0000915778 DSP GROUP INC /DE/ false --12-31 FY 2020 0.001 0.001 50,000,000 50,000,000 23,709,924 23,709,924 23,110,631 23,110,631 0 0 0 0 0 0 0 0 1 0 0 9 2 5 5 3 1 1 1 3 0 4 33 33 33 7 7 0 0 5.21 7.49 10.15 6 2 4 6 8 2 4 5 8 8 10 17 3 Nexty Electronics sells the Company’s products to a limited number of customers, none of which had exceeded 10% of total revenues for the periods ended December 31, 2020, 2019 and 2018. Includes equity-based compensation expense in the amount of $3,448, $2,842 and $2,873 for the years ended December 31, 2020, 2019 and 2018, respectively. The pre-vest cancellation rate was calculated on an annual basis and is presented here on an annual basis. Includes equity-based compensation expense in the amount of $3,315, $2,583 and $2,255 for the years ended December 31, 2020, 2019 and 2018, respectively. The post-vest cancellation rate was calculated on a monthly basis and is presented here on an annual basis. The breakdown of the undiscounted lease payments by years as of December 31, 2020 was as follows: Operating Leases 2021 $ 2,977 2022 2,507 2023 1,804 2024 1,533 2025 and thereafter 6,989 Total undiscounted lease payments 15,810 Due to the ceiling imposed on the SAR grants, the exercisable amount above can be exercised for a maximum of 394 thousand shares of the Company’s common stock as of December 31, 2020. Calculation of aggregate intrinsic value for options, RSUs and SARs outstanding and exercisable is based on the share price of the Company’s common stock as of December 31, 2020, 2019 and 2018 which was $16.59, $15.74 and $11.20 per share, respectively. The intrinsic value for options and SARs exercised and RSUs vested during those years represents the difference between the fair market value of the Company’s common stock on the date of exercise and vesting for RSUs and the exercise price of each option, RSU or SAR, as applicable. The ratio of the stock price to strike price at the time of exercise of the option. Calculation of weighted average remaining contractual term does not include the RSUs that were granted, which have an indefinite contractual term. Distributor Due to the ceiling imposed on the SAR grants, the outstanding amount above can be exercised for a maximum of 1,651 thousand shares of the Company’s common stock as of December 31, 2020. Includes mainly legal, accounting, board of directors and investors relation expenses. Includes $614 and $785 of exchange rate differences resulting from the new lease accounting standard (ASC 842) for the years ended December 31, 2020 and 2019, respectively. During the third quarter of 2020, the Company completed the acquisition of SoundChip S.A. (“SoundChip”), a Swiss private company. The net fair value of the assets acquired, and the liabilities assumed, on the date of acquisition, was as follows: Working capital, excluding cash and cash equivalents $ (230 ) Property and equipment 456 Prepaid employees’ retention expenses 2,000 Developed technology 7,189 Customer relationships 678 Backlog 55 Deferred tax liability (1,121 ) Other long-term liability (1,945 ) Goodwill 6,862 $ 13,944 Ascend Technology sells our products to a limited number of customers. One of those customers – Cisco Systems, Inc. (“Cisco”) – accounted for 12%, 10% and 8% of the Company’s total revenues for the years ended December 31, 2020, 2019 and 2018, respectively. Includes equity-based compensation expense in the amount of $2,426, $1,758 and $1,248 for the years ended December 31, 2020, 2019 and 2018, respectively. Includes equity-based compensation expense in the amount of $524, $448 and $428 for the years ended December 31, 2020, 2019 and 2018, respectively. 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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

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

  

For the Fiscal Year Ended December 31, 2020

 

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

 

Commission File Number 001-35256

 

DSP GROUP, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

(State or other jurisdiction of
incorporation and organization)

94-2683643

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

 

2055 Gateway Place, Suite 480, San Jose, California 95110

 

(Address of principal executive offices, including zip code)

 

408-986-4300

(Registrant’s telephone number)

 

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

Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 per share
(Title of class)

 

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

DSPG

The NASDAQ Stock Market LLC

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.     Yes  ☐    No  ☒

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.      Yes  ☐    No  ☒

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes  ☒    No  ☐

 

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

 

Large accelerated filer  ☐                  Accelerated filer ☒         

Non-accelerated filer  ☐                    Smaller reporting company

 

Emerging growth Company

 

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

 

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

 

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

 

As of June 30, 2020, the aggregate market value of voting stock held by non-affiliates of the Registrant, based on the closing price of the Common Stock on June 30, 2020 as reported on the NASDAQ Global Select Market, was approximately $349,365,526. Shares of Common Stock held by each officer and director and their affiliates have been excluded from this computation in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

 

As of March 4, 2021, the Registrant had outstanding 24,226,009 shares of Common Stock.

 

Documents incorporated by reference: Portions of the Registrant’s proxy statement to be filed pursuant to Regulation 14A within 120 days after Registrant’s fiscal year end of December 31, 2020 are incorporated herein by reference into Item 5 of Part II and Items 10, 11, 12, 13 and 14 of Part III of this annual report.

 

 

 

 

 

INDEX

 

DSP GROUP, INC.

 

 

    Page No .

PART I

   

Item 1.

BUSINESS.

3

Item 1A.

RISK FACTORS.

12

Item 1B.

UNRESOLVED STAFF COMMENTS.

27

Item 2.

PROPERTIES.

27

Item 3.

LEGAL PROCEEDINGS.

28

Item 4.

MINE SAFETY DISCLOSURES.

28

     

PART II

   

Item 5.

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

29

Item 6.

SELECTED FINANCIAL DATA

32

Item 7.

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

33

Item 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

50

Item 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

52

Item 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

114

Item 9A.

CONTROLS AND PROCEDURES.

114

Item 9B.

OTHER INFORMATION.

114

PART III

   

Item 10.

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.

115

Item 11.

EXECUTIVE COMPENSATION.

115

Item 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

115

Item 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.

115

Item 14.

PRINCIPAL ACCOUNTANT FEES AND SERVICES.

115

PART IV

   

Item 15.

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

116

 

SIGNATURES

121

 

-1-

 

 

This report and certain information incorporated herein by reference contain forward-looking statements, which are provided under the "safe harbor" protection of the Private Securities Litigation Reform Act of 1995. All statements included or incorporated by reference in this report, other than statements that are purely historical in nature, are 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 statements regarding:

 

 

Our expectation that revenues from our IoAT businesses will increase in 2021 as compared to 2020;

 

 

Our belief that we are uniquely positioned to leverage our leadership in Unified Communications, SmartVoice and SmartHome technologies with world-class technologies and innovative solutions to address trends emerging from the work-from-home environment;

 

 

Our belief that there is increasing traction and interest among security service providers for ULE;

 

 

Our expectation that the Unified Communications market will recover in 2021;

 

 

Our anticipation that our gross margin on an annual basis will continue to increase in the foreseeable future as our product mix shifts in favor of new products, which generally have higher gross margins; 

 

 

Our belief that new communication access methods, including mobile, wireless broadband, cable and other connectivity will continue to grow, and that the traditional cordless telephony market using fixed-line telephony will continue to decline, which will continue to reduce our revenues derived from, and unit sales of, cordless telephony products; and

 

 

Our belief that our available cash and cash equivalents at December 31, 2020 should be sufficient to finance our operations for the foreseeable future.

 

All forward looking statements included in this Annual Report on Form 10K are made as of the date hereof, based on information available to us as of the date hereof, and we assume no obligation to update any forward-looking statement. Many factors may cause actual results to differ materially from those express or implied by the forward looking statements contained in this report. These factors include those risks described in Part II Item 1A "Risk Factors" of this Form 10K.

 

This Annual Report on Form 10K includes trademarks and registered trademarks of DSP Group. Products or service names of other companies mentioned in this Annual Report on Form 10K may be trademarks or registered trademarks of their respective owners.

 

DSP Group, Inc. is referred to in this Annual Report as "DSP Group," "we," "us" "our" or "company."

 

-2-

 

 

PART I

 

Item 1.         BUSINESS.

