10-Q 1 ceva20190930_10q.htm FORM 10-Q ceva20190930_10q.htm
 

 

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: September 30, 2019

 

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.)

   

1174 Castro Street, Suite 210, Mountain View, California

94040

(Address of Principal Executive Offices)

(Zip Code)

 

(650) 417-7900

 

(Registrant’s Telephone Number, Including Area Code)

 


 

 

 

 

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

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $.001 per share

CEVA

The NASDAQ Stock Market LLC

 

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: 21,992,936 of common stock, $0.001 par value, as of November 4, 2019.

 

 

 
 

 

TABLE OF CONTENTS

 

   

Page

PART I.

FINANCIAL INFORMATION

 
Item 1.

Interim Condensed Consolidated Balance Sheets at September 30, 2019 (unaudited) and December 31, 2018

6

 

Interim Condensed Consolidated Statements of Income (Loss) (unaudited) for the three and nine months ended September 30, 2019 and 2018

7

 

Interim Condensed Consolidated Statements of Comprehensive Income (Loss) (unaudited) for the three and nine months ended September 30, 2019 and 2018

8

 

Interim Condensed Consolidated Statements of Changes In Stockholders’ Equity (unaudited) for the three and nine months ended September 30, 2019 and 2018

9

 

Interim Condensed Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 30, 2019 and 2018

10

 

Notes to the Interim Condensed Consolidated Financial Statements

11

Item 2.

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

27

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

35

Item 4.

Controls and Procedures

36

PART II.

OTHER INFORMATION

 
Item 1.

Legal Proceedings

36

Item 1A.

Risk Factors

36

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

47

Item 3

Defaults Upon Senior Securities

47

Item 4

Mine Safety Disclosures

47

Item 5

Other Information

47

Item 6

Exhibits

47

SIGNATURES

48

 

 

 
 

 

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 forecast that in 2022, our licensing and related revenue will have grown approximately 10% to 20% from the 2018 licensing revenue level , our royalty revenue will be approximately two times as compared to the 2018 royalty revenue and our non GAAP net income will be approximately three times as compared to 2018 non GAAP net income;

       
     

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

       
     

●        Our belief that we are firmly established in the handsets space with customers with strong industry presence;

       
     

●        Our belief that the adoption of our wireless connectivity technologies and smart sensing products, beyond our incumbency in the handset baseband market, continues to progress, and that our non-handset baseband shipment data is indicative of the continued expansion of that part of our business;

       
     

●        Our belief that the acquisition of the Hillcrest Labs business from InterDigital and the technology investment and strategic partnership we formed with Immervision will enable us to further expand our smart sensing product offerings, customer reach and royalty revenue sources and allow us to move up the value chain and create tighter relationships with semiconductor companies and OEMs;

       
     

●        Our belief that the Hillcrest Labs and Immervision IP are value-adds for our customers;

       
     

●        Our expectation that a new 5G chip powered by our DSP will be in the market in 2020;

       
     

●        Our belief that the emergence of voice assisted smart devices offers an additional growth segment for us in handsets, wireless earbuds, smart home, automotive and consumer devices;

       
     

●        Our belief that our WhisPro speech recognition technology and ClearVox voice input software put us in a stronger position to power audio and voice roadmaps across a range of addressable end markets;

       
     

●        Our belief that our advanced DSPs and PentaG platform for mobile broadband put us in a strong position to power 5G baseband for base station, smartphones, fixed wireless and a range of machine to machine usage devices;

       
     

●        Our belief that our PentaG is the most advanced cellular baseband IP;

       
     

●        Per Yole Dévelopement, camera-enabled devices incorporating computer vision and AI are expected to exceed 1 billion units by 2022;

       
     

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

       
     

●        Our belief that our specialization and competitive edge in signal processor platforms for 5G base station RAN put us in a strong position to capitalize on the emergence of 5G to address mass market adoption and new 5G infrastructure usage models;

 

4

 

 

     

●        Our belief that our computer vision DSP and neural net compilers are opportunities for us to expand our footprint and content in ADAS, drones, consumer cameras, surveillance, mobile, robots and IoT applications;

       
     

●        Our belief that our newly announced NeuPro™, a family of AI processors and CDNN compiler for deep learning inference at the edge, represents licensing and royalty drivers for the company;

       
     

●        Our expectation of significant growth in royalty revenues derived from non-handset baseband 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 base station RAN, as well as royalty ASP of our other products being in between the two ranges;

       
     

●        Our expectations that royalty revenue will substantially increase in the second half of 2019 with more than a 10% sequential increase for the fourth quarter of 2019 and should account for one of the highest royalty revenue quarters in the Company’s history;

       
     

●        Our expectation that as a result of the acquisition of the Hillcrest Labs business, our operating expenses will include, starting from the third quarter of 2019, the ongoing Hillcrest Labs expenses, which is expected to be approximately an additional $1.5 million per quarter, not including amortizations and equity based compensation expenses;

       
     

●        Our anticipation that our research and development expenses cost will continue to increase by approximately $5 million in 2019;

       
     

●        Our anticipation that our cost of revenues will increase by up to $2 million in 2019 as compared to prior years;

       
     

●        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; and

       
     

●        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.

 

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.

