax, net

    (1,005 )     (1,016 )

Trade payables

    (74 )     140  

Deferred revenues

    960       392  

Accrued expenses and other payables

    (464 )     (526 )

Accrued payroll and related benefits

    8,854       1,640  

Operating lease liability

    (711 )     (436 )

Accrued severance pay, net

    (69 )     129  

Net cash provided by operating activities

    15,193       6,417  
                 

Cash flows from investing activities:

               

Acquisition of business

          (204 )

Purchase of property and equipment

    (1,057 )     (790 )

Investment in bank deposits

          (8,893 )

Proceeds from bank deposits

    12,989       10,893  

Investment in available-for-sale marketable securities

    (6,752 )     (13,108 )

Proceeds from maturity of available-for-sale marketable securities

    9,063       5,426  

Proceeds from sale of available-for-sale marketable securities

    1,975       3,757  

Net cash provided by (used in) investing activities

    16,218       (2,919 )
                 

Cash flows from financing activities:

               

Purchase of treasury stock

          (4,780 )

Proceeds from exercise of stock-based awards

    1,577       1,416  

Net cash provided by (used in) financing activities

    1,577       (3,364 )

Effect of exchange rate changes on cash and cash equivalents

    (469 )     (34 )

Increase in cash and cash equivalents

    32,519       100  

Cash and cash equivalents at the beginning of the period

    21,143       22,803  

Cash and cash equivalents at the end of the period

  $ 53,662     $ 22,903  
                 

Supplemental information of cash-flow activities:

               

Cash paid during the period for:

               

Income and withholding taxes

  $ 2,192     $ 1,084  

Non-cash transactions:

               

Property and equipment purchases incurred but unpaid at period end

  $ 7     $ 84  

 

The accompanying notes are an integral part of the unaudited interim condensed consolidated financial statements.

 

9

 

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

(in thousands, except share data)

 

 

NOTE 1: BUSINESS

 

The financial information in this quarterly report includes the results of CEVA, Inc. and its subsidiaries (the “Company” or “CEVA”).

 

CEVA licenses a family of signal processing IPs in two types of categories: wireless connectivity and smart sensing. These products 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. CEVA also offers 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, the Company offers 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’s technologies are licensed to leading semiconductor and original equipment manufacturer (“OEM”) companies. These companies design, manufacture, market and sell application-specific integrated circuits (“ASICs”) and application-specific standard products (“ASSPs”) based on CEVA’s technology to wireless, consumer electronics and automotive companies for incorporation into a wide variety of end products.

 

CEVA is a sustainability and environmentally conscious company, adhering to its Code of Business Conduct and Ethics. As such, it emphasizes and focuses on environmental preservation, recycling, the welfare of its employees and privacy – all of which it promotes on a corporate level. CEVA is committed to social responsibility, values of preservation and consciousness towards these purposes.

 

 

NOTE 2: BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

The interim condensed consolidated financial statements have been prepared according to U.S Generally Accepted Accounting Principles (“U.S. GAAP”).

 

The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021. For further information, reference is made to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10K for the year ended December 31, 2020.

 

The significant accounting policies applied in the annual consolidated financial statements of the Company as of December 31, 2020, contained in the Company’s Annual Report on Form 10K filed with the Securities and Exchange Commission on March 1, 2021, have been applied consistently in these unaudited interim condensed consolidated financial statements.

 

Recently Adopted Accounting Pronouncements

 

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. The adoption by the Company of the new guidance did not have a material impact on its consolidated financial statements.

 

 

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

(in thousands, except share data)

 

Use of Estimates

 

The preparation of the interim condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates, judgments and assumptions. The Company’s management believes that the estimates, judgments and assumptions used are reasonable based upon information available at the time they are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the dates of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The novel coronavirus (“COVID-19”) pandemic has created, and may continue to create, significant uncertainty in macroeconomic conditions, and the extent of its impact on the Company’s operational and financial performance will depend on certain developments, including the duration and spread of the outbreak and the impact on the Company’s customers and its sales cycles. The Company considered the impact of COVID-19 on the estimates and assumptions and determined that there were no material adverse impacts on the interim condensed consolidated financial statements for the period ended March 31, 2021. As events continue to evolve and additional information becomes available, the Company’s estimates and assumptions may change materially in future periods.

 

 

NOTE 3: REVENUE RECOGNITION

 

Under ASC 606, “Revenue from Contracts with Customers” (“ASC 606”), an entity recognizes revenue when or as it satisfies a performance obligation by transferring intellectual property (“IP”) licenses or services to the customer, either at a point in time or over time. The Company recognizes most of its revenues at a point in time upon delivery when the customer accepts control of the IP. The Company recognizes revenue over time on significant license customization contracts that are in the scope of ASC 606 by using cost inputs to measure progress toward completion of its performance obligations.

 

The following table includes estimated revenue expected to be recognized in future periods related to performance obligations that are unsatisfied or partially unsatisfied at the end of the reporting period. The estimated revenues do not include amounts of royalties or unexercised contract renewals:

 

  

Remainder of 2021

  

2022

 

License and related revenues

 $5,131  $761 

 

Disaggregation of revenue:

 

The following table provides information about disaggregated revenue by primary geographical market, major product line and timing of revenue recognition (in thousands):

 

  

Three months ended March 31, 2021 (unaudited)

  

Three months ended March 31, 2020 (unaudited)

 
  

Licensing and related revenues

  

Royalties

  

Total

  

Licensing and related revenues

  

Royalties

  

Total

 

Primary geographical markets

                        

United States

 $572  $3,378  $3,950  $2,782  $513  $3,295 

Europe and Middle East

  423   676   1,099   1,059   4,044   5,103 

Asia Pacific

  13,402   6,951   20,353   10,654   4,563   15,217 

Total

 $14,397  $11,005  $25,402  $14,495  $9,120  $23,615 
                         

Major product/service lines

                        

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

 $12,805  $8,105  $20,910  $10,927  $7,042  $17,969 

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

  1,592   2,900   4,492   3,568   2,078   5,646 

Total

 $14,397  $11,005  $25,402  $14,495  $9,120  $23,615 
                         

Timing of revenue recognition

                        

Products transferred at a point in time

 $11,988  $11,005  $22,993  $11,038  $9,120  $20,158 

Products and services transferred over time

  2,409      2,409   3,457      3,457 

Total

 $14,397  $11,005  $25,402  $14,495  $9,120  $23,615 

 

11

 

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

(in thousands, except share data)

 

Contract balances:

 

The following table provides information about trade receivables, unbilled receivables and contract liabilities from contracts with customers (in thousands):

 

  

March 31, 2021 (unaudited)

  

December 31, 2020

 
         

Trade receivables

 $13,802  $14,765 

Unbilled receivables (associated with licensing and related revenue)

  1,332   5,479 

Unbilled receivables (associated with royalties)

  9,497   10,980 

Deferred revenues (short-term contract liabilities)

  3,394   2,434 

 

The Company receives payments from customers based upon contractual payment schedules; trade receivables are recorded when the right to consideration becomes unconditional, and an invoice is issued to the customer. Unbilled receivables associated with licensing and other include amounts related to the Company’s contractual right to consideration for completed performance objectives not yet invoiced. Unbilled receivables associated with royalties are recorded as the Company recognizes revenues from royalties earned during the quarter, but not yet invoiced, either by actual sales data received from customers, or, when applicable, by the Company’s estimation. Contract liabilities (deferred revenue) include payments received in advance of performance under the contract, and are realized with the associated revenue recognized under the contract.