 

Introduction

 

DSP Group®, Inc. (NASDAQ: DSPG) is a leading global provider of wireless chipset solutions for converged communications, delivering system solutions that combine semiconductors and software with reference designs. We provide a broad portfolio of wireless chipsets integrating VoIP, Wi-Fi, PSTN and DECT technologies with state-of-the-art application processors and related software. We also enable converged voice, audio and data connectivity across diverse consumer products – from Unified Communications and cordless phones to home gateways, wearables and connected multimedia screens. Our Home segment consists of SmartHome products, which are comprised of our home gateway, and home automation and cordless telephony products. Our Unified Communications segment consists of a comprehensive set of solutions for Unified Communications office products. Our SmartVoice segment consists of products targeted at mobile, IoT and wearable device markets that incorporate our noise suppression and voice quality enhancement HDClear technology, as well as other third party advanced voice processing, always on and sensor hub functionalities.

 

In 2013, we defined three initiatives aimed at growing market verticals, which align well with our expertise. We called these initiatives Unified Communications, SmartHome, and SmartVoice, which together we referred to as “growth initiatives.” Our past research and development investments paid dividentds and our strategy with respect to such initiatives has proven successful. Starting in 2018, our growth initiatives accounted for a majority of our total revenues. Reflecting our success in turning growth initiatives into our core expertise, we changed the terminology for these market verticals that we operate in from “growth initiatives” to Internet of Audio Things or “IoAT” businesses.

 

In July 2020, we completed the acquisition of SoundChip SA, a privately-held Swiss company (“SoundChip”) for an initial purchase price of approximately $15 million and agreed to pay future contingent cash milestone payments of up to $6 million upon the achievement of certain customer and product sales. SoundChip is a leading supplier of active noise cancellation (ANC) technology, engineering services, design tools and production-line test systems for headsets. The acquisition combines SoundChip’s proven capabilities in hybrid ANC with our SmartVoice™ advanced low-power voice processing platform, algorithms, and mixed-signal expertise to streamline the delivery of cutting-edge wireless and true wireless stereo (TWS) headsets, from concept through to manufacturing. SoundChip operations were consolidated as of July 1, 2020t and are included in the SmartVoice segment.

 

In 2020, revenues from our IoAT businesses accounted for 60% of our total revenues.

 

We were incorporated in California in 1987 and reincorporated in Delaware in 1994. We completed our initial public offering in February 1994.

 

Industry Environment and Our Business

 

The COVID-19 outbreak we faced in 2020 presented an unprecedented global challenge affecting every aspect of our lives, including, of course, the semiconductor industry. Our technical solutions are playing a significant role in enabling the technological trends that were accelerated as a result of the pandemic. For instance, with more employees working remotely, and offices reconfiguring workspaces to cater to social distancing requirements, high-quality communication and remote collaboration tools have become essential. Moreover, individuals worldwide became very aware of and sensitive to the health risks of touching commonly used surfaces. This awareness has accelerated the adoption of voice user interfaces (VUIs) for a broad array of products, beyond the original value propositions of convenience and functionality. We believe DSP Group is well positioned to leverage its leadership in Unified Communications, SmartVoice and SmartHome technologies with world-class technologies and innovative solutions that address the increasing demands of these markets.

 

-3-

 

Our focus on the design of highly-integrated, mixed-signal devices that combine signal processing, complex RF (radio frequency), analog and digital functions enables us to address the complex challenges of integrating various technologies, platforms and processes posed by emerging industry trends. Our IC products are customizable and achieve high functionality and performance at reduced power consumption. This is especially important for Internet of Things (IoT), home automation devices, mobile, hearables, wearables, cordless and IP telephony products that require very low power consumption, and can be manufactured in high volumes using cost-effective process technologies. Our system level architectures provide an open design environment for ODMs to design and market their own differentiated end products.

 

Our expertise and investment in software development, including Board Support Packages (BSPs) and drivers, telephony, communication stacks and application layers in Real-Time Operating System (RTOS) and Full Featured Operating System (FFOS) frameworks, enable our customers’ fast time to market with cost- and performance-optimized flexible solutions. With our internally developed innovations and acquired intellectual property, we deliver value to our existing market verticals and address new market verticals, including markets for IoT, office phones, mobile, hearables and wearables, consumer and computing devices, and voice user interface, thus expanding our market opportunities.

 

We offer leading wireless voice and data transmission system solutions for various connectivity applications in the home and enterprise. Since 1999, to address our customer requirements, we have developed and acquired a broad set of communication technologies, including Direct Sequence Spread Spectrum (DSSS), Frequency Hopping Spread Spectrum (FHSS), Orthogonal Frequency Digital Modulation (OFDM), Digital Narrow Band, Complementary Metal Oxide Semiconductor (CMOS), Gallium Arsenide (GaAs) technology, and Silicon Germanium (SiGe) RF chips for 900MHz, 2.4GHz and 5.8GHz Industry Scientific and Medical (ISM) bands, European DECT (1.9GHz), DECT 6.0 (1.8GHz), Korean DECT (1.7GHz), Bluetooth (2.4GHz), Wi‑Fi (802.11, 2.4GHz/5GHz), BiCMOS (Bipolar CMOS) and deep sub-micron CMOS technologies.

 

Moreover, we expanded our DECT solutions beyond cordless telephony to address the IoT market via an ultra-low energy version of DECT called DECT ULE or ULE. ULE offers numerous technological benefits due to its operation in licensed and interference-free bands, longer range, RF robustness, propagation through multiple walls, voice and data support, while consuming very low power. ULE is built from the ground up to support two-way voice and audio transport, making it ideal for today’s voice-enabled SmartHome.

 

Over the past decade, we have expanded from primarily delivering cordless telephony solutions serving consumers to chipsets and telephony solutions for office and business applications to becoming a market leader in the Office segment. Today, DSP Group offers comprehensive system-on -chip (SoC) and solutions for VoIP, home, SoHo and office IP phones. VoIP is a technology that enables users to make HD voice and video calls via a broadband Internet connection rather than an analog phone line. Furthermore, with speech-enabled mobile, smart assistants and IoT devices playing an increasingly significant role in peoples’ lives, in February 2013, we unveiled our HDClear technology. We have incorporated this HDClear technology into our SmartVoice product family which consists of a comprehensive suite of artificial intelligence (AI) and machine learning (ML) embedded noise suppression and voice quality enhancement products for mobile, wearables, hearables and always-on IoT and SmartHome devices. HDClear capitalizes on the voice user interface trend by incorporating voice command, voice activation, proprietary noise cancellation, acoustic echo cancellation, and beam forming algorithms, thereby dramatically improving user experience and delivering leading voice quality and speech recognition. Our HDClear technology is both high performance and ultra-low power. In 2020, we achieved 4% year-over-year growth in the SmartVoice segment via a broad-based expansion with both existing and new customers across our target markets.

 

-4-

 

Committed to advancing technology across the CE and telecommunications markets, DSP Group is actively involved in prominent industry associations, including the ULE Alliance, the European Telecommunications Standards Institute and DECT Forum. We also participate in the 3GPP, MIPI and tinyML alliances. DSP Group is deeply involved in all stages of defining DECT CAT-iq and ULE standards and is building full eco-systems to support these solutions. We are also an active member of the Home Gateway Initiative (HGI). Such industry involvements enable us to participate in the definition of standards and keep abreast of the latest innovations, and market and technology requirements. We also maintain close relationships with many world-leading telecommunication service providers, thereby providing us with insight into future plans across the industry.

 

Target Markets and DSP Group Products

 

In response to market trends, we are concentrating our development efforts on new products and opportunities to leverage our strong voice technology base and customer relationships to address evolving market opportunities and take advantage of the current market trends in our domain. We focus our efforts on four product areas: (i) SmartVoice products which consist of AI/ML engines with DSP for voice-enabled products targeting mobile computing, SmartHome/IoT, wearables and hearables markets that incorporate our HDClear and Neural Network (NN) AI technologies, as well as other third party advanced voice processing, always on and sensor fusion functionality; (ii) Unified Communications products consisting of VoIP SoC products for Enterprise, SMB and SoHo; (iii) SmartHome products consisting of ULE ICs and home gateway ICs targeting the growing markets of IoT, SmartHome and security devices; and (iv) cordless phones which consist of largely DECT SoCs for cordless telephony. The SmartHome and cordless product lines are both part of our Home segment.

 

Below is a discussion of our business segments and the products within each segment.