 

5

 
 

 

PART I. FINANCIAL INFORMATION

 

Item 1. FINANCIAL STATEMENTS

 

INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS


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

 

   

September 30,
2019

   

December 31,
2018

 

 

 

Unaudited

         
ASSETS                

Current assets:

               

Cash and cash equivalents

  $ 14,851     $ 22,260  

Short term bank deposits

    56,991       46,139  

Marketable securities

    70,462       77,469  

Trade receivables

    26,813       26,156  

Prepaid expenses and other current assets

    5,682       5,264  

Total current assets

    174,799       177,288  

Long-term assets:

               

Bank deposits

    5,330       21,864  

Severance pay fund

    9,732       9,026  

Deferred tax assets, net

    10,891       5,924  

Property and equipment, net

    7,891       7,344  

Operating lease right-of-use assets

    10,688        

Goodwill

    51,070       46,612  

Intangible assets, net

    17,353       2,700  

Investments in other company

    936       936  

Other long-term assets

    5,235       5,569  

Total long-term assets

    119,126       99,975  

Total assets

  $ 293,925     $ 277,263  
                 

LIABILITIES AND STOCKHOLDERS’ EQUITY

               

Current liabilities:

               

Trade payables

  $ 1,319     $ 632  

Deferred revenues

    4,766       3,593  

Accrued expenses and other payables

    4,003       4,344  

Accrued payroll and related benefits

    13,164       13,183  

Operating lease liabilities

    2,442        

Total current liabilities

    25,694       21,752  

Long-term liabilities:

               

Accrued severance pay

    10,447       9,632  

Operating lease liabilities

    7,879        

Other accrued liabilities

    545        

Total long-term liabilities

    18,871       9,632  

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 September 30, 2019 (unaudited) and December 31, 2018. 21,984,178 and 21,787,860 shares outstanding at September 30, 2019 (unaudited) and December 31, 2018, respectively

    22       22  

Additional paid in-capital

    225,483       223,250  

Treasury stock at cost (1,610,982 and 1,807,300 shares of common stock at September 30, 2019 (unaudited) and December 31, 2018, respectively)

    (35,492 )     (39,132 )

Accumulated other comprehensive loss

    (22 )     (1,114 )

Retained earnings

    59,369       62,853  

Total stockholders’ equity

    249,360       245,879  

Total liabilities and stockholders’ equity

  $ 293,925     $ 277,263  

 

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

 

6

 
 

 

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF LOSS (UNAUDITED)

 

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


 

    Nine months ended     Three months ended  
   

September 30,

   

September 30,

 
   

2019

   

2018

   

2019

   

2018

 

Revenues:

                               

Licensing and related revenue

  $ 33,084     $ 29,907     $ 11,269     $ 9,786  

Royalties

    25,756       26,569       12,202       11,627  

Total revenues

    58,840       56,476       23,471       21,413  

Cost of revenues

    7,283       5,966       2,767       2,006  

Gross profit

    51,557       50,510       20,704       19,407  

Operating expenses:

                               

Research and development, net

    38,593       35,756       13,873       11,897  

Sales and marketing

    8,809       9,302       2,832       2,727  

General and administrative

    8,360       8,193       3,509       2,406  

Amortization of intangible assets

    1,177       676       757       225  

Total operating expenses

    56,939       53,927       20,971       17,255  

Operating income (loss)

    (5,382 )     (3,417 )     (267 )     2,152  

Financial income, net

    2,299       2,535       603       831  

Income (loss) before taxes on income

    (3,083 )     (882 )     336       2,983  

Income taxes expense (benefit)

    (49 )     847       (439 )     440  

Net income (loss)

  $ (3,034 )   $ (1,729 )   $ 775     $ 2,543  
                                 
                                 

Basic net income (loss) per share

  $ (0.14 )   $ (0.08 )   $ 0.04     $ 0.12  

Diluted net income (loss) per share

  $ (0.14 )   $ (0.08 )   $ 0.03     $ 0.11  
                                 
                                 

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

                               

Basic

    21,936       22,091       21,953       21,997  

Diluted

    21,936       22,091       22,404       22,428  

 

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

 

7

 
 

 

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

 

U.S. dollars in thousands


 

    Nine months ended     Three months ended  
   

September 30,

   

September 30,

 
   

2019

   

2018

   

2019

   

2018

 
                                 

Net income (loss):

  $ (3,034 )   $ (1,729 )   $ 775     $ 2,543  

Other comprehensive income (loss) before tax:

                               

Available-for-sale securities:

                               

Changes in unrealized gains (losses)

    1,131       (863 )     (93 )     16  

Reclassification adjustments for (gains) losses included in net income (loss)

    38       30       3       32  

Net change

    1,169       (833 )     (90 )     48  

Cash flow hedges:

                               

Changes in unrealized gains (losses)

    401       (259 )     83       21  

Reclassification adjustments for (gains) losses included in net income (loss)

    (304 )     259       (117 )     63  

Net change

    97             (34 )     84  

Other comprehensive income (loss) before tax

    1,266       (833 )     (124 )     132  

Income tax expense (benefit) related to components of other comprehensive income (loss)

    174       (135 )     (38 )     (1 )

Other comprehensive income (loss), net of taxes

    1,092       (698 )     (86 )     133  

Comprehensive income (loss)

  $ (1,942 )   $ (2,427 )   $ 689     $ 2,676  

 

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

 

8

 
 

 

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

 

U.S. dollars in thousands, except share data


 

   

Common stock

                                 

Nine months ended September 30, 2019

 

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, 2019

    21,787,860     $ 22     $ 223,250     $ (39,132 )   $ (1,114 )   $ 62,853     $ 245,879  