 

During the three months ended March 31, 2021, the Company recognized $1,094, that was included in deferred revenues (short-term contract liability) balance at January 1, 2021.

 

 

NOTE 4: LEASES

 

The Company leases substantially all of its office space and vehicles under operating leases. The Company's leases have original lease periods expiring between 2021 and 2034. Many leases include one or more options to renew. The Company does not assume renewals in its determination of the lease term unless the renewals are deemed to be reasonably certain at lease commencement. Lease payments included in the measurement of the lease liability comprise the following: the fixed non-cancelable lease payments, payments for optional renewal periods where it is reasonably certain the renewal period will be exercised, and payments for early termination options unless it is reasonably certain the lease will not be terminated early.

 

The following is a summary of weighted average remaining lease terms and discount rates for all of the Company’s operating leases:

 

  

March 31, 2021 (Unaudited)

 

Weighted average remaining lease term (years)

  4.68 

Weighted average discount rates

  1.93%

 

Total operating lease cost and cash payments for operating leases were as follows:

 

  

Three months ended march 31,

 
  

2021

  

2020

 
         

Operating lease cost

 $741  $598 

Cash payments for operating leases

 $799  $592 

 

 

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

(in thousands, except share data)

 

Maturities of lease liabilities are as follows:

 

The remainder of 2021

 $2,171 

2022

  2,633 

2023

  1,185 

2024

  462 

2025

  474 

2026 and thereafter

  1,338 

Total undiscounted cash flows

  8,263 

Less imputed interest

  373 

Present value of lease liabilities

 $7,890 

 

 

NOTE 5: MARKETABLE SECURITIES

 

The following is a summary of available-for-sale marketable securities:

 

  

March 31, 2021 (Unaudited)

 
  

Amortized
cost

  

Gross
unrealized
gains

  

Gross
unrealized
losses

  

Fair
value

 

Available-for-sale - matures within one year:

                

Corporate bonds

 $12,553  $61  $(46) $12,568 
                 

Available-for-sale - matures after one year through five years:

                

Corporate bonds

  71,184   497   (365)  71,316 
                 

Total

 $83,737  $558  $(411) $83,884 

 

  

December 31, 2020

 
  

Amortized
cost

  

Gross
unrealized
gains

  

Gross
unrealized
losses

  

Fair
value

 

Available-for-sale - matures within one year:

                

Corporate bonds

 $12,667  $49  $(7) $12,709 
                 

Available-for-sale - matures after one year through five years:

                

Corporate bonds

  75,483   667   (105)  76,045 
                 

Total

 $88,150  $716  $(112) $88,754 

 

 

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

(in thousands, except share data)

 

The following table presents gross unrealized losses and fair values for those investments that were in an unrealized loss position as of March 31, 2021 and December 31, 2020, and the length of time that those investments have been in a continuous loss position:

 

  

Less than 12 months

  

12 months or greater

 
  

Fair value

  

Gross unrealized loss

  

Fair value

  

Gross unrealized loss

 

As of March 31, 2021 (unaudited)

 $32,679  $(382) $8,372  $(29)

As of December 31, 2020

 $31,393  $(91) $7,381  $(21)

 

As of March 31, 2021, the allowance for credit losses was not material.

 

The following table presents gross realized gains and losses from sale of available-for-sale marketable securities:

 

  

Three months ended
March 31,

 
  

2021

(unaudited)

  

2020

(unaudited)

 
         

Gross realized gains from sale of available-for-sale marketable securities

 $  $4 

Gross realized losses from sale of available-for-sale marketable securities

 $  $(6)

 

 

NOTE 6: FAIR VALUE MEASUREMENT

 

FASB ASC No. 820, “Fair Value Measurements and Disclosures” defines fair value, establishes a framework for measuring fair value. Fair value is an exit price, representing the amount that would be received for selling an asset or paid for the transfer of a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability. A three-tier fair value hierarchy is established as a basis for considering such assumptions and for inputs used in the valuation methodologies in measuring fair value:

 

Level I

Unadjusted quoted prices in active markets that are accessible on the measurement date for identical, unrestricted assets or liabilities;

  

Level II

Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability; and

  

Level III

Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported by little or no market activity).

 

The Company measures its marketable securities and foreign currency derivative contracts at fair value. Marketable securities and foreign currency derivative contracts are classified within Level II as the valuation inputs are based on quoted prices and market observable data of similar instruments.

 

The table below sets forth the Company’s assets measured at fair value by level within the fair value hierarchy. Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

 

Description

 

March 31, 2021 (unaudited)

  

Level I

(unaudited)

  

Level II (unaudited)

  

Level III (unaudited)

 

Assets:

                

Marketable securities:

                

Corporate bonds

 $83,884  $  $83,884  $ 
                 

Liabilities:

                

Foreign exchange contracts

  28      28    
                 
                 

Description

 

December 31, 2020

  

Level I

  

Level II

  

Level III

 

Assets:

                

Marketable securities:

                

Corporate bonds

 $88,754     $88,754    

 

 

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

(in thousands, except share data)

 

 

NOTE 7: INTANGIBLE ASSETS, NET

 

      

Three months ended March 31, 2021 (unaudited)

  

Year ended December 31, 2020

 
  

Weighted average amortization period (years)

  

Gross carrying amount

  

Accumulated amortization

  

Net

  

Gross carrying amount

  

Accumulated amortization

  

Net

 
                             

Intangible assets –amortizable:

                            
                             

Intangible assets related to the acquisition of Hillcrest Labs business

                            

Customer relationships

  4.4  $3,518  $1,479  $2,039  $3,518  $1,262  $2,256 

Customer backlog

  0.5   72   72      72   72    

Core technologies

  7.5   2,475   563   1,912   2,475   480   1,995 
                             

Intangible assets related to an investment in Immervision

                            

Core technologies

  6.4   7,063   1,851   5,212   7,063   1,575   5,488 
                             

Intangible assets related to an investment in NB-IoT technologies

                            

NB-IoT technologies (*)

  7.0   1,961   934   1,027   1,961   864   1,097 
                             

Total intangible assets

     $15,089  $4,899  $10,190  $15,089  $4,253  $10,836 

 

(*) 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 March 31, 2021. 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 interim condensed consolidated statements of income (loss).