 

SmartVoice - Products Targeted at Mobile Computing, Consumer Electronics, IoT, Wearable and Hearables Device Markets

 

Our SmartVoice product portfolio encompasses HDClear technology for intelligent voice enhancement, always-on voice trigger and control, and noise cancellation. This technology is primarily targeted at devices supporting voice as a user interface. The current market trend is to use voice as a user interface in almost all devices. Our HDClear high-performance and lower-power solutions continue to achieve important design wins with our numerous enabling technologies such as voice command, voice activation, proprietary noise cancellation, acoustic echo cancellation, and beam forming algorithms, all of which dramatically improve the user experience and deliver world class voice quality and speech recognition.

 

HDClear-based solutions comprise of robust and powerful noise cancellation algorithms that effectively isolate voice from ambient noise. In doing so, HDClear delivers clearer voice calls and enables high mobile IoT voice quality and intelligibility. HDClear also maximizes the accuracy of Automatic Speech Recognition (ASR) applications by drastically lowering Word Error Rate (WER). This dramatically improves the user experience for speech-enabled applications like virtual assistants, voice search, speakerphone conference calls and speech-to-text on mobile and wearables, tablets, and other consumer devices.

 

Starting in 2012, we taped-out a number of voice-enhancment ICs that comprise the DBMD family, which we believe are the market’s most efficient voice-enhancement processors. We started with DBMD2, a low power chip, that provides always-on, natural-voice capabilities for mobile and wearable battery-powered devices. Average users access their devices tens or hundreds of times per day by physically pressing a screen or a button. A truly always-on technology lets the user skip this step by instead using natural voice to access the device—even while the device is in standby mode. By providing all the necessary hardware and software in a single solution, DBMD2 allows mobile OEMs to preserve battery life and to offload voice and audio tasks from a mobile device’s CPU, in addition to running HDClear to enhance ASR accuracy.

 

In 2015, we taped-out DBMD4, a chip targeted for ultra-low-power, always-on voice and audio applications. DBMD4 incorporates a suite of voice-enhancement algorithms, including noise suppression, which significantly improves the accuracy of speech-driven applications, particularly in high noise environments, thereby enhancing the user experience. Offered in a small form factor, DBMD4 embeds a TeakLite-III DSP core, incorporates advanced connectivity options, including I2S, UART, SPI, I2C ports and SLIMbus. It is also equipped with a comprehensive software framework that enables rapid development. As such, DBMD4 overcomes many of the demands of portable design, including small footprint, low power, and rapid time to market.

 

-5-

 

In January 2017, we unveiled our latest audio and voice enhancement SoC, DBMD5. This low-power audio SoC is built to ensure clearer human-machine voice interactions in multi-microphone-equipped devices. 

 

The year 2018 was a milestone year for SmartVoice: we shipped our SoCs to customers in six different categories – smartphones, IoT, wearables, hearables, tablets and smart speakers. That same year, Amazon Alexa Voice Services certified our far-field three-mic development kit, based on our DBMD5 SoC.

 

In 2019, we introduced our DBMD7 line of audio & voice processors that carefully balance the low power consumption needed for battery-powered smart sensing with the high-performance computing capability and large embedded memory needed for high-quality, low-latency voice and ML processing at the edge. The design of DBMD7 is architected such that it has the high-performance processing required to run the advanced algorithms necessary for far-field voice activation, accuracy, range and reliability, and it allows our customers to meet EnergyStar requirements for stand-by power consumption.

 

In 2020, we introduced DBM10, a low-power, cost-effective AI and MLSoC. The SoC comprises a DSP and our nNetLite NN processor, both optimized for low-power voice and sensor processing in battery-operated devices. This architecture offers developers full flexibility of partitioning innovative algorithms between DSP and NN processor and enables fast TTM for integration of voice and sensing algorithms such as noise reduction, acoustic echo cancellation (AEC), wake-word detection, voice activity detection and other ML models. The DBM10 features an open platform approach with a comprehensive software framework. This allows developers to quickly get next-generation designs to market with their own algorithms, or with our comprehensive and proven suite of optimized algorithms for voice, sound event detection (SED), and sensor fusion for applications ranging from true wireless stereo (TWS) headsets to smartphones, tablets and wearables.

 

In 2020, we entered the hearables (headphones, headsets, ear buds) market with the launch of first TWS ANC headphones based on our DBMC2 smart ANC codec. Our solutions for hearables are based on low power DSPs, AI/ML engines, as well as smart codecs serving the current and future needs of ambient- and user-aware voice, audio, and augmented hearing designs.

 

Our advanced smart ANC codecs feature our patented Soundflex® technology to deliver authentic, high-resolution audio playback with a suite of advanced features, including Framed Adaptive™ sound processing and Smartaware™ augmented audio. This power-optimized multi-core SoCs enable the design of new and differentiated smart products, such as TWS headsets and voice-enabled smart wearables. The codec’s SoCs and algorithms are supported by a suite of design, development, test, and production tools that take a full-system approach to acoustic design while accelerating time to market and achieving consistent end-product quality.

 

Unified Communications (formerly Office) Segment - Products Targeted at the Office Market

 

As a leading silicon vendor for enterprise voice, we offer a comprehensive portfolio of solutions for VoIP telephony solutions. Our DVF SoCs family is a comprehensive solution for developing affordable, scalable and green VoIP home and office products. DVF facilitates rapid introduction of embedded features into residential devices such as cordless IP and instant messaging (IM) phones. DVF enables development of low-power enterprise IP, analog terminal adapters (ATAs) and home VoIP phones that offer superb AEC, high-quality HD voice, multi-line capabilities, and an enhanced user interface. Built on an open platform with multi-ARM processors running on Linux OS, DVF includes IPfonePro™, an extensive SDK for IP phones and ATAs.

 

For the video phone product family, we offer the DVF1100 a high-end media processors, which powers advanced Android video phones and conferencing phones.

 

-6-

 

Our software and hardware offered for the enterprise telephony product family addresses conventional VoIP phones and ATAs to cover conferencing systems, IP intercoms, public announcement systems, as well as accessories such as key expansion modules, DECT microphones and headsets with advanced capabilities for voice and audio.

 

A number of significant customers successfully launched phones based on our DVF99 and DVF101 families. In addition, we secured additional design wins with our existing tier one customers for higher end products which started production in 2020, thereby contributing to further progress in this growing segment.

 

Home Segment Our SmartHome Products, Including Home Gateways, Home Automation Products and Cordless Telephony Products

 

Our DECT and 2.4 GHz technologies are targeted at three broad categories of products: (a) home gateways and fixed mobile convergence, (b) home automation/security and IoT applications, and (c) digital cordless telephony. Gateway products and IoT applications that are supported by our ULE technology are categorized as SmartHome.

 

As a market leader in DECT, we offer a wide range of cost-effective, highly integrated SoC solutions. Delivering high-quality audio with low power consumption, our field-proven chipset solutions are ideal for highly integrated digital cordless telephony, DECT-enabled gateways and home automation and security. Our chipsets provide an integrated digital solution and include all relevant digital baseband, analog interface and RF functionality.

 

Our Home chipset solutions enable worldwide coverage, supporting all RF bands and cordless protocols, such as:

 

 

1.7GHz -1.9GHz DECT – used in Europe, U.S. (DECT6.0), Korea, Japan and Latin America; and

 

 

2.4GHz – used in Japan, China, India and the U.S.; the dominant protocols for this RF band is our proprietary EDCT (Enhanced Digital Cordless Technology) and WDCT (Wireless Digital Cordless Technology) protocols.

 

This chipset portfolio combines wireless communications technology with a range of telephony features, audio and voice-processing algorithms to provide the industry a low cost, high performance and small footprint solution. Enhanced with our hardware and software technologies, these chipsets are highly versatile and enable the development of an array of cordless telephony solutions, DECT home gateways and SmartHome applications and devices that allow for faster time to market than alternative custom silicon and software offerings. This portfolio supports cordless phones, cordless headsets, remote controls, home DECT-enabled gateways, fixed-mobile convergence solutions and home security and automation devices.

 

In 2017, Deutsche Telecom launched home automation and control services and products based on our DECT and ULE solutions. In 2018, Zipato, AwoX, Deutsche Telecom, SGW, Technicolor, Elite Computer, Bezeq and Orange all announced plans to roll out products and/or services based on ULE solutions. In 2019, we successfully penetrated the U.S. market with ULE, whereby ADT, a security provider serving residential and business customers in the U.S., selected our ULE technology and SmartVoice solutions to wirelessly connect its smart IoT devices to its Blue by ADT security systems.