Net loss

                                  (3,034 )     (3,034 )

Other comprehensive income

                            1,092             1,092  

Equity-based compensation

                7,847                         7,847  

Purchase of treasury stock

    (194,316 )                 (4,861 )                 (4,861 )

Issuance of treasury stock upon exercise of stock-based awards

    390,634       (*)     (5,614 )     8,501             (450 )     2,437  

Balance as of September 30, 2019

    21,984,178     $ 22     $ 225,483     $ (35,492 )   $ (22 )   $ 59,369     $ 249,360  

 

 

   

Common stock

                                 

Three months ended September 30, 2019

 

Number of

shares

outstanding

   

Amount

    Additional
paid-in

capital
   

Treasury

stock

   

Accumulated

other

comprehensive

income (loss)

    Retained
earnings
    Total
stockholders’

equity
 

Balance as of July 1, 2019

    21,893,128     $ 22     $ 223,306     $ (37,498 )   $ 64     $ 58,751     $ 244,645  

Net loss

                                  775       775  

Other comprehensive loss

                            (86 )           (86 )

Equity-based compensation

                2,752                         2,752  

Issuance of treasury stock upon exercise of stock-based awards

    91,050       (*)     (575 )     2,006             (157 )     1,274  

Balance as of September 30, 2019

    21,984,178     $ 22     $ 225,483     $ (35,492 )   $ (22 )   $ 59,369     $ 249,360  

 

 

   

Common stock

                                 

Nine months ended September 30, 2018

 

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, 2018

    22,064,007     $ 22     $ 217,417     $ (26,056 )   $ (586 )   $ 53,873     $ 244,670  

Net loss

                                  (1,729 )     (1,729 )

Other comprehensive loss

                            (698 )           (698 )

Equity-based compensation

                8,083                         8,083  

Purchase of treasury stock

    (527,212 )                 (16,742 )                 (16,742 )

Issuance of treasury stock upon exercise of stock-based awards

    365,581       (*)     (4,252 )     6,630             (129 )     2,249  

Cumulative effect of adoption of new accounting standard

                                  8,555       8,555  

Balance as of September 30, 2018

    21,902,376     $ 22     $ 221,248     $ (36,168 )   $ (1,284 )   $ 60,570     $ 244,388  

 

 

   

Common stock

                                 

Three months ended September 30, 2018

 

Number of

shares

outstanding

   

Amount

    Additional
paid-in

capital
   


Treasury

stock

   

Accumulated

other

comprehensive

income (loss)

    Retained
earnings
    Total
stockholders’

equity
 

Balance as of July 1, 2018

    22,030,598     $ 22     $ 219,333     $ (31,640 )   $ (1,417 )   $ 58,068     $ 244,366  

Net income

                                  2,543       2,543  

Other comprehensive income

                            133             133  

Equity-based compensation

                2,467                         2,467  

Purchase of treasury stock

    (216,156 )                 (6,308 )                 (6,308 )

Issuance of treasury stock upon exercise of stock-based awards

    87,934       (*)     (552 )     1,780             (41 )     1,187  

Balance as of September 30, 2018

    21,902,376     $ 22     $ 221,248     $ (36,168 )   $ (1,284 )   $ 60,570     $ 244,388  

 

(*)

Amount less than $1.

 

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

 

9

 
 

 

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

U.S. dollars in thousands


 

   

Nine months ended
September 30,

 
   

2019

   

2018

 

Cash flows from operating activities:

               

Net loss

  $ (3,034 )   $ (1,729 )

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

               

Depreciation

    2,274       1,914  

Amortization of intangible assets

    1,412       938  

Equity-based compensation

    7,847       8,083  

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

    38       30  

Amortization of premiums on available-for-sale marketable securities

    427       609  

Unrealized foreign exchange loss

    461       141  

Changes in operating assets and liabilities:

               

Trade receivables

    (657 )     1,658  

Prepaid expenses and other assets

    (1,458 )     (3,815 )

Operating lease right-of-use assets

    (903 )      

Accrued interest on bank deposits

    (945 )     (643 )

Deferred tax, net

    (3,856 )     (949 )

Trade payables

    689       557  

Deferred revenues

    1,209       (785 )

Accrued expenses and other payables

    (257 )     (802 )

Accrued payroll and related benefits

    251       (1,329 )

Operating lease liability

    823        

Income taxes payable

    (63 )     55  

Accrued severance pay, net

    60       149  

Net cash provided by operating activities

    4,318       4,082  
                 

Cash flows from investing activities:

               

Acquisition of business

    (11,000 )      

Purchase of property and equipment

    (2,664 )     (2,913 )

Purchase of intangible assets

    (10,140 )     (1,960 )

Investment in bank deposits

    (13,346 )     (21,596 )

Proceeds from bank deposits

    20,165       22,065  

Investment in available-for-sale marketable securities

    (18,738 )     (15,516 )

Proceeds from maturity of available-for-sale marketable securities

    3,888       10,122  

Proceeds from sale of available-for-sale marketable securities

    22,561       7,803  

Net cash used in investing activities

    (9,274 )     (1,995 )
                 

Cash flows from financing activities:

               

Purchase of treasury stock

    (4,861 )     (16,742 )

Proceeds from exercise of stock-based awards

    2,437       2,249  

Net cash used in financing activities

    (2,424 )     (14,493 )

Effect of exchange rate changes on cash and cash equivalents

    (29 )     (121 )