 

Future estimated annual amortization charges are as follows:

 

2021

 $1,936 

2022

  2,581 

2023

  1,906 

2024

  1,852 

2025

  1,563 

2026 and thereafter

  352 
  $10,190 

 

 

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

(in thousands, except share data)

 

 

NOTE 8: GEOGRAPHIC INFORMATION AND MAJOR CUSTOMER DATA

 

a.         Summary information about geographic areas:

 

The Company manages its business on the basis of one reportable segment: the licensing of intellectual property to semiconductor companies and electronic equipment manufacturers (see Note 1 for a brief description of the Company’s business). The following is a summary of revenues within geographic areas:

 

  

Three months ended
March 31,

 
  

2021

(unaudited)

  

2020

(unaudited)

 
Revenues based on customer location:        

United States

 $3,950  $3,295 

Europe and Middle East (1)

  1,099   5,103 

Asia Pacific (2)

  20,353   15,217 
  $25,402  $23,615 
         

(1) Germany

 $*)  $3,964 

(2) China

 $17,259  $12,074 

 

*) Less than 10%

 

b.         Major customer data as a percentage of total revenues:

 

The following table sets forth the customers that represented 10% or more of the Company’s total revenues in each of the periods set forth below.

 

  

Three months ended
March 31,

 
  

2021

(unaudited)

  

2020

(unaudited)

 
         

Customer A

  23%  *) 

Customer B

  14%  *) 

Customer C

  12%  *) 

Customer D

  *)   16%

 

*) Less than 10%

 

 

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

(in thousands, except share data)

 

 

NOTE 9: NET INCOME (LOSS) PER SHARE OF COMMON STOCK

 

Basic net income (loss) per share is computed based on the weighted average number of shares of common stock outstanding during each period. Diluted net income (loss) per share is computed based on the weighted average number of shares of common stock outstanding during each period, plus dilutive potential shares of common stock considered outstanding during the period, in accordance with FASB ASC No. 260, “Earnings Per Share.”

 

  

Three months ended
March 31,

 
  

2021

(unaudited)

  

2020

(unaudited)

 

Numerator:

        

Net loss

 $(3,630) $(1,185)

Denominator (in thousands):

        

Basic weighted-average common stock outstanding

  22,546   21,994 

Effect of stock -based awards

      

Diluted weighted average common stock outstanding

  22,546   21,994 
         

Basic net loss per share

 $(0.16) $(0.05)

Diluted net loss per share

 $(0.16) $(0.05)

 

The total number of shares related to the outstanding stock options excluded from the calculation of diluted net loss per share, since the effect was anti-dilutive, amounted to 625,044 and 1,363,306 for the three months ended March 31, 2021 and 2020, respectively.

 

 

NOTE 10: COMMON STOCK AND STOCK-BASED COMPENSATION PLANS

 

The Company grants a mix of stock options and restricted stock units (“RSUs”) to employees and non‑employee directors of the Company and its subsidiaries under the Company’s equity plans and provides the right to purchase common stock pursuant to the Company’s 2002 employee stock purchase plan to employees of the Company and its subsidiaries. In addition, prior to 2016, the Company granted stock appreciation rights (“SARs”) capped with a ceiling to employees of the Company and its subsidiaries.

 

Each SAR unit confers the holder the right to stock appreciation over a preset price of the Company’s common stock during a specified period of time. When the unit is exercised, the appreciation amount is paid through the issuance of shares of the Company’s common stock. The ceiling limits the maximum income for each SAR unit to 400% of fair market value on the grant date. SARs are considered an equity instrument as it is a net share settled award capped with a ceiling. The options and SARs granted under the Company’s stock incentive plans have been granted at the fair market value of the Company’s common stock on the grant date. Options and SARs granted to employees under stock incentive plans vest at a rate of 25% of the shares underlying the option after one year and the remaining shares vest in equal portions over the following 36 months, such that all shares are vested after four years. Options granted to non‑employee directors vest 25% of the shares underlying the option on each anniversary of the option grant.

 

A summary of the Company’s stock option and SAR activities and related information for the three months ended March 31, 2021, are as follows:

 

  

Number of
options and SAR units (1)

  

Weighted
average exercise
price

  

Weighted
average remaining
contractual term

  

Aggregate
intrinsic-value

 

Outstanding as of December 31, 2020

  289,069  $22.42   3.6  $6,673 

Granted

              

Exercised

  (153,295)  24.79         

Forfeited or expired

              

Outstanding as of March 31, 2021 (2)

  135,774  $19.74   3.2  $4,944 

Exercisable as of March 31, 2021 (3)

  135,774  $19.74   3.2  $4,944 

 

 

(1)

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.

 

 

(2)

Due to the ceiling imposed on the SAR grants, the outstanding amount equals a maximum of 131,581 shares of the Company’s common stock issuable upon exercise.

 

 

(3)

Due to the ceiling imposed on the SAR grants, the exercisable amount equals a maximum of 131,581 shares of the Company’s common stock issuable upon exercise.

 

 

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

(in thousands, except share data)

 

As of March 31, 2021, there were no unrecognized compensation expenses related to unvested stock options and SARs.

 

An RSU award is an agreement to issue shares of the Company’s common stock at the time the award or a portion thereof vests. RSUs granted to employees generally vest in three equal annual installments starting on the first anniversary of the grant date. Until the end of 2017, RSUs granted to non-employee directors would generally vest in full on the first anniversary of the grant date. Starting in 2018, RSUs granted to non-employee directors would generally vest in two equal annual installments starting on the first anniversary of the grant date.

 

On February 15, 2021, Bruce A. Mann resigned from the Board of Directors (the “Board”) of the Company, effective immediately. In connection with his retirement, the Board determined to accelerate in full the vesting of Mr. Mann’s 5,902 unvested RSUs.