 

In 2019, we enhanced our DHX91 offering by introducing the DHX101 SoC a low-power, flashed-based solution for home automation and security targeting the node/device side. We also offer the DHAN-S and DHAN-T pre-certified, product quality ULE modules for both the device and the hub/gateway side. The modules are appropriate for a ULE Dual-Mode (data and/or audio) application on the device side. These modules all include microphone and speaker interfaces for applications using audio links. They also feature super low current hibernation mode to facilitate a multi-year battery lifetime.

 

-7-

 

In 2020, we continued to position ULE as a key connectivity solution for the SmartHome and home security segments. We see increasing traction and interest among security service providers for ULE due to its low power and range benefits.

 

Customers

 

We are an innovative, flexible, customer-centric company that proactively partners with our broad base of global customers and service providers. As a reliable long-term industry supplier, we maintain a proven track record of operational excellence and successful on-time delivery. With offices across Asia, Europe and North America, we deliver outstanding local service and support worldwide. We sell our products through distributors and directly to OEMs and ODMs who incorporate our products into consumer and commercial products for the worldwide residential wireless communications market and enterprise products for the worldwide office communications market.

 

In 2020, we continued expanding our customer base, and in some cases, increased our share of business with existing customers, which include many of the world’s top consumer brands. Our chipset and software solutions have been deployed in devices from these prominent tier-one customers across the globe, including: 3NOD, Aprotech, ADB, ADT, AEG, Alcatel-Lucent Enterprise, Alibaba, Amazon, Arcadyan, Arlo, Arris, Askey, Atlas, Atlinks, AT&T, Audiocodes, Avaya, AVM, AwoX, Baycom, BBK, Becker, Binatone, British Telecom, , Chipguide, Cisco, Climax, Comcast, Crow, Cuco, Cybertan, Daktel, Deutsche Telekom, DNI, DX Antenna, Elevoc, Escene, Eurotronic, Facebook, Fanvil, Flextronics, Foneric, Foxconn, France Telecom, Freebox, Fujitsu, Gibson (formerly Philips), Gigaset, Google, Goertek, GoPro, Grandstream, HCN, Huawei, Iflytek, Infinite, Innolux, Innomedia,  Intelbras, Invoxia, Jazz Hipster, JXE, Korea Telecom, Lenovo, Leviton, LG Electronics, Libre, Life Alert, Logitech, Longcheer, Meitu, Mitac, Mitel, Mitrastar, Moimstone, Motorola, Netgear, Network Thermostat, Nortek, NTT, Ooma, Oppo, Orange, Panasonic, Pegatron, Pioneer, Poly, Proximus, Rademacher, Readboy, Sagemcom, Samsung, Sanyo, SAXA, SeGYe, Sercomm, SGW, Sharp, Simple Human, SK Telecom, Starnet, Sunrise, Swisscom, Swissvoice, TCL, Technicolor, Telefield (RCA), Telefonica, Telegartner, Telstra, Tinno, TP-Link, T&W, Uniden, Verisure, Victory Concept, VTech, Wistron, WNC, Xingtel, Yealink, Youxuepai, ZEASN, Zipato and ZTE.

 

International Sales and Operations

 

International sales accounted for 98% of our total revenues for 2020, 96% of our total revenues for 2019 and 95% in 2018. As most of our sales to foreign entities are denominated in U.S. dollars, we are subject to risks of conducting business internationally. See Note 17 of the attached Notes to Consolidated Financial Statements for the year ended December 31, 2020, for a summary of the geographic breakdown of our revenues and location of our long-lived assets.

 

As a result of our international operations, a significant portion of our expenses in Israel is paid in the Israeli currency (New Israeli Shekel (NIS)). Our primary expenses paid in NIS are employee salaries and lease payments on our Israeli facilities. In addition, a portion of our expenses in Europe is paid in Euro. Our primary expenses paid in Euro are employee salaries and lease and operational payments on our European facility.

 

Sales, Marketing and Distribution

 

We market and distribute our products through our direct sales and marketing offices, as well as through a network of global distributors. Our sales and marketing team has global reach through our sales offices in San Jose, California; Hong Kong, China; Nierenberg, Germany; Tokyo, Japan; Herzliya Pituach, Israel, Edinburgh, Scotland; Shanghai and Shenzhen, China, South Korea and Switzerland . In territories where we do not have sales offices, we operate either directly from our corporate headquarters or through a network of distributors and representatives.

 

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The following table represents our sales as a percentage of our total revenues through our main distributors Nexty Electronics, Ltd. (“Nexty Electronics”) and Ascend Technology Inc. (“Ascend Technology”) for the years ended December 31, 2020, 2019 and 2018:

 

   

Year ended December 31,

 

Major Distributors

 

2020

   

2019

   

2018

 

Nexty Electronics (1)

  11%     9%     11%  
                   

Ascend Technology (2)

  29%     27%     26%  

 

 

(1)

Our distributor, Japan-based Nexty Electronics, sells our products to a limited number of customers. None of those customers accounted for 10% of our total revenues for the years ended December 31, 2020, 2019 and 2018, respectively.

 

 

(2)

Our Taiwan-based distributor, Ascend Technology, sells our products to a limited number of customers. One of those customers - Cisco – accounted for 12%, 10% and 8% of our total revenues for the years ended December 31, 2020, 2019 and 2018, respectively.

 

We also derive a significant amount of revenues from a limited number of customers. The following table represents our sales as a percentage of our total revenues from our main customers for the years ended December 31, 2020, 2019 and 2018:

 

   

Year ended December 31,

 

Major Customers

 

2020

   

2019

   

2018

 

Vtech Holdings Ltd. (“Vtech”)

  23%     21%     24%  
                   

Cisco Systems, Inc. (“Cisco”)

  12%     10%     8%  

 

Furthermore, as our products are generally incorporated into consumer products sold by our OEM customers, our revenues may be affected by seasonal buying patterns of consumer products sold by our OEM customers.

 

Manufacturing and Design Methodology

 

We are ISO9001:2015 certified. This certification is applicable for the design, development, testing and supply of our system-on-chip solutions. We also have well established methodologies and working procedures that are also regularly audited.

 

We contract product wafer fabrication and IC product services mostly from TSMC, the leading semiconductor foundry in the world. We intend to continue to use independent foundries to manufacture our IC products.

 

We use independent subcontractors located in Asia, to package, assemble and test certain of our products. We develop detailed testing procedures and specifications for each product and require each subcontractor to use these procedures and specifications before shipping us the finished products. We test and/or assemble our products at Amkor, ASE, Giga Solutions, KYEC and SPIL. Furthermore, some of our products require an external component in the finished product, which is supplied by a third party.

 

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Competition

 

The principal competitive factors in the smart audio and noise reduction market include price, performance, system integration level, range, the ability to accurately detect and extract a high quality voice signal, power consumption, customer support and the timing of product introductions. We believe that we are well positioned from a competitive position. Competitors in this market include Knowles Corporation, Cirrus Logic, Synaptics, Microchip Technology, and developers of noise cancellation and VUI software running on general purpose processors, such as Qualcomm and in some cases, in-house engineering teams.

 

Similar principal competitive factors affect the Unified Communications market. We also believe that we are competitive with respect to most of these factors. Our principal competitors in the Unified Communications market include Broadcom, Dialog Semiconductors (to be acquired by Renesas Electronics), Intel, Texas Instruments and Taiwanese IC vendors.

 

Similar principal competitive factors affect the Home Automation (DECT ULE) market. Our principal competitors are developers of different wireless home automation technologies, including Bluetooth, Wi-Fi, Z-Wave and Zigbee. Among those, the major competitors for digital home connectivity are Microchip Technology, NXP, Texas Instruments and Silicon Labs.

 

Similar principal competitive factors affect the cordless telephony market. Our main competitor in the cordless market is Dialog Semiconductors (to be acquired by Renesas Electronics).

 

Research and Development

 

Timely development and introduction of new products are essential to maintain our competitive position. We currently conduct most of our product development at our facilities. As of December 31, 2020, we had a staff of 211 research and development personnel, of which 137 were located in Israel. We also employ independent contractors to assist with certain product development and testing activities. Due to various new developments in the home residential market and consistent with our strategy, we have expanded our product lines and developed products and services targeted at wider markets, including office enterprise market, the intensively competitive mobile device market and the expansive voice user interface market. We will need to continue to invest in research and development, and our research and development expenses may increase in the future, including the addition of new research and development personnel, to secure our leading position in discrete markets we operate in and keep pace with new and rapidly changing trends in our industry.