Decrease in cash and cash equivalents

    (7,409 )     (12,527 )

Cash and cash equivalents at the beginning of the period

    22,260       21,739  

Cash and cash equivalents at the end of the period

  $ 14,851     $ 9,212  
                 

Supplemental information of cash-flow activities:

               

Cash paid during the period for:

               

Income and withholding taxes

  $ 3,845     $ 3,716  

Non-cash transactions:

               

Cumulative effect of adoption of new accounting standard

  $     $ 8,555  

Property and equipment purchases incurred but unpaid at period end

  $     $ 54  

Intangible assets purchases incurred but unpaid at period end

  $     $ 750  

Right-of-use assets obtained in the exchange for operating lease liabilities

  $ 1,881     $  

 

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

 

10

 

 

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 products. These products include comprehensive DSP-based platforms for 5G baseband processing in mobile and infrastructure, advanced imaging and computer vision for any camera-enabled device and audio/voice/speech and ultra-low power always-on/sensing applications for multiple IoT markets. For sensor fusion, following the acquisition of the business of Hillcrest Laboratories, Inc. (“Hillcrest Labs”) as discussed in Note 3, CEVA’s Hillcrest Labs sensor processing technologies provide a broad range of sensor fusion software and IMU solutions for AR/VR, robotics, remote controls, and IoT. For artificial intelligence, CEVA offers a family of AI processors capable of handling the complete gamut of neural network workload and on-device. For wireless IoT, CEVA 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.

 

 

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 and nine months ended September 30, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019. 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, 2018.

 

The significant accounting policies applied in the annual consolidated financial statements of the Company as of December 31, 2018, contained in the Company’s Annual Report on Form 10K filed with the Securities and Exchange Commission on March 4, 2019, have been applied consistently in these unaudited interim condensed consolidated financial statements, except for changes associated with recent accounting standards for leases, as detailed below.

 

Recently Adopted Accounting Pronouncements

 

On January 1, 2019, the Company adopted Accounting Standards Update (“ASU”) No. 2016-02, Leases (“Topic 842”), as amended, which supersedes the lease accounting guidance under Topic 840, and generally requires lessees to recognize operating and financing lease liabilities and corresponding right-of-use (ROU) assets on the balance sheet and to provide enhanced disclosures surrounding the amount, timing and uncertainty of cash flows arising from leasing arrangements. The Company adopted the new guidance using the modified retrospective transition approach by applying the new standard to all leases existing on the date of initial application and not restating comparative periods. The most significant impact was the recognition of ROU assets and lease liabilities for operating leases. For information regarding the impact of Topic 842 adoption, see Significant Accounting Policies - Leases and Note 5- Leases.

 

In August 2017, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities,” amending the eligibility criteria for hedged items and transactions to expand an entity’s ability to hedge nonfinancial and financial risk components. The new guidance eliminates the requirement to separately measure and present hedge ineffectiveness and aligns the presentation of hedge gains and losses with the underlying hedge item. The new guidance also simplifies the hedge documentation and hedge effectiveness assessment requirements. The amended presentation and disclosure requirements must be adopted on a prospective basis, while any amendments to cash flow and net investment hedge relationships that exist on the date of adoption must be applied on a “modified retrospective” basis, meaning a cumulative effect adjustment to the opening balance of retained earnings as of the beginning of the year of adoption. The new guidance was effective for the Company on January 1, 2019 and the adoption did not have a material impact on the Company’s consolidated financial statements.

 

11

 

 

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

 

(in thousands, except share data)

 

Significant Accounting Policies- Leases 

 

Effective as of January 1, 2019, the Company adopted Topic 842, which requires the recognition of lease assets and lease liabilities by lessees for leases classified as operating leases. The Company has adopted Topic 842 using the modified retrospective transition approach by applying the new standard to all leases existing on the date of initial application. Results and disclosure requirements for reporting periods beginning after January 1, 2019 are presented under Topic 842, while prior period amounts have not been adjusted and continue to be reported in accordance with the Company’s historical accounting under Topic 840.

 

The Company elected the package of practical expedients permitted under the transition guidance, which allowed the Company to carryforward the historical lease classification, the Company’s assessment on whether a contract was or contains a lease, and initial direct costs for any leases that existed prior to January 1, 2019. The Company also elected to keep leases with an initial term of 12 months or less off the balance sheet and recognize the associated lease payments in the consolidated statements of income (loss) on a straight-line basis over the lease term.

 

As a result of the adoption of Topic 842 on January 1, 2019, the Company recorded both operating lease ROU assets of $9,785 and operating lease liabilities of $9,498. The ROU assets include adjustments for prepayments in the amount of $287. The adoption did not impact the Company’s beginning retained earnings, or its prior year condensed consolidated statements of income (loss) and statements of cash flows.

 

The Company determines if an arrangement is a lease at inception. The Company’s assessment is based on: (1) whether the contract includes an identified asset, (2) whether the Company obtains substantially all of the economic benefits from the use of the asset throughout the period of use, and (3) whether the Company has the right to direct how and for what purpose the identified asset is used throughout the period of use.

 

Leases are classified as either finance leases or operating leases. A lease is classified as a finance lease if any one of the following criteria are met: the lease transfers ownership of the asset by the end of the lease term, the lease contains an option to purchase the asset that is reasonably certain to be exercised, the lease term is for a major part of the remaining useful life of the asset, the present value of the lease payments equals or exceeds substantially all of the fair value of the asset, or the underlying asset is of such a specialized nature that it is expected to have no alternative use to the lessor at the end of lease term. A lease is classified as an operating lease if it does not meet any one of these criteria. Since all of the Company’s lease contracts do not meet any one of the criteria above, the Company concluded that all of its lease contracts should be classified as operation leases.