 

On February 16, 2021, the Board unanimously approved the appointment of Jaclyn “Jackie” Liu as an independent member of the Board with the appointment effective as of February 16, 2021. Pursuant to her appointment, Ms. Liu will serve as a director until the Company’s annual meeting of stockholders in 2021. In accordance with the Company’s non-employee director compensation policy, Ms. Liu received an annual director grant of 1,784 RSUs with fair value of $124,670 under the Company’s Amended and Restated 2011 Stock Incentive Plan (the “2011 Plan”). The RSUs vest over a two-year period with the first 50% vesting after the first anniversary of the grant date and the remainder vesting on the second anniversary of the grant date.

 

On February 18, 2021, the Committee granted 5,962, 4,024, 3,577 and 3,577 time-based RSUs to each of the Company’s CEO, Executive Vice President, Worldwide Sales, Chief Financial Officer and Chief Operating Officer, respectively, pursuant to the 2011 Plan. The RSU grants vest 33.4% on February 18, 2022, 33.3% on February 18, 2023 and 33.3% on February 18, 2024.

 

Also, on February 18, 2021, the Committee granted 8,943, 2,683, 2,385 and 2,385 performance-based stock units (“PSUs”) to each of the Company’s CEO, Executive Vice President, Worldwide Sales, Chief Financial Officer and Chief Operating Officer, respectively, pursuant to 2011 Plan (collectively, the “Short-Term Executive PSUs”). The performance goals for the Short-Term Executive PSUs with specified weighting are as follows:

 

Weighting

Goals

50%

Vesting of the full 50% of the PSUs occurs if the Company achieves the 2021 license and related revenue target approved by the Board (the “2021 License Revenue Target”). The vesting threshold is achievement of 90% of 2021 License Revenue Target. If the Company’s actual result exceeds 90% but less than 99% of the 2021 License Revenue Target, 91% to 99% of the eligible PSUs would be subject to vesting. If the Company’s actual result exceeds 100% of the 2021 License Revenue Target, every 1% increase of the 2021 License Revenue Target, up to 110%, would result in an increase of 2% of the eligible PSUs.

50%

Vesting of the full 50% of the PSUs occurs if the Company achieves positive total shareholder return whereby the return on the Company’s stock for 2021 is greater than the S&P500 index. The vesting threshold is if the return on the Company’s stock for 2021 is at least 90% of the S&P500 index. If the return on the Company’s stock, in comparison to the S&P500, is above 90% but less than 99% of the S&P500 index, 91% to 99% of the eligible PSUs would be subject to vesting. If the return on the Company’s stock exceeds 100% of the S&P500 index, every 1% increase in comparison to the S&P500 index, up to 110%, would result in an increase of 2% of the eligible PSUs.

 

 

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

(in thousands, except share data)

 

Additionally, PSUs representing an additional 20%, meaning an additional 1,788, 536, 477 and 477, would be eligible for vesting for each of the Company’s CEO, Executive Vice President, Worldwide Sales, Chief Financial Officer and Chief Operating Officer, respectively, if the performance goals set forth above are exceeded.

 

Subject to achievement of the thresholds the above performance goals for 2021, the Short-Term Executive PSUs vest 33.4% on February 18, 2022, 33.3% on February 18, 2023 and 33.3% on February 18, 2024.

 

A summary of the Company’s RSU and PSU activities and related information for the three months ended March 31, 2021, are as follows:

 

  

Number of
RSUs and PSUs

  

Weighted Average Grant-Date
Fair Value

 

Unvested as of December 31, 2020

  842,948  $29.30 

Granted

  57,598   66.07 

Vested

  (385,776)  25.95 

Forfeited or expired

  (25,500)  34.88 

Unvested as of March 31, 2021

  489,270  $35.99 

 

As of March 31, 2021, there was $13,901 of unrecognized compensation expense related to unvested RSUs and PSUs. This amount is expected to be recognized over a weighted-average period of 1.5 years.

 

The following table shows the total equity-based compensation expense included in the interim condensed consolidated statements of income (loss):

 

  

Three months ended
March 31,

 
  

2021

(unaudited)

  

2020

(unaudited)

 

Cost of revenue

 $143  $158 

Research and development, net

  1,685   1,623 

Sales and marketing

  418   451 

General and administrative

  952   875 

Total equity-based compensation expense

 $3,198  $3,107 

 

The fair value for rights to purchase shares of common stock under the Company’s employee stock purchase plan was estimated on the date of grant using the following assumptions:

 

  

Three months ended
March 31,

 
  

2021

(unaudited)

  

2020

(unaudited)

 

Expected dividend yield

  0%    0%  

Expected volatility

 39%-56%  32%-42% 

Risk-free interest rate

 0.1%-1.7%  1.5%-1.9% 

Contractual term of up to (months)

  24    24  

 

 

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

(in thousands, except share data)

 

 

NOTE 11: DERIVATIVES AND HEDGING ACTIVITIES

 

The Company follows the requirements of FASB ASC No. 815,” Derivatives and Hedging” which requires companies to recognize all of their derivative instruments as either assets or liabilities in the statement of financial position at fair value. The accounting for changes in fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging transaction and further, on the type of hedging transaction. For those derivative instruments that are designated and qualify as hedging instruments, a company must designate the hedging instrument, based upon the exposure being hedged, as a fair value hedge, cash flow hedge, or a hedge of a net investment in a foreign operation. Due to the Company’s global operations, it is exposed to foreign currency exchange rate fluctuations in the normal course of its business. The Company’s treasury policy allows it to offset the risks associated with the effects of certain foreign currency exposures through the purchase of foreign exchange forward or option contracts (“Hedging Contracts”). The policy, however, prohibits the Company from speculating on such Hedging Contracts for profit. To protect against the increase in value of forecasted foreign currency cash flow resulting from salaries paid in currencies other than the U.S. dollar during the year, the Company instituted a foreign currency cash flow hedging program. The Company hedges portions of the anticipated payroll of its non-U.S. employees denominated in the currencies other than the U.S. dollar for a period of one to twelve months with Hedging Contracts. Accordingly, when the dollar strengthens against the foreign currencies, the decline in present value of future foreign currency expenses is offset by losses in the fair value of the Hedging Contracts. Conversely, when the dollar weakens, the increase in the present value of future foreign currency expenses is offset by gains in the fair value of the Hedging Contracts. These Hedging Contracts are designated as cash flow hedges.

 

For derivative instruments that are designated and qualify as a cash flow hedge (i.e., hedging the exposure to variability in expected future cash flows that is attributable to a particular risk), the gain or loss on the derivative instrument is reported as a component of other comprehensive income (loss) and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. As of March 31, 2021 and December 31, 2020, the notional principal amount of the Hedging Contracts to sell U.S. dollars held by the Company was $3,750 and $0, respectively.