 

Licenses, Patents and Trademarks

 

We actively pursue foreign patent protection in countries of interest to us. Our policy is to apply for patents or for other appropriate statutory protection when we develop valuable technology. As of December 31, 2020, we have been granted a total of 183 patents and 49 patents are pending.

 

We attempt to protect our trade secrets and other proprietary information through agreements with our customers, suppliers, employees and consultants, and through other security measures. Although we intend to protect our rights vigorously, there are no assurances that these measures will be successful.

 

While our ability to compete may be affected by our ability to protect our intellectual property, we believe that because of the rapid pace of technological change in our industry, our technical expertise and ability to innovate on a timely basis and in a cost-effective manner will be at least as important in maintaining our competitive position than the protection of our intellectual property. In addition, we believe that due to rapid technological changes in residential telephony, computer telephony and personal computer markets, patents and trade secret protection are important but must be supported by other factors, including expanding the knowledge, ability and experience of our personnel, new product introductions and frequent product enhancements. Although we continue to implement protective measures and intend to defend our intellectual property rights vigorously, we cannot assure that these measures will be successful.

 

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Backlog

 

At December 31, 2020, our backlog was approximately $65.8 million, compared to approximately $21.4 million and $23.5 million at December 31, 2019 and 2018, respectively. We include in our backlog all accepted product purchase orders with respect to which a delivery schedule has been specified for product shipment within one year and for which collectability is not considered a risk. Our business is characterized by short-term order and shipment schedules. Product orders in our current backlog are subject to change, sometimes on short notice, due to changes in delivery schedules or cancellation by a purchaser. Moreover, as the semiconductors industry is currently experiencing severe capacity and supply chain constraints, our ability to deliver this backlog within the timetable requested by our customers could be uncertain. Moreover, these industry-wide supply chain constraints are known to our customers which may have resulted in inflated backlog that may not necessarily represent real end-market demand. Accordingly, although useful for scheduling production, backlog as of any particular date may not be a reliable measure of our sales for any future period.

 

Employees

 

Core Principles

 

We believe our employees are key to our success and we are committed to all of our employees’ engagement, training and career development, and personal and professional growth. Our Board of Directors also receives regular updates from senior management on matters relating to our strategy associated with the recruitment, retention and development of our employees. We provide training in technical and operational, and managerial skills, and places special emphasis on safety, effective communications, customer service, and employee development.

 

Headcount

 

At December 31, 2020, we had 352 employees, including 211 in research and development, 74 in sales and marketing, and 67 in corporate, administration and manufacturing coordination. None of our employees are covered by a collective bargaining agreement, and management believes its relationship with our employees is good.

 

Diversity, Equity and Inclusion

 

We are consciously expanding the diversity of our workforce, creating growth and development opportunities for our employees, embracing different perspectives and fostering an inclusive work environment.

 

Competition

 

Competition for personnel in the semiconductor industry in general is intense. We believe that our future prospects will depend, in part, on our ability to continue to attract and retain sought after, highly-skilled technical, marketing and management personnel and are taking active measures to ensure we are perceived as a sought after employer. In particular, there is a limited supply of RF chip designers and highly-qualified engineers with digital signal processing, machine learning and artificial intelligence experience. We believe that we provide an excellent culture, challenging work and competitive compensation to retain our valuable employees.

 

Governmental Regulations

 

As a public company with global operations, we are subject to various federal, state, local, and foreign laws and our products and services are governed by a number of rules and regulations. These regulations, which differ among jurisdictions, include those related to financial and other disclosures, accounting standards, import-export control, ITAR, intellectual property, tax, trade, antitrust, employment, privacy, and anti-corruption. The costs we incurred in complying with applicable rules and regulations for the year ended December 31, 2020 were not material. It is possible, however, that future developments, including changes in laws and regulations or government policies, could lead to material costs, and such costs may have a material adverse effect on our future business or prospects.

 

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Web Site Access to Companys Reports

 

Our web site address is www.dspg.com. Our annual reports on Form 10‑K, quarterly reports on Form 10‑Q, current reports on Form 8‑K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are available free of charge through our web site as soon as reasonably practicable after they are electronically filed with, or furnished to, the Securities and Exchange Commission. We will also provide the reports in electronic or paper form free of charge upon request.

 

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

 

Item 1A.         RISK FACTORS.

 

The following risk factors, among others, could in the future affect our actual results of operations and could cause our actual results to differ materially from those expressed in our forward-looking statements. These forward-looking statements are based on current expectations and we assume no obligation to update this information. Before you decide to buy, hold, or sell our common stock, you should carefully consider the risks described below, in addition to the other information contained elsewhere in this report in addition to our other public filings and presentations. The following risk factors are not the only risk factors facing our company. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also affect our business. Our business, financial condition, and results of operation could be seriously harmed if any of the events underlying any of these risks or uncertainties actually occurs. In that event, the market price for our common stock could decline, and you may lose all or part of your investment.

 

Trends, Risks and Uncertainties Related to Our Business

 

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

 

The COVID-19 pandemic has resulted in government authorities implementing numerous measures to try to contain the virus, and these measures have impacted and may further impact our workforce and operations, the operations of our customers, and those of our respective vendors and suppliers. We have seen that demand for consumer electronic products has softened due to social distancing and other restrictions. Also, we have noticed a slowdown in spending on enterprise IT infrastructure which negatively affects revenues from our Unified Communications segment. Furthermore, certain industry-wide supply chain constraints are placing certain limitations on our product deliveries. Therefore, we face near-term challenges, related to a shortfall in consumer spending and demand for consumer electronic products, as well as near-term decrease in revenues from our Unified Communications segment.

 

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

 

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

 

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

 

In order to expand our business and increase our revenues, we must penetrate new markets and introduce new products, especially our Unified Communications, SmartVoice and SmartHome product families. To sustain the future growth of our business, we need to introduce new products as sales of our cordless products continue to decline as expected. We have invested significant resources in pursuing potential opportunities for revenue growth in new product initiatives. We also are exploring opportunities to expand sales of our products in new geographies. However, there are no assurances that we will be successful in the development, sales and marketing of our products in these competitive markets. Moreover, there are no assurances that we will recoup our investments made pursuing additional revenue opportunities. Our inability to penetrate such markets and increase our market share in those markets or lack of customer acceptance of those products may harm our business and potential growth.

 

Because the markets in which we compete are subject to rapid changes, our products may become obsolete or unmarketable.

 

The markets for our products and services are characterized by rapidly changing technology, short product life cycles, evolving industry standards, changes in customer needs, geo-political influences, demand for higher levels of integration, growing competition and new product introductions. Our future growth is dependent not only on the continued success of our existing products but also successful introduction of new products. Our ability to adapt to changing technology and anticipate future standards, and the rate of adoption and acceptance of those standards, will be a significant factor in maintaining or improving our competitive position and prospects for growth. If new industry standards emerge, our products or our customers’ products could become unmarketable or obsolete, and we could lose market share. We may also have to incur substantial unanticipated costs to comply with these new standards. If our product development and improvements take longer than planned, the availability of our products would be delayed. Any such delay may render our products obsolete or unmarketable, which would have a negative impact on our ability to sell our products and our results of operations. Moreover, if any of our competitors implement new technologies before us, those competitors may be able to provide products that are more effective or with more user-friendly features than ours, possibly at lower prices, which could adversely impact our sales and impact our market share. Our failure to develop and introduce competitive new products that are compatible with industry standards and that satisfy customer requirements, and the failure of our products to achieve broad market acceptance, could have a negative impact on our ability to sell our products and our results of operations.

 

Because our quarterly operating results may fluctuate significantly, the price of our common stock may decline.