 

ROU assets and liabilities are recognized on the commencement date based on the present value of remaining lease payments over the lease term. For this purpose, the Company considers only payments that are fixed and determinable at the time of commencement. As most of the Company's leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available on the commencement date in determining the present value of lease payments. The ROU asset also includes any lease payments made prior to commencement and is recorded net of any lease incentives received. All ROU assets are reviewed for impairment. The lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise such options.

 

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 interim condensed consolidated financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

 

Reclassification

 

During the period, the Company changed the classification of prepaid expenses and other assets and deferred tax assets, net, in order to properly reflect the nature of such activities.

 

12

 

 

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

 

(in thousands, except share data)

 

 

NOTE 3: ACQUISITIONS

 

In July 2019, the Company acquired the Hillcrest Labs business from InterDigital, Inc. (“InterDigital”). Hillcrest Labs is a leading global supplier of software and components for sensor processing in consumer and IoT devices. Under the terms of the agreement, the Company agreed to pay an aggregate of $11,204 to purchase the Hillcrest Labs business, as well as non-exclusive rights to certain Hillcrest Labs’ patents retained by InterDigital, with $10,000 paid at closing, $204 of which is a contingent consideration that is expected to be paid during the fourth quarter of 2019, and the remainder of $1,000 held in escrow to satisfy indemnification claims, if any.

 

The milestone-based contingent payment is calculated based on payments to be received by the Company for certain products to be sold by the Company prior to October 15, 2019. These milestone-based contingent payments were measured at fair value on the closing date and recorded as a liability on the balance sheet in the amount of $204.

 

In addition, the Company incurred acquisition-related deal expenses and write-off of an acquired lease associated with the Hillcrest Labs transaction in a total amount of $846, which were included in general and administrative expenses for the three and nine months ended September 30, 2019. Acquisition-related costs included legal, accounting and consulting fees, and other external costs directly related to the acquisition.

 

Goodwill generated from this business combination is attributed to synergies between the Company's and Hillcrest Lab's respective products and services.

 

The results of Hillcrest Lab's operations have been included in the consolidated financial statements since July 19, 2019. Pro forma results of operations related to this acquisition have not been prepared because they are not material to the Company's consolidated statement of income.

 

The preliminary purchase price allocation for the acquisition has been determined as follows:

 

Tangible assets (including inventory, property and equipment and other)

  $ 681  

Intangible assets:

       

Developed technologies

    2,475  

Customer relationships

    3,518  

Customer backlog

    72  

Goodwill

    4,458  

Total assets

  $ 11,204  

 

 

The acquisition of the Hillcrest Labs business has been accounted in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) No. 805, “Business Combinations” (“ASC 805”). Under the acquisition method of accounting, the total purchase price is allocated to the net tangible and intangible assets based on their fair values on the closing date.

 

The purchase price allocations have been prepared on a preliminary basis based on information that was available to the Company at the time the condensed consolidated financial statements were prepared, and revisions to the preliminary purchase price allocations may result as additional information becomes available.

 

In August 2019, the Company entered into a strategic agreement with a private company, Immervision, Inc. (“Immervision”), whereby the Company made a strategic technology investment for a total consideration of $10,000 to secure exclusive licensing rights to Immervision’s advanced portfolio of patented wide-angle image processing technology and software. The Company considered the guidance in ASC 805 and determined that the transaction was an asset acquisition. As a result, the estimated fair value of the assets acquired have been included in the accompanying balance sheet from the date of acquisition.

 

The preliminary consideration for the investment has been determined as follows:

 

Intangible assets:

       

Core technologies

  $ 10,000  

 

The intangible assets will be amortized based on the pattern upon which the economic benefits of the intangible assets are to be utilized.

 

13

 

 

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

 

(in thousands, except share data)

 

 

Note 4: revenue recognition

 

Under ASC 606, “Revenue from Contracts with Customers “, an entity recognizes revenue when or as it satisfies a performance obligation by transferring IP license 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 of its IPs. The Company recognizes revenue over time on significant license customization contracts that are covered by contract accounting standards 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 2019

   

2020

   

2021

 

License and related revenues

  $ 5,262     $ 7,884     $ 1,780  

 

 

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):

 

   

Nine months ended September 30, 2019

(unaudited)

   

Three months ended September 30, 2019

(unaudited)

 
   

Licensing and

related revenues

   

Royalties

   

Total

   

Licensing and

related revenues

   

Royalties

   

Total

 

Primary geographical markets

                                               

United States

  $ 6,809     $ 904     $ 7,713     $ 3,450     $ 361     $ 3,811  

Europe and Middle East

    2,848       10,397       13,245       1,241       5,670       6,911  

Asia Pacific

    23,427       14,455       37,882       6,578       6,171       12,749  

Total

  $ 33,084     $ 25,756     $ 58,840     $ 11,269     $ 12,202     $ 23,471  
                                                 

Major product/service lines

                                               

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

  $ 23,324     $ 23,100     $ 46,424     $ 8,608     $ 10,424     $ 19,032  

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

    9,760       2,656       12,416       2,661       1,778       4,439  

Total

  $ 33,084     $ 25,756     $ 58,840     $ 11,269     $ 12,202     $ 23,471  
                                                 

Timing of revenue recognition

                                               