 

The fair value of the Company’s outstanding derivative instruments is as follows:

 

  

March 31, 2021

  

December 31, 2020

 
  

(unaudited)

     

Derivative liabilities:

        

Derivatives designated as cash flow hedging instruments:

        

Foreign exchange option contracts

 $1  $ 

Foreign exchange forward contracts

  27    

Total

 $28  $ 

 

The increase (decrease) in unrealized gains (losses) recognized in “accumulated other comprehensive gain (loss)” on derivatives, before tax effect, is as follows:

 

  

Three months ended
March 31,

 
  

2021

(unaudited)

  

2020

(unaudited)

 

Derivatives designated as cash flow hedging instruments:

        

Foreign exchange option contracts

 $(1) $(28)

Foreign exchange forward contracts

  (49)  229 
  $(50) $201 

 

 

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

(in thousands, except share data)

 

The net (gains) losses reclassified from “accumulated other comprehensive gain (loss)” into income are as follows:

 

  

Three months ended
March 31,

 
  

2021

(unaudited)

  

2020

(unaudited)

 

Derivatives designated as cash flow hedging instruments:

        

Foreign exchange option contracts

 $  $ 

Foreign exchange forward contracts

  22    
  $22  $ 

 

The Company recorded in cost of revenues and operating expenses a net loss of $22 during the three months ended March 31, 2021 related to its Hedging Contracts.

 

 

NOTE 12: ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

 

The following tables summarize the changes in accumulated balances of other comprehensive income (loss), net of taxes:

 

  

Three months ended March 31, 2021 (unaudited)

  

Three months ended March 31, 2020 (unaudited)

 
  

Unrealized

gains (losses) on available-for-sale marketable securities

  

Unrealized gains (losses) on cash flow hedges

  

Total

  

Unrealized

gains (losses) on available-for-sale marketable securities

  

Unrealized gains (losses) on cash flow hedges

  

Total

 
                         

Beginning balance

 $478  $  $478  $45  $49  $94 

Other comprehensive income before reclassifications

  (360)  (44)  (404)  (621)  177   (444)

Amounts reclassified from accumulated other comprehensive income (loss)

     19   19   1      1 

Net current period other comprehensive income (loss)

  (360)  (25)  (385)  (620)  177   (443)

Ending balance

 $118  $(25) $93  $(575) $226  $(349)

 

21

 

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

(in thousands, except share data)

 

The following table provides details about reclassifications out of accumulated other comprehensive income (loss):

 

Details about Accumulated Other Comprehensive Income (Loss) Components

 

Amount Reclassified from Accumulated Other Comprehensive Income (Loss)

  

Affected Line Item in the Statements of Income (Loss)

           
  

Three months ended March 31,

   
  

2021
(unaudited)

  

2020
(unaudited)

   

Unrealized gains (losses) on cash flow hedges

 $  $  

Cost of revenues

   (19)    

Research and development

   (1)    

Sales and marketing

   (2)    

General and administrative

   (22)    

Total, before income taxes

   (3)    

Income tax benefit

   (19)    

Total, net of income taxes

Unrealized gains (losses) on available-for-sale marketable securities

     (2) 

Financial loss, net

      (1) 

Income tax benefit

      (1) 

Total, net of income taxes

  $(19) $(1) 

Total, net of income taxes

 

 

NOTE 13: SHARE REPURCHASE PROGRAM

 

The Company did not repurchase any shares of common stock during the first quarter of 2021. During the first quarter of 2020, the Company repurchased 202,392 shares of common stock at an average purchase price of $23.62 per share for an aggregate purchase price of $4,780. As of March 31, 2021, 497,608 shares of common stock remained available for repurchase pursuant to the Company’s share repurchase program.

 

The repurchases of common stock are accounted for as treasury stock, and result in a reduction of stockholders’ equity. When treasury shares are reissued, the Company accounts for the reissuance in accordance with FASB ASC No. 505-30, “Treasury Stock” and charges the excess of the repurchase cost over issuance price using the weighted average method to retained earnings. The purchase cost is calculated based on the specific identified method. In the case where the repurchase cost over issuance price using the weighted average method is lower than the issuance price, the Company credits the difference to additional paid-in capital.

 

 

NOTE 14: SUBSEQUENT EVENTS

 

In May 9, 2021, the Company entered into an agreement and plan of merger (“Merger Agreement”) to acquire Intrinsix Corp. (“Intrinsix”). Intrinsix provides complex System-on-Chip (“SOC”) design expertise in the areas of RF, mixed signal, digital, software, secure processors and interface IP for Heterogeneous SOCs, otherwise referred to as chiplets. Under the terms of the Merger Agreement, the Company will acquire Intrinsix in for $33,000 in cash, subject to working capital and other customary purchase price adjustments. The closing of the acquisition is subject to the satisfaction or waiver of customary conditions contained in the Merger Agreement, and is currently expected to occur in the second quarter of 2021. The final purchase price allocation for the acquisition has not been determined as of the filing of this Quarterly Report on Form 10-Q.

 

22

 

 

Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

You should read the following discussion together with the unaudited financial statements and related notes appearing elsewhere in this quarterly report. This discussion contains forward-looking statements that involve risks and uncertainties. Any or all of our forward-looking statements in this quarterly report may turn out to be wrong. These forward-looking statements can be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. Factors which could cause actual results to differ materially include those set forth under in Part II Item 1A Risk Factors, as well as those discussed elsewhere in this quarterly report. See Forward-Looking Statements.

 

Management is actively monitoring the impact of the pandemic on the companys financial condition, liquidity, operations, suppliers, industry, and workforce. Given the continual evolution of the COVID-19 pandemic and the global responses to curb its spread, we are not able to estimate the full effect of the pandemic on the companys financial results for fiscal year 2021. The following discussions are subject to the future effects of the pandemic.

 

The financial information presented in this quarterly report includes the results of CEVA, Inc. and its subsidiaries.

 

BUSINESS 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.

 

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 sustainability 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 myriad 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. In particular, we are currently experiencing exceptional interest for our wireless connectivity platforms, in both traditional and new areas. Reflecting this trend, all eleven licensing deals in the first quarter were for wireless connectivity, including a first deal for a new technology we are developing, known as ultra-wide band (UWB).

 

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 unique capabilities in wireless audio through the combination of our Bluetooth, audio DSP and software for voice, sound and motion sensing puts us in a strong position to capitalize on the fast-growing True Wireless Stereo (TWS) markets of earbuds, speakers, smartwatches and more. Our recently announced BlueBud platform integrates all of these technologies, lowering the entry barriers for semiconductors and OEMs to develop differentiated, high-performance solution for TWS devices.