 

Our quarterly results of operations may vary significantly in the future for a variety of reasons, many of which are outside our control, including the following:

 

 

fluctuations in volume and timing of product orders;

 

-13-

 

 

timing, rescheduling or cancellation of significant customer orders and our ability, as well as the ability of our customers, to manage inventory;

 

 

supply chain constraints that may affect customer deliveries;

 

 

changes in demand for our products due to seasonal consumer buying patterns and other factors;

 

 

timing of new product introductions by us and by our customers or competitors;

 

 

changes in the mix of products sold by us or our competitors;

 

 

fluctuations in the level of sales by our OEM customers and other vendors of end products incorporating our products;

 

 

timing and size of expenses, including expenses to develop new products and product improvements, and expenses resulting from restructuring activities;

 

 

the timing and amount of funding from Israeli Innovation Authority (“IIA”);

 

 

entry into new geographies;

 

 

currency exchange fluctuations;

 

 

our ability to scale our operations in response to changes in demand for our existing products and services or demand for new products requested by our customers;

 

 

Geo-political policies outside of our control;

 

 

mergers and acquisitions by us, our competitors and our existing and potential customers; and

 

 

general economic conditions, including current economic conditions in the United States and worldwide, and the adverse effects on the semiconductor and consumer electronics industries.

 

Each of the above factors is difficult to forecast and could harm our business, financial condition and results of operations. Also, we sell our products to OEM customers that operate in consumer markets. As a result, our revenues are affected by seasonal buying patterns of consumer products sold by our OEM customers that incorporate our products and the market acceptance of such products supplied by our OEM customers.

 

Our future success is dependent on market acceptance of our SmartVoice, SmartHome and Unified Communications product families, which are intensively competitive markets with dominant and established players.

 

Our ability to increase our revenues and offset declining revenues from our cordless product family are substantially dependent on our ability to gain market share for our SmartVoice, SmartHome and Unified Communications product families. Moreover, we are targeting a new market with our SmartVoice product family, a market with dominant and established players selling to OEM customers with whom they have established relationships. In order to gain market share, we will need to earn the business of such customers, with whom we do not have established relationships. If we are unable to generate significant revenues from our SmartVoice product family and gain significant and sustainable market share in the mobile device market, our operating results would be adversely affected. Furthermore, our future growth is also dependent on the market acceptance of our Unified Communications products, a market where we also compete with existing and potential competitors, many of whom have significantly greater financial, technical, manufacturing, marketing, sales and distribution resources and management expertise than we do. In addition, our continued success and growth in the new markets in which we have recently gained market share, which markets are highly competitive, is highly dependent on our ability to be designed into future flagship products of top tier OEMs.

 

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The market for mobile device components is highly competitive and we expect competition to intensify in the future.

 

The market for mobile device components is highly competitive and characterized by the presence of large companies with significantly greater resources than we have. Our SmartVoice product family relates only to the voice and audio subsystem of a mobile device and there are only a limited number of OEMs that address this market. Our main competitors include Knowles Corporation, Synaptics and Cirrus Logic. We also face competition from other companies and could face competition from new market entrants. We also compete against solutions internally developed by OEMs, as well as combined third-party software and hardware systems. Notwithstanding prior design wins with any OEM customer, our SmartVoice products may be designed out as a result of internal solutions or replacement with software systems in future products of such OEM customer. If we are unable to compete effectively, we may not succeed in achieving additional design wins and may have to lower our pricing in an attempt to gain design wins, both of which would adversely impact our operating results.

 

Our future business growth depends on the growth in demand for mobile devices with improved sound quality and always-on capability.

 

Our SmartVoice product family is designed to enhance the sound quality and minimize background noise for mobile device users and to enable always-on capabilities in mobile and other wearable devices. OEMs and ODMs may decide that the costs of improving sound quality outweigh the benefits or that always-on voice technology is not a required feature, both of which could limit demand for our SmartVoice product family. Moreover, users may also be satisfied with existing sound quality or blame poor quality on phone carriers. The market that we are targeting is evolving rapidly and is technologically challenging. New mobile devices with different components or software may be introduced that provide the same functionality as SmartVoice product family. Our future business growth will depend on the growth of this market and our ability to adapt to technological changes, user preferences and OEM demands. Our business could be materially adversely affected if we fail to do so.

 

We generate a significant amount of our total revenues from the sale of digital cordless telephony products and our business and operating results may be materially adversely affected if we do not continue to succeed in this competitive market or if sales within the overall cordless digital market continue to decrease.

 

Sales of our digital cordless telephony products comprised 40% of our total revenues for 2020, 37% for 2019 and 45% for 2018. Although we historically generated a majority of our revenue from cordless telephony products, the traditional cordless telephony market using fixed-line telephony is declining and will continue to decline, potentially steeper than prior years, which reduces our revenues derived from, and unit sales of, cordless telephony products.

 

We rely significantly on revenue derived from a limited number of customers.

 

We expect that a limited number of customers, varying in identity from period-to-period, will account for a substantial portion of our revenues in any period.

 

   

Year ended December 31,

 

Major Customers

 

2020

   

2019

   

2018

 

Vtech

  23%     21%     24%  

Cisco

  12%     10%     8%  

 

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Typically, our sales are made on a purchase order basis, and most of our customers have not entered into a long-term agreement requiring it to purchase our products. Moreover, we do not typically require our customers to purchase a minimum quantity of our products, and our customers can generally reschedule the delivery date of their orders on short notice without significant penalties. A significant amount of our revenues will continue to be derived from a limited number of large customers. Furthermore, the primary customers for our products are original equipment manufacturers (OEMs) and original design manufacturers (ODMs). This industry is highly cyclical and has been subject to significant economic downturns at various times. These downturns are characterized by production overcapacity and reduced revenues, which at times may affect the financial stability of our customers. Therefore, the loss of one of our major customers, or reduced demand for products from, or the reduction in purchasing capability of, one of our major customers, could have a material adverse effect on our business, financial condition and results of operations.

 

Because our products are components of end products, if OEMs do not incorporate our products into their end products or if the end products of our OEM customers do not achieve market acceptance, we may not be able to generate adequate sales of our products.

 

Our products are not sold directly to the end-user; rather, we deliver hardware and software components to OEMs and ODMs who incorporate them into their products. As a result, we rely upon OEMs and ODMs to incorporate our products into their end products at the design stage. Once an OEM designs a competitor’s product into its end product, it becomes significantly more difficult for us to sell our products to that customer because changing suppliers involves significant cost, time, effort and risk for the customer. As a result, we may incur significant expenditures on the development of a new product without any assurance that an OEM will select our product for design into its own product and without this “design win” it becomes significantly difficult to sell our products. This is especially the case for our SmartVoice product family. Moreover, even after an OEM agrees to design our products into its end products, the design cycle is long and may be delayed or discontinued due to factors beyond our control which may result in the end product incorporating our products not to reach the market until long after the initial “design win” with the OEM or not at all. From initial product design-in to volume production, many factors could impact the timing and/or amount of sales actually realized from the design-in. These factors include, but are not limited to, changes in the competitive position of our technology, our customers’ financial stability, and our ability to ship products according to our customers’ schedule and specifications. Moreover, the continued uncertainty about the sustainability of the global economic recovery and outlook may further prolong an OEM customer’s decision-making process and design cycle. Furthermore, we rely on the end products of our OEM customers that incorporate our products to achieve market acceptance. Many of our OEM customers face intense competition in their markets. If end products that incorporate our products are not accepted in the marketplace, we may not achieve adequate sales volume of our products, which would have a negative effect on our results of operations.

 

Our revenues, gross margins and profitability may be materially adversely affected by the continued decline in average selling prices of our products and other factors, including increases in assembly and testing expenses, and raw material and commodity costs.

 

We have experienced and will continue to experience a decrease in the average selling prices of our products. Decreasing average selling prices could result in decreased revenues even if the volume of products sold increases. Decreasing average selling prices may also require us to sell our products at much lower gross margin than in the past and reduce profitability. Although we have to date been able to partially offset on an annual basis the declining average selling prices of our products through general operational efficiencies and manufacturing cost reductions by achieving a higher level of product integration and improving our yield percentages, there is no guarantee that our ongoing efforts will be successful or that they will keep pace with the anticipated, continued decline in average selling prices of our products.

 

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In addition to the continued decline in the average selling prices of our products, our gross profit may decrease in the future due to other factors, including the roll-out of new products in any given period and the penetration of new markets which may require us to sell products at a lower margin, our failure to introduce new engineering processes and mix of products sold. Our gross margins also are affected by the product mix. For example, mature products typically have lower average gross margins than newer products. Therefore, increased sales of certain mature products would lower our gross margins. The pressures in the supply chain make it very difficult for us to increase or even maintain our product pricing, which further adversely affects our gross margins. Furthermore, increases in the price of silicon wafers, testing costs and commodities such as gold and oil, which may result in increased production costs, mainly assembly and packaging costs, may result in a decrease in our gross margins. Moreover, our suppliers may pass the increase in raw materials and commodity costs onto us, which would further reduce the gross margin of our products. In addition, as we are a fabless company, global market trends such as “under-capacity” problems so that there is a shortage of capacity to fulfill our fabrication needs also may increase our raw material costs and thus decrease our gross margin.