Products transferred at a point in time

  $ 22,775     $ 25,756     $ 48,531     $ 7,468     $ 12,202     $ 19,670  

Products and services transferred over time

    10,309             10,309       3,801             3,801  

Total

  $ 33,084     $ 25,756     $ 58,840     $ 11,269     $ 12,202     $ 23,471  

 

14

 

 

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

 

(in thousands, except share data)

 

   

Nine months ended September 30, 2018

(unaudited)

   

Three months ended September 30, 2018

(unaudited)

 
   

Licensing and

related revenues

   

Royalties

   

Total

   

Licensing and

related revenues

   

Royalties

   

Total

 

Primary geographical markets

                                               

United States

  $ 4,667     $ 1,420     $ 6,087     $ 1,483     $ 776     $ 2,259  

Europe and Middle East

    3,286       8,019       11,305       534       5,605       6,139  

Asia Pacific

    21,954       17,130       39,084       7,769       5,246       13,015  

Total

  $ 29,907     $ 26,569     $ 56,476     $ 9,786     $ 11,627     $ 21,413  
                                                 

Major product/service lines

                                               

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

  $ 21,769     $ 25,065     $ 46,834     $ 8,210     $ 11,189     $ 19,399  

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

    8,138       1,504       9,642       1,576       438       2,014  

Total

  $ 29,907     $ 26,569     $ 56,476     $ 9,786     $ 11,627     $ 21,413  
                                                 

Timing of revenue recognition

                                               

Products transferred at a point in time

  $ 22,163     $ 26,569     $ 48,732     $ 6,878     $ 11,627     $ 18,505  

Products and services transferred over time

    7,744             7,744       2,908             2,908  

Total

  $ 29,907     $ 26,569     $ 56,476     $ 9,786     $ 11,627     $ 21,413  

 

 

Contract balances:

 

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

 

   

September 30,

2019

(unaudited)

   

December 31,

2018

 
                 

Trade receivables

  $ 7,967     $ 9,971  

Unbilled receivables (associated with licensing and related revenue)

    7,985       6,745  

Unbilled receivables (associated with royalties)

    10,861       9,440  

Deferred revenues (short-term contract liabilities)

    4,766       3,593  

 

 

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 and nine months ended September 30, 2019, the Company recognized $322 and $3,513, respectively, that was included in deferred revenues (short-term contract liability) balance at January 1, 2019.

 

15

 

 

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

 

(in thousands, except share data)

 

 

NOTE 5: 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 2020 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. The Company has an option to extend the lease of one of its principal office space until 2028, which is reasonably certain to be assured. 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.

 

Under Topic 842, all leases with durations greater than 12 months, including non-cancelable operating leases, are now recognized on the balance sheet. The aggregate present value of lease agreements are recorded as a long-term asset titled ROU assets. The corresponding lease liabilities are split between operating lease liabilities within current liabilities and operating lease liabilities within long-term liabilities.

 

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

 

   

September 30, 2019

(Unaudited)

 

weighted average remaining lease term (years)

    7.62  

weighted average discount rates

    3.80 %

 

Total operating lease cost during the three and nine months ended September 30, 2019 was $502 and $1,320, respectively. Cash paid for amounts included in the measurement of operating lease liabilities was $421 and $1,380 during the three and nine months ended September 30, 2019, respectively.

 

Maturities of lease liabilities are as follows:

 

The remainder of 2019

  $ 705  

2020

    2,361  

2021

    1,566  

2022

    1,272  

2023

    1,192  

2024 and thereafter

    4,856  

Total undiscounted cash flows

    11,952  

Less imputed interest

    1,631  

Present value of lease liabilities

  $ 10,321  

 

 

 

NOTE 6: MARKETABLE SECURITIES

 

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

 

   

September 30, 2019 (Unaudited)

 
   

Amortized
cost

   

Gross
unrealized

gains

   

Gross
unrealized

losses

   

Fair
value

 

Available-for-sale - matures within one year:

                         

Corporate bonds

  $ 17,245     $ 13     $ (30 )   $ 17,228  
      17,245       13       (30 )     17,228  

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

                               

Government bonds

    501             (1 )     500  

Corporate bonds

    52,770       162       (198 )     52,734  
      53,271       162       (199 )     53,234  
                                 

Total

  $ 70,516     $ 175     $ (229 )   $ 70,462  

 

16

 

 

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

 

(in thousands, except share data)

 

   

December 31, 2018

 
   

Amortized
cost

   

Gross
unrealized

gains

   

Gross
unrealized

losses

   

Fair
value

 

Available-for-sale - matures within one year:

                               

Corporate bonds

  $ 6,094     $     $ (32 )   $ 6,062  
      6,094             (32 )     6,062  

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

                               

Certificate of deposits

    747                   747  

Government bonds

    501             (5 )     496  

Corporate bonds

    71,350       134       (1,320 )     70,164  
      72,598       134       (1,325 )     71,407  
                                 

Total

  $ 78,692     $ 134     $ (1,357 )   $ 77,469  

 

 

The following table presents gross unrealized losses and fair values for those investments that were in an unrealized loss position as of September 30, 2019 and December 31, 2018, 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 September 30, 2019 (unaudited)

  $ 12,974     $ (110 )   $ 30,835     $ (119 )

As of December 31, 2018

  $ 16,580     $ (192 )   $ 52,590     $ (1,165 )

 

As of September 30, 2019 and December 31, 2018, management believes the impairments are not other than temporary and therefore the impairment losses were recorded in accumulated other comprehensive income (loss).