 

 

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 continue to experience significant growth in royalty revenues derived from base station and IoT product category (formerly referred to as non-handset products), up by 55% year-over-year in the first quarter. 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 and for the first quarter ended March 31, 2021 was not material, 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 semiconductor demand surpasses supply and severe pandemic infections in large markets like India and Brazil may lead to lock downs and related reduction in economic activities. We will continue to closely monitor the effects of the ongoing pandemic on our operations, employees and customers.

 

 

RESULTS OF OPERATIONS

 

Total Revenues

 

Total revenues were $25.4 million for the first quarter of 2021, representing an increase of 8% as compared to the corresponding period in 2020. Both quarters presented strong licensing execution and healthy environment, which in 2021 translated to strong wireless connectivity design wins. Royalties increased by 21% year-over-year, ahead of our expectations.

 

Our five largest customers accounted for 64% of our total revenues for the first quarter of 2021, as compared to 45% for the comparable period in 2020. Three customers accounted for 23%, 14% and 12% of our total revenues for the first quarter of 2021, as compared to one customer that accounted for 16% of our total revenues for the first quarter of 2020. Sales to UNISOC (formerly Spreadtrum Communications, Inc.) represented 14% of our total revenues for the first quarter of 2021, as compared to 9.6% for comparable period in 2020. 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, three royalty paying customers represented 10% or more of our total royalty revenues for the first quarter of 2021, and collectively represented 61% of our total royalty revenues for the first quarter of 2021. Three royalty paying customers each represented 10% or more of our total royalty revenues for the first quarter of 2020, and collectively represented 70% of our total royalty revenues for the first quarter of 2020. 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 following table sets forth the products and services as percentages of our total revenues for each of the periods set forth below:

 

   

First Quarter
2021

   

First Quarter
2020

 
                 

Connectivity products

    82 %     76 %

Smart sensing products

    18 %     24 %

 

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Licensing and Related Revenues

 

Licensing and related revenues were $14.4 million for the first quarter of 2021, representing a slight decrease of 1% as compared to $14.5 million in the first quarter of 2020. Both quarters represented strong licensing execution and chip design environments. In 2021, we experienced high demand for the licensing for our connectivity products associated mainly with Bluetooth and Wi-Fi technologies for a variety of IoT devices for smart home and mobile devices, while in 2020, we saw strong traction in the markets for communication technologies like 5G RAN and for our smart sensing technologies.

 

Eleven license agreements were concluded during the first quarter of 2021, all of which were for connectivity products. Two of the eleven deals were with first time customers. Customers’ target applications include 5G reduced capability (RedCap) connectivity and Bluetooth, Wi-Fi and ultra-wide band (UWB) connectivity for a range of IoT, smartphones and smart home devices. Geographically, ten of the deals signed were in China, and one was elsewhere in the Asia-Pacific region. The licensing environment continues to be healthy. Based on good demand for our technology base, DSPs, coupled with our core competencies and customer relationships, we believe that we are well positioned to capitalize on secular growth in the IoT space.

 

Licensing and related revenues accounted for 57% of our total revenues for the first quarter of 2021, as compared to 61% for the comparable period of 2020.

 

Royalty Revenues

 

Royalty revenues were $11.0 million for the first quarter of 2021, representing an increase of 21% as compared to the corresponding period in 2020. Royalty revenues accounted for 43% of our total revenues for the first quarter of 2021, as compared to 39% for the comparable period of 2020. The increase in royalty revenues for the first quarter of 2021 reflects robust demand for our consumer and IoT products and above seasonal demand in smartphones, both ahead of our expectations. We believe our customers are facing tight supply constraints, as with most of the industry, and we are working hard to expedite shipments for high-demand products.

 

Our customers reported sales of 341 million chipsets incorporating our technologies for the first quarter of 2021, an increase of 31% from the corresponding period in 2020 for actual shipments reported.

 

The five largest royalty-paying customers accounted for 70% of our total royalty revenues for the first quarter of 2021, as compared to 79% for the comparable period of 2020.

 

Geographic Revenue Analysis

 

    First Quarter
2021
    First Quarter
2020
 
    (in millions, except percentages)  

United States

  $ 3.9       16 %   $ 3.3       14 %

Europe and Middle East (1)

  $ 1.1       4 %   $ 5.1       22 %

Asia Pacific (2)

  $ 20.4       80 %   $ 15.2       64 %
                                 

(1) Germany

    *)       *)     $ 4.0       17 %

(2) China

  $ 17.3       68 %   $ 12.1       51 %

 

*) Less than 10%.

 

Due to the nature of our license agreements and the associated potential large individual contract amounts, the geographic split of revenues both in absolute dollars and percentage terms generally varies from quarter to quarter.

 

Cost of Revenues

 

Cost of revenues was $2.4 million for the first quarter of 2021, as compared to $2.8 million for the comparable period of 2020. Cost of revenues accounted for 9% of our total revenues for the first quarter of 2021, as compared to 12% for the comparable period of 2020. The decrease for the first quarter of 2021 principally reflected lower customization work for our licensees. Included in cost of revenues for the first quarter of 2021 was a non-cash equity-based compensation expense of $143,000, as compared to $158,000 for the comparable period of 2020.

 

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Gross Margin

 

Gross margin for the first quarter of 2021 was 91%, as compared to 88% for the comparable period of 2020. The increase for the first quarter of 2021 mainly reflected higher royalty revenues and lower cost of revenues as set forth above.

 

Operating Expenses

 

Total operating expenses were $24.4 million for the first quarter of 2021, as compared to $22.5 million for the comparable period of 2020. The net increase in total operating expenses for the first quarter of 2021 principally reflected higher salary and employee-related costs, mainly due to higher headcount and higher currency exchange expenses as a result of the devaluation of the U.S. dollar against the Israeli NIS and the Euro, partially offset by lower allowance for credit losses.

 

Research and Development Expenses, Net

 

Our research and development expenses, net, were $17.6 million for the first quarter of 2021, as compared to $15.1 million for the comparable period of 2020. The net increase for the first quarter of 2021 principally reflected higher salary and employee-related costs, mainly due to higher headcount and higher currency exchange expenses as a result of the devaluation of the U.S. dollar against the Israeli NIS and the Euro. Included in research and development expenses for the first quarter of 2021 were non-cash equity-based compensation expenses of $1,685,000, as compared to $1,623,000 for the comparable period of 2020. Research and development expenses as a percentage of our total revenues were 69% for the first quarter of 2021, as compared to 64% for the comparable period of 2020. The percentage increase for the first quarter of 2021, as compared to the comparable period of 2020, was due to the same reasons as set forth above for the increase in research and development expenses in absolute dollars for the comparable period of 2021 and 2020.