 

We are dependent on a small number of OEM customers, and our business could be harmed by the loss of any of these customers or reductions in their purchasing volumes.

 

We sell our products to a limited number of OEM customers directly or through a network of distributors. Moreover, many North American, European and Japanese OEMs are moving their manufacturing sites to Southeast Asia and China, as a result of the cyclical nature of manufacturing capacity issues and cost of silicon integrated circuits, the continued decline of average selling prices of chipsets and other industry-wide factors. In addition, OEMs located in Southeast Asia and China are growing and gaining competitive strength. As a result, the mix of our OEM customers may change in the future. However, we may not succeed in attracting new customers as these potential customers may have pre-existing relationships with our current or potential competitors. This trend also may promote the consolidation of OEMs located in North America, Europe and Japan with OEMs located in Southeast Asia, which may reduce the number of our potential customers and reduce the volume of chipsets the combined OEM customer may purchase from us. However, as is common in our industry, we typically do not enter into long term contracts with our customers in which they commit to purchase products from us. The loss of any of our OEM customers may have a material adverse effect on our results of operations. To attract new customers, we may be faced with intense price competition, which may affect our revenues and gross margins.

 

Because the markets in which we compete are highly competitive, and many of our competitors may have greater resources than we do, we cannot be certain that our products will be accepted in the marketplace or capture market share.

 

The markets in which we operate are extremely competitive and characterized by rapid technological change, evolving standards, short product life cycles and price erosion. We expect competition to intensify as current competitors expand their product offerings and new competitors enter the market. Given the highly competitive environment in which we operate, we cannot be sure that any competitive advantages enjoyed by our current products would be sufficient to establish and sustain our new products in the market. Any increase in materials price or competition could result in the erosion of our market share, to the extent we have obtained market share, and would have a negative impact on our financial condition and results of operations.

 

In our current business activities and new markets that we enter, we face current and potential competition from competitors that may have significantly greater financial, technical, manufacturing, marketing, sales and distribution resources and management expertise than we do. The expenditure of greater resources to expand our current product lines may increase our operating expenses and reduce our gross profit. There are no assurances that we will succeed in developing and introducing new products that are responsive to market demands. These competitors may also have pre-existing relationships with our customers or potential customers. Further, in the event of a manufacturing capacity shortage, these competitors may be able to manufacture products when we are unable to do so. Our principal competitor in the cordless market is Dialog Semiconductors. Our principal competitors in the Unified Communications market include Broadcom, Dialog Semiconductors (to be acquired by Renesas Technologies), Intel, Texas Instruments and Taiwanese IC vendors. Our principal competitors in the SmartVoice market include Knowles Corporation, Cirrus Logic, Synaptics, Microchip and developers of noise cancellation software running on mobile phones such as Qualcomm.

 

-17-

 

Because we depend on independent foundries and other third party suppliers to manufacture, test and package all of our integrated circuit products, we are subject to additional risks that may materially disrupt our business.

 

All of our integrated circuit products are manufactured, tested and packaged by independent foundries and other third party suppliers. While these foundries and other third party suppliers have been able to adequately meet the demands of our increasing business and market dynamics, we are and will continue to be dependent upon these foundries and third party suppliers to achieve acceptable manufacturing yields, quality levels and costs, and to allocate to us a sufficient portion of their foundry, assembly and test capacity to meet our needs in a timely manner. For example, the industry is now facing some near-term challenges associated with certain industry-wide supply chain constraints that are placing certain limitations on our product deliveries that could negatively impact our revenues for 2021.

 

During worldwide shortages in foundry, such as the present time, assembly and/or test capacity, we may not be able to obtain a sufficient allocation of such capacity to meet our product needs or we may incur additional costs to ensure specified quantities of products and services. Under-capacity at the current foundries and other third party suppliers we use, or future foundries or other third party suppliers we may use, to manufacture, test and assemble our integrated circuit products may lead to increased operating costs and lower gross margins. In addition, such a shortage could lengthen our products’ manufacturing, testing and assembly cycle and cause a delay in the shipment of our products to our customers. This could ultimately lead to a loss of sales of our products, harm our reputation and competitive position, and our revenues could be materially reduced. . Our business could also be harmed if our current foundries or other third party suppliers terminate their relationship with us and we are unable to obtain satisfactory replacements to fulfill customer orders on a timely basis and in a cost-effective manner. Moreover, we do not have long term capacity guarantee agreements with our foundries and with other third party suppliers.

 

In addition, as TSMC produces a significant portion of our integrated circuit products and ASE tests and assembles a significant portion of our products, earthquakes, aftershocks or other natural disasters in Asia, or adverse changes in the political situation in Taiwan, could preclude us from obtaining an adequate supply of wafers to fill customer orders. Such events could harm our reputation, business, financial condition, and results of operations.

 

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

 

We currently receive research grants from programs of the Israeli Innovation Authority (“IIA”). To be eligible for these grants, we must meet certain development conditions and comply with periodic reporting obligations. Although we have met such conditions in the past, should we fail to meet such conditions in the future our research grants may be repayable, reduced or withheld. Such reduction can also take place due to different allocation and methodology that IIA is implementing. The reduction of such research grants may increase our research and development expenses, which in turn may reduce our operating income. Our research and development expenses may increase if the grants from the IIA are reduced which may negatively affect our financial results.

 

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As we depend on independent subcontractors, located in Asia, to assemble and test our semiconductor products, we are subject to additional risks that may materially disrupt our business.

 

Independent subcontractors, located in Asia, assemble and test our semiconductor products. Because we rely on independent subcontractors to perform these services, we cannot directly control our product delivery schedules or quality levels. We are dependent on these subcontractors to allocate to us a sufficient portion of their capacity to meet our needs in a timely manner. Our future success also depends on the financial viability of our independent subcontractors. If the capital structures of our independent subcontractors weaken, we may experience product shortages, production delays, quality assurance problems, increased manufacturing costs, and/or supply chain disruption. All of this could ultimately lead to a loss of sales of our products, harm our reputation and competitive position, and our revenues could be materially harmed. Moreover, the economic, market, social, and political situations in countries where some of our independent subcontractors are located are unpredictable, can be volatile, and can have a significant impact on our business because we may not be able to obtain product in a timely manner. Market and political conditions, including currency fluctuation, terrorism, political strife, war, labor disruption, and other factors, including natural or man-made disasters, adverse changes in tax laws, tariff, import or export quotas, power and water shortages, or interruption in air transportation, in areas where our independent subcontractors are located also could have a severe negative impact on our operating capabilities.

 

We are subject to order and shipment uncertainties and if we are unable to accurately predict customer demand, our business may be harmed.

 

We typically sell products pursuant to shorter term purchase orders rather than long-term purchase commitments. Customers can generally change or defer purchase orders on short notice without incurring a significant penalty. Given current market conditions, we have less ability to accurately predict what or how many products our customers will need in the future. In addition, we have little visibility into and no control of the demand by our customer’s customers – generally consumer electronics retailers and businesses. Furthermore, based on discussions with our customers, we understand that our customers also have less visibility into their product demands. A decrease in the consumer electronics retailers’ or businesses’ demand or a build-up of their inventory, both of which are out of the control of our customers and us, may cause a cancellation, change or deferral of purchase orders on short notice by our customers. Anticipating demand is difficult because our customers and their customers face volatile pricing and unpredictable demand for their own products, and are increasingly focused on cash preservation and tighter inventory management. Based on these trends, our customers are reluctant to place orders with normal lead times, and we are seeing a shift to shorter lead-times and rush orders. However, we place orders with our suppliers based on forecasts of our customers’ demand and, in some instances, may establish buffer inventories to accommodate anticipated demand. Our forecasts are based on multiple assumptions, each of which may introduce error into our estimates. If we overestimate our customers’ demand or our customers overestimate their demand, we may allocate resources to manufacturing products that we may not be able to sell when we expect to, if at all. As a result, we could hold excess or obsolete inventory, which would reduce our profit margins and adversely affect our financial results. Conversely, if we underestimate our customers’ demand or our customers underestimate their demand and insufficient manufacturing capacity is available, we could forego revenue opportunities and potentially lose market share and damage our customer relationships.

 

Furthermore, we maintain inventory, or hubbing, arrangements with certain of our customers. Pursuant to these arrangements, we deliver products to a customer or a designated third party warehouse based upon the customer’s projected needs, but do not recognize product revenue unless and until the customer reports that it has removed our product from the warehouse to incorporate into its end products. Since we own inventory that is physically located in a third party’s warehouse, our ability to effectively manage inventory levels may be impaired, causing our total inventory turns to decrease, which could increase expenses associated with excess and obsolete product and negatively impact our cash flow.

 

Because the manufacture of our products is complex, the foundries on which we depend may not achieve the necessary yields or product reliability that our business requires.

 

The manufacture of our products is a highly complex and precise process, requiring production in a highly controlled environment. Changes in manufacturing processes or the inadvertent use of defective or contaminated materials by a foundry could adversely affect the foundry’s ability to achieve acceptable manufacturing yields and product reliability. If the foundries we currently use do not achieve the necessary yields or product reliability, our ability to fulfill our customers’ needs could suffer. This could ultimately lead to a loss of sales of our products and have a negative effect on our gross margins and results of operations.

 

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Furthermore, there are other significant risks associated with relying on these third-party foundries, including:

 

 

risks due to the fact that we have reduced control over production cost, delivery schedules and product quality;

 

 

less recourse if problems occur as the warranties on wafers or products supplied to us are limited; and

 

 

increased exposure to potential misappropriation of our intellectual property.

 

The possible emerging trend of our OEM customers outsourcing their production may cause our revenue to decline.

 

We believe there may be an emerging trend of our OEM customers outsourcing their production to third parties. We have invested substantial resources to build relationships with our OEM customers. However, the outsourcing companies whom our OEM customers may choose to outsource production may not have prior business relationship with us or may instead have prior or ongoing relationships with our competitors. The emergence of this trend may require us to expend substantial additional resources to build relationships with these outsourcing companies, which would increase our operating expenses. Even if we do expend such resources, there are no assurances that these outsourcing companies will choose to incorporate our chipsets rather than chipsets of our competitors. Our inability to retain an OEM customer once such customer chooses to outsource production would have a material adverse effect on our future revenue.

 

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

 

Our products are complex and may contain errors, defects and bugs when introduced. If we deliver products with material errors, defects or bugs, our credibility and the market acceptance and sales of our products could be significantly harmed. Furthermore, the nature of our products may also delay the detection of any such error or defect. If our products contain material errors, defects and bugs, then we may be required to expend significant capital and resources to alleviate these problems. This could result in the diversion of technical and other resources from our other development efforts. Any actual or perceived problems or delays may also adversely affect our ability to attract or retain customers. Furthermore, the existence of any defects, errors or failures in our products could lead to product liability claims or lawsuits against us or against our customers. We generally provide our customers with a standard warranty for our products, generally lasting one year from the date of purchase. Although we attempt to limit our liability for product defects to product replacements, we may not be successful, and customers may sue us or claim liability for the defective products. A successful product liability claim could result in substantial cost and divert management’s attention and resources, which would have a negative impact on our financial condition and results of operations.

 

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

 

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

 

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We may experience difficulties in transitioning to smaller geometry process technologies or in achieving higher levels of design integration, which may result in reduced manufacturing yields, delays in product deliveries and increased expenses.

 

A growing trend in our industry is the integration of greater semiconductor content into a single chip to achieve higher levels of functionality. In order to remain competitive, we must achieve higher levels of design integration and deliver new integrated products on a timely basis. This will require us to expend greater research and development resources, and may require us to modify the manufacturing processes for some of our products, to achieve greater integration. We periodically evaluate the benefits, on a product-by-product basis, of migrating to smaller geometry process technologies to reduce our costs. Although this migration to smaller geometry process technologies has helped us to offset the declining average selling prices of our products, this effort may not continue to be successful. Also, because we are a fabless semiconductor company, we depend on our foundries to transition to smaller geometry processes successfully. We cannot assure you that our foundries will be able to effectively manage the transition. In case our foundries or we experience significant delays in this transition or fail to efficiently implement this transition, our business, financial condition and results of operations could be materially and adversely affected.

 

Trends, Risks and Uncertainties Related to International Operations

 

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

 

Although the majority of end users of the consumer products that incorporate our products are located in the U.S., we are dependent on sales to OEM customers, located outside of the U.S., that manufacture these consumer and office products. Also, we depend on a network of distributors to sell our products that also are primarily located outside of the U.S. Export sales shipped to manufacturers in Europe and Asia, including Japan and Asia Pacific, represented 98%, 96% and 95% of our total revenues for 2020, 2019 and 2018, respectively. Furthermore, we have material operations in Germany, Hong Kong and India and employ a number of individuals within those foreign operations. As a result, the occurrence of any negative international political, economic or geographic events, as well as our failure to mitigate the challenges in managing an organization operating in various countries, could result in significant revenue shortfalls and disrupt our workforce within our foreign operations. These shortfalls and disruptions could cause our business, financial condition and results of operations to be harmed. Some of the risks of doing business internationally include:

 

 

unexpected changes in foreign government regulatory requirements;

 

 

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

 

 

import and export license requirements;

 

 

imposition of tariffs and other barriers and restrictions;

 

 

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

 

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

 

 

difficulty in collecting accounts receivable and longer payment cycles for international customers than existing customers;

 

 

difficulty in staffing and managing foreign operations and maintaining the morale and productivity of employees within foreign operations;

 

 

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

 

 

political and economic instability, including protectionist policies; and

 

 

changes in diplomatic and trade relationships.

 

One or more of these factors may have a material adverse effect on our future operations and consequently, on our business, financial conditions and operating results.

 

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

 

Our principal research and development facilities are located in the State of Israel and most of our executive officers and some of our directors are residents of Israel. Although substantially all of our sales currently are being made to customers outside of Israel, we are nonetheless directly influenced by the political, economic and military conditions affecting Israel. Any major hostilities involving Israel, or the interruption or curtailment of trade between Israel and its present trading partners, could significantly harm our business, operating results and financial condition. In addition, certain of our employees are currently obligated to perform annual reserve duty in the Israel Defense Forces and are subject to being called to active military duty at any time. Although we have operated effectively under these requirements since our inception, we cannot predict the effect of these obligations on the company in the future. Our operations could be disrupted by the absence, for a significant period, of one or more of our key employees due to military service.

 

Furthermore, there is currently a level of unprecedented political instability in Israel. The Israeli government has been in a transitionary phase since December 2018, when the Israeli Parliament, or the Knesset, first resolved to dissolve itself and call for new general elections. In 2019, Israel held general elections twice – in April and September – and a third general election was held on March 2, 2020. The Knesset, for reasons related to this extended political transition, has failed to pass a budget for the year 2020, and certain government ministries are left without necessary resources and may not receive sufficient funding moving forward. During December 2020, the government was unable to pass a budget by the applicable deadline, triggering a snap election expected to take place during March 2021. Actual or perceived political instability in Israel or any negative changes in the political environment, may individually or in the aggregate adversely affect the Israeli economy and, in turn, our business, financial condition, results of operations, and prospects.

 

The tax benefits available to us under Israeli law require us to meet several conditions, and may be terminated or reduced in the future, which would increase our taxes.

 

We enjoy certain tax benefits in Israel, particularly as a result of our facilities in Israel having been granted Approved Enterprise and Beneficiary Enterprise status. To be eligible for tax benefits, we must meet certain conditions, relating principally to adherence to the investment program filed with the Investment Center of the Israeli Ministry of Economy and periodic reporting obligations. Although we believe we have met such conditions in the past, should we fail to meet such conditions in the future, we would be subject to corporate tax in Israel at the standard corporate tax rate (23% for 2021) and could be required to refund tax benefits (including with interest and adjustments for inflation based on the Israeli consumer price index) already received. Our average tax rate for our investment programs also may change in the future due to circumstances outside of our control, including changes to legislation. Additionally, if we increase our activities outside of Israel, for example, by acquisitions, our increased activities may not be eligible for inclusion in Israeli tax benefit programs. The termination or reduction of certain programs and tax benefits or a requirement to refund tax benefits (including with interest and adjustments for inflation based on the Israeli consumer price index) already received may have a material adverse effect on our business, operating results and financial condition.

 

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We are exposed to