 

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

 

   

Nine months ended
September 30,

   

Three months ended
September 30,

 
   

2019

(unaudited)

   

2018

(unaudited)

   

2019

(unaudited)

   

2018

(unaudited)

 
                                 

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

  $ 1     $ 4     $ 1     $  

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

  $ (39 )   $ (34 )   $ (4 )   $ (32 )

 

17

 

 

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

 

(in thousands, except share data)

 

 

NOTE 7: 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, foreign currency derivative contracts and investment in other company 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. Investment in other company is classified within Level III as the Company estimates the value based on valuation methods using the observable transaction price on the transaction date and other unobservable inputs, including volatility, as well as rights and obligations of the securities the Company holds.

 

The table below sets forth the Company’s assets and liabilities 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

 

September 30,

2019 (unaudited)

   

Level I

(unaudited)

   

Level II

(unaudited)

   

Level III

(unaudited)

 

Assets:

                               

Marketable securities:

                               

Government bonds

  $ 500     $     $ 500     $  

Corporate bonds

    69,962             69,962        

Foreign exchange contracts

    20             20        

 

Description

 

December 31, 2018

   

Level I

   

Level II

   

Level III

 

Assets:

                               

Marketable securities:

                               

Certificate of deposits

  $ 747     $     $ 747     $  

Government bonds

    496             496        

Corporate bonds

    76,226             76,226        

Investment in other company (1)

    936                   936  
                                 

Liabilities:

                               

Foreign exchange contracts

    77             77        

 

(1) Non- marketable equity securities remeasured during the year ended December 31, 2018.

 

18

 

 

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

 

(in thousands, except share data)

 

 

NOTE 8: GOODWILL AND INTANGIBLE ASSETS, NET

 

 

(a)

Goodwill:

 

Changes in goodwill are as follows:

 

   

September 30, 2019

(unaudited)

   

December 31,

2018

 
                 

Balance as of January 1,

  $ 46,612     $ 46,612  

Acquisition

    4,458        

Balance as of September 30,

  $ 51,070     $ 46,612  

 

 

(b)

Intangible assets:

 

 

           

Nine months ended September 30, 2019

(unaudited)

   

Year ended December 31, 2018

 
   

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 RivieraWaves

                                                       

Customer relationships

    4.5     $ 272     $ 272     $     $ 272     $ 272     $  

Customer backlog

    1.5       93       93             93       93        

Core technologies

    5.1       5,796       5,586       210       5,796       4,955       841  
                                                         

Intangible assets related to the acquisition of Hillcrest Labs business

                                                       

Customer relationships

    4.4       3,518       176       3,342                    

Customer backlog

    0.5       72       29       43                    

Core technologies

    7.5       2,475       67       2,408                    
                                                         

Intangible assets related to a technology investment in Immervision

                                                       

Core technologies

    6.4       10,000       274       9,726                    
                                                         

Intangible assets related to an investment in NB-IoT technologies

                                                       

NB-IoT technologies (*)

    7.0       2,200       576       1,624       2,200       341       1,859  
                                                         

Total intangible assets

          $ 24,426     $ 7,073     $ 17,353     $ 8,361     $ 5,661     $ 2,700  

 

 

(*) 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, $610 has not resulted in cash outflows as of September 30, 2019. 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).

 

19

 

 

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

 

(in thousands, except share data)

 

Future estimated annual amortization charges are as follows:

 

2019

  $ 1,021  

2020

    3,080  

2021

    3,075  

2022

    3,075  

2023

    2,399  

2024 and thereafter

    4,703  
    $ 17,353  

 

 

NOTE 9: 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:

 

   

Nine months ended
September 30,

   

Three months ended
September 30,

 
   

2019

(unaudited)

   

2018

(unaudited)

   

2019

(unaudited)

   

2018

(unaudited)

 

Revenues based on customer location:

                               

United States

  $ 7,713     $ 6,087     $ 3,811     $ 2,259  

Europe and Middle East (1)

    13,245       11,305       6,911       6,139  

Asia Pacific (2) (3) (4)

    37,882       39,084       12,749       13,015  
    $ 58,840     $ 56,476     $ 23,471     $ 21,413  
                                 

(1) Germany

  $ 10,613     $ 8,582     $ 5,425     $ 5,600  

(2) China

  $ 25,542     $ 23,127     $ 8,993     $ 10,192  

(3) S. Korea

  $ *)     $ 7,152     $ *)     $ *)  

(4) Japan

  $ 6,544     $ 6,116     $ *)     $ *)  

 

*) 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.

 

   

Nine months ended
September 30,

   

Three months ended
September 30,

 
   

2019

(unaudited)

   

2018

(unaudited)

   

2019

(unaudited)

   

2018

(unaudited)

 
                                 

Customer A

    19 %     16 %     23 %     26 %

Customer B

    15 %     16 %     15 %     16 %

Customer C

    *)       12 %     *)       *)  

 

*) Less than 10%

 

20

 

 

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

 

(in thousands, except share data)

 

 

NOTE 10: NET 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.”