 

The number of research and development personnel was 313 at March 31, 2021, as compared to 298 at March 31, 2020.

 

Sales and Marketing Expenses

 

Our sales and marketing expenses were $3.3 million for the first quarter of 2021, as compared to $3.2 million for the comparable period of 2020. The slight increase for the first quarter of 2021 primarily reflected higher salary and employee-related costs, partially offset by lesser travel due to COVID-19. Included in sales and marketing expenses for the first quarter of 2021 were non-cash equity-based compensation expenses of $418,000, as compared to $451,000 for the comparable period of 2020. Sales and marketing expenses as a percentage of our total revenues were 13% for both the first quarter of 2021 and 2020.

 

The total number of sales and marketing personnel was 34 at both March 31, 2021 and March 31, 2020.

 

General and Administrative Expenses

 

Our general and administrative expenses were $2.9 million for the first quarter of 2021, as compared to $3.7 million for the comparable period of 2020. The decrease for the first quarter of 2021 primarily reflected lower allowance for credit losses. Included in general and administrative expenses for the first quarter of 2021 were non-cash equity-based compensation expenses of $952,000, as compared to $875,000 for the comparable period of 2020. General and administrative expenses as a percentage of our total revenues were 11% for the first quarter of 2021, as compared to 16% for the comparable period of 2020.

 

The number of general and administrative personnel was 32 at March 31, 2021, as compared to 33 at March 31, 2020.

 

Amortization of intangible assets

 

Our amortization charges was $0.6 million for both the first quarter of 2021 and the comparable period of 2020. The amortization charges for the first quarter of both 2021 and 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. For more information about our intangible assets, see Notes 7 to the interim condensed consolidated financial statements for the three months ended March 31, 2021.

 

Financial Income, Net (in millions)

 

   

First Quarter
2021

   

First Quarter
2020

 

Financial income, net

  $ 0.04     $ 0.83  

of which:

               

Interest income and gains and losses from marketable securities, net

  $ 0.45     $ 0.85  

Foreign exchange loss

  $ (0.41 )   $ (0.02 )

 

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Financial income, net, consists of interest earned on investments, gains and losses from sale of marketable securities, accretion (amortization) of discounts (premiums) on marketable securities and foreign exchange movements.

 

The decrease in interest income and gains and losses from marketable securities, net, during the first quarter of 2021, principally reflected lower yields, offset with higher combined cash, bank deposits and marketable securities balances held.

 

We review our monthly expected major non-U.S. dollar denominated expenditures and look to hold equivalent non-U.S. dollar cash balances to mitigate currency fluctuations. However, our Euro cash balances increase significantly on a quarterly basis beyond our Euro liabilities, mainly from the French research tax benefits applicable to Crédit Impôt Recherche (CIR), which is generally refunded every three years. This has resulted in an increase in foreign exchange loss during the first quarter of 2021 due to the devaluation of our Euro cash balances as the U.S. dollar strengthened significantly during this period as compared to the Euro.

 

Provision for Income Taxes

 

Our income tax expenses was $2.3 million for the first quarter of 2021, as compared to income tax expenses of $0.4 million for the comparable period of 2020. The increase for the first quarter of 2021 primarily reflected a significant increase in income earned in France, which has a relatively high corporate tax rate.

 

We are subject to income and other taxes in the United States and in numerous foreign jurisdictions. Our domestic and foreign tax liabilities are dependent on the jurisdictions in which profits are determined to be earned and taxed. Additionally, the amount of taxes paid is subject to our interpretation of applicable tax laws in the jurisdictions in which we operate. A number of factors influence our effective tax rate, including changes in tax laws and treaties as well as the interpretation of existing laws and rules. Federal, state, and local governments and administrative bodies within the United States, and other foreign jurisdictions have implemented, or are considering, a variety of broad tax, trade, and other regulatory reforms that may impact us. For example, the Tax Cuts and Jobs Act enacted on December 22, 2017 resulted in changes in our corporate tax rate, our deferred income taxes, and the taxation of foreign earnings. It is not currently possible to accurately determine the potential comprehensive impact of these or future changes, but these changes could have a material impact on our business and financial condition.

 

We have significant operations in Israel and operations in France and the Republic of Ireland. A substantial portion of our taxable income is generated in Israel and France. Currently, our Israeli and Irish subsidiaries are taxed at rates substantially lower than U.S. tax rates. Starting in 2020 and continuing into 2021, our French subsidiary was in a profit position and local French tax rate of 26.5% was applied, that is significantly higher than the Company’s overall blended tax rate.

 

Our Irish subsidiary qualified for a 12.5% tax rate on its trade. Interest income generated by our Irish subsidiary is taxed at a rate of 25%.

 

Our Israeli subsidiary is entitled to various tax benefits as a technological enterprise. In December 2016, the Economic Efficiency Law (Legislative Amendments for Applying the Economic Policy for the 2017 and 2018 Budget Years), 2016, which includes the Amendment to the Law for the Encouragement of Capital Investments, 1959 (Amendment 73) (the “Amendment”), was published. The Amendment, among other things, prescribes special tax tracks for technological enterprises, which are subject to rules that were issued by the Minister of Finance in April 2017.

 

The new tax track under the Amendment, which is applicable to our Israeli subsidiary, is the “Technological Preferred Enterprise.” Technological Preferred Enterprise is an enterprise for which total consolidated revenues of its parent company and all subsidiaries are less than 10 billion New Israeli Shekel (NIS). A Technological Preferred Enterprise, as defined in the Amendment, that is located in the center of Israel (where our Israeli subsidiary is currently located), is taxed at a rate of 12% on profits deriving from intellectual property. Any dividends distributed to “foreign companies,” as defined in the Amendment, deriving from income from technological enterprises will be taxed at a rate of 4%. We are applying the Technological Preferred Enterprise tax track for our Israeli subsidiary from tax year 2020 and onwards.

 

Critical Accounting Policies and Estimates

 

Our consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates.

 

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We believe that the assumptions and estimates associated with revenue recognition, fair value of financial instruments, equity-based compensation and income taxes have the greatest potential impact on our consolidated financial statements. Therefore, we consider these to be our critical accounting policies and estimates.

 

See our Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SEC on March 1, 2021, for a discussion of additional critical accounting policies and estimates. There have been no changes in our critical accounting policies as compared to what was previously disclosed in the Annual Report on Form 10-K for the year ended December 31, 2020.

 

LIQUIDITY AND CAPITAL RESOURCES

 

As of March 31, 2021, we had approximately $53.6 million in cash and cash equivalents, $8.4 million in short term bank deposits, $83.9 million in marketable securities, and $28.2 million in long term bank deposits, totaling $174.1 million, as compared to $159.7 million at December 31, 2020. The increase for the first three months of 2021 principally reflected cash provided by operations.

 

Out of total cash, cash equivalents, bank deposits and marketable securities of $174.1 million, $150.3 million was held by our foreign subsidiaries. Our intent is to permanently reinvest earnings of our foreign subsidiaries and our current operating plans do not demonstrate a need to repatriate foreign earnings to fund our U.S. operations. However, if these funds were needed for our operations in the United States, we would be required to accrue and pay taxes to repatriate these funds. The determination of the amount of additional taxes related to the repatriation of these earnings is not practicable, as it may vary based on various factors such as the location of the cash and the effect of regulation in the various jurisdictions from which the cash would be repatriated.

 

During the first three months of 2021, we invested $6.8 million of cash in marketable securities with maturities up to 60 months from the balance sheet date. In addition, during the same period, bank deposits and marketable securities were sold or redeemed for cash amounting to $24.0 million. All of our marketable securities are classified as available-for-sale. The purchase and sale or redemption of available-for-sale marketable securities are considered part of investing cash flow. Available-for-sale marketable 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 investments, as determined on a specific identification basis, are included in the interim condensed consolidated statements of income (loss). We did not recognize any credit losses during the first three months of 2021. For more information about our marketable securities, see Notes 5 to the interim condensed consolidated financial statements for the three months ended March 31, 2021.

 

Bank deposits are classified as short-term bank deposits and long-term bank deposits. Short-term bank deposits are deposits with maturities of more than three months but no longer than one year from the balance sheet date, whereas long-term bank deposits are deposits with maturities of more than one year as of the balance sheet date. Bank deposits are presented at their cost, including accrued interest, and purchases and sales are considered part of cash flows from investing activities.

 

Operating Activities

 

Cash provided by operating activities for the first three months of 2021 was $15.2 million and consisted of net loss of $3.6 million, adjustments for non-cash items of $5.2 million, and changes in operating assets and liabilities of $13.6 million. Adjustments for non-cash items primarily consisted of $1.5 million of depreciation and amortization of intangible assets and $3.2 million of equity-based compensation expenses. The increase in operating assets and liabilities primarily consisted of a decrease in trade receivables of $6.6 million, an increase in deferred revenues of $1.0 million, and an increase of accrued payroll and related benefits of $8.9 million (mainly due to increase in employee’s tax liabilities related to exercise of stock-based awards), partially offset by an increase in prepaid expenses and other assets of $1.3 million (mainly as a result of payment of a yearly design tool subscription), an increase in deferred taxes, net of $1.0 million and a decrease in accrued expenses and other payables of $0.5 million.

 

Cash provided by operating activities for the first three months of 2020 was $6.4 million and consisted of net loss of $1.2 million, adjustments for non-cash items of $4.6 million, and changes in operating assets and liabilities of $3.0 million. Adjustments for non-cash items primarily consisted of $1.5 million of depreciation and amortization of intangible assets and $3.1 million of equity-based compensation expenses. The increase in operating assets and liabilities primarily consisted of a decrease in trade receivables of $3.4 million (mainly as a result of a decrease in unbilled receivables associated with royalties) and an increase in accrued payroll and related benefits of $1.6 million, partially offset by an increase in prepaid expenses and other assets of $1.6 million (mainly as a result of payment of a yearly design tool subscription) and an increase in deferred taxes, net, of $1.0 million.

 

Cash flows from operating activities may vary significantly from quarter to quarter depending on the timing of our receipts and payments. Our ongoing cash outflows from operating activities principally relate to payroll-related costs and obligations under our property leases and design tool licenses. Our primary sources of cash inflows are receipts from our accounts receivable, to some extent, funding from research and development government grants and French research tax credits, and interest earned from our cash, deposits and marketable securities. The timing of receipts of accounts receivable from customers is based upon the completion of agreed milestones or agreed dates as set out in the contracts.

 

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Investing Activities

 

Net cash provided by investing activities for the first three months of 2021 was $16.2 million, compared to $2.9 million of net cash used in investing activities for the comparable period of 2020. We had a cash outflow of $6.8 million and a cash inflow of $11.0 million with respect to investments in marketable securities during the first three months of 2021, as compared to a cash outflow of $13.1 million and a cash inflow of $9.2 million with respect to investments in marketable securities during the first three months of 2020. For the first three months of 2021, we had proceeds of $13.0 million from bank deposits, as compared to net proceeds of $2.0 million from bank deposits for the comparable period of 2020. We had a cash outflow of $1.1 million and $0.8 million during the first three months of 2021 and 2020, respectively, from purchase of property and equipment. For the first three months of 2020, we had a cash outflow of $0.2 million for the acquisition of the Hillcrest Labs business.

 

Financing Activities

 

Net cash provided by financing activities for the first three months of 2021 was $1.6 million, as compared to $3.4 million of net cash used in financing activities for the comparable period of 2020.

 

In August 2008, we announced that our board of directors approved a share repurchase program for up to one million shares of common stock which was further extended collectively by an additional 6,400,000 shares in 2010, 2013, 2014, 2018 and 2020. We did not repurchase any shares of common stock during the first three months of 2021. During the first three months of 2020, we repurchased 202,392 shares of common stock pursuant to our share repurchase program, at an average purchase price of $23.62 per share, for an aggregate purchase price of $4.8 million. As of March 31, 2021, we had 497,608 shares available for repurchase.

 

During the first three months of 2021, we received $1.6 million from the exercise of stock-based awards, as compared to $1.4 million received for the comparable period of 2020.

 

We believe 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. We cannot provide assurances, however, that the underlying assumed levels of revenues and expenses will prove to be accurate. We believe the company has the financial resources to weather the expected short-term impacts of COVID-19. However, we have limited insight into the extent to which our business may be impacted by COVID-19, and there are many uncertainties, including the length and severity of the pandemic. An extended and severe pandemic may materially and adversely affect our future operations, financial position and liquidity.

 

In addition, as part of our business strategy, we occasionally evaluate potential acquisitions of businesses, products and technologies and minority equity investments. Accordingly, a portion of our available cash may be used at any time for the acquisition of complementary products or businesses or minority equity investments. Such potential transactions may require substantial capital resources, which may require us to seek additional debt or equity financing. We cannot assure you that we will be able to successfully identify suitable acquisition or investment candidates, complete acquisitions or investments, integrate acquired businesses into our current operations, or expand into new markets. Furthermore, we cannot provide assurances that additional financing will be available to us in any required time frame and on commercially reasonable