 

   

Nine months ended
September 30,

   

Three months ended
September 30,

 
   

2019

(unaudited)

   

2018

(unaudited)

   

2019

(unaudited)

   

2018

(unaudited)

 

Numerator:

                               

Net income (loss)

  $ (3,034 )   $ (1,729 )   $ 775     $ 2,543  

Denominator (in thousands):

                               

Basic weighted-average common stock outstanding

    21,936       22,091       21,953       21,997  

Effect of stock -based awards

                451       431  

Diluted weighted average common stock outstanding

    21,936       22,091       22,404       22,428  
                                 

Basic net income (loss) per share

  $ (0.14 )   $ (0.08 )   $ 0.04     $ 0.12  

Diluted net income (loss) per share

  $ (0.14 )   $ (0.08 )   $ 0.03     $ 0.11  

 

 

The weighted average number of shares related to outstanding equity-based awards excluded from the calculation of diluted net income per share, since their effect was anti-dilutive, was 105,901 shares for the three months ended September 30, 2019. The total number of shares related to the outstanding equity-based awards excluded from the calculation of diluted net loss per share was 1,385,525 for the nine months ended September 30, 2019. The weighted average number of shares related to outstanding equity-based awards excluded from the calculation of diluted net income per share, since their effect was anti-dilutive, was 136,113 shares for the three months ended September 30, 2018. The total number of shares related to the outstanding equity-based awards excluded from the calculation of diluted net loss per share was 1,273,610 for the nine months ended September 30, 2018.

 

 

NOTE 11: COMMON STOCK AND STOCK-BASED COMPENSATION PLANS

 

The Company grants stock options and stock appreciation rights (“SARs”) capped with a ceiling to employees and stock options to non-employee directors of the Company and its subsidiaries 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. The 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. SARs are considered an equity instrument as it is a net share settled award capped with a ceiling (400% for SAR grants). 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 nine months ended September 30, 2019, 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, 2018

    702,817     $ 19.88       4.3     $ 2,708  

Granted

                           

Exercised

    (54,114 )     16.73                  

Forfeited or expired

    (730 )     21.83                  

Outstanding as of September 30, 2019 (2)

    647,973     $ 20.14       3.7     $ 6,361  

Exercisable as of September 30, 2019 (3)

    611,677     $ 19.62       3.6     $ 6,313  

 

21

 

 

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

 

(in thousands, except share data)

 

 

(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 601,167 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 565,070 shares of the Company’s common stock issuable upon exercise.

 

As of September 30, 2019, there was $44 of unrecognized compensation expense related to unvested stock options and SARs. This amount is expected to be recognized over a weighted-average period of 1.0 years.

 

Starting in the second quarter of 2015, the Company granted to employees, including executive officers, and non-employee directors, restricted stock units (“RSUs”) under the Company’s 2011 Stock Incentive Plan. A 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. The fair value of each RSU is the market value as determined by the closing price of the common stock on the day of grant. The Company recognizes compensation expenses for the value of its RSU awards, based on the straight-line method over the requisite service period of each of the awards.

 

On May 7, 2019, the Compensation Committee (the “Committee”) of the Board of Directors (the “Board”) of the Company approved, effective immediately, an amendment to the RSU award granted to the Company’s Chief Executive Officer (the “CEO”) on February 19, 2019, consisting of 30,000 RSUs that vest in a three-year period (the “Prior RSU Award”). Based on feedback from stockholders during engagements with them prior to the Company’s 2019 annual meeting of stockholders, the Committee and the CEO mutually agreed to amend the Prior RSU Award. In lieu of the Prior RSU Award, the CEO would receive (1) 10,000 time-based RSUs with the same original three-year vesting schedule starting with 1/3 on February 19, 2020, and (2) an opportunity to receive up to 24,000 performance-based PSUs shares (the “PSUs”) based on the Company’s achievement of the 2019 license and related revenue goal approved by the Board (the “2019 License Revenue Target”). If the Company’s results equal 100% of the 2019 License Revenue Target, the CEO would receive 20,000 PSUs. If the Company’s results are between 90% to 99% of the 2019 License Revenue Target, the CEO would receive the same proportion of the 20,000 PSUs. If the Company’s results exceed 100% of the 2019 License Revenue Target, every 1% increase of the 2019 License Revenue Target, up to 120%, would result in an increase of 1% of the 20,000 PSUs to be awarded to the CEO. Subject to the Company achieving 90% of the 2019 License Revenue Target, the PSUs would vest in a three-year period, with 1/3 of the PSUs vest on February 19, 2020, and thereafter 1/3 of the remaining PSUs would vest on each of February 19, 2021 and February 19, 2022.

 

A summary of the Company’s RSU and PSU activities and related information for the nine months ended September 30, 2019, are as follows:

 

   

Number of
RSUs and

PSUs

   

Weighted Average

Grant-Date
Fair Value

 

Unvested as of December 31, 2018

    564,390     $ 32.28  

Granted

    489,099       27.77  

Vested

    (266,820 )     29.78  

Forfeited or expired

    (49,117 )     31.19  

Unvested as of September 30, 2019

    737,552     $ 30.27  

 

As of September 30, 2019, there was $16,238 of unrecognized compensation expense related to unvested RSUs and PSUs. This amount is expected to be recognized over a weighted-average period of 1.6 years.

 

22

 

 

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

 

(in thousands, except share data)

 

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

 

   

Nine months ended
September 30,

   

Three months ended
September 30,

 
   

2019

(unaudited)

   

2018

(unaudited)

   

2019

(unaudited)

   

2018

(unaudited)

 

Cost of revenue

  $ 464     $ 480     $ 168     $ 155  

Research and development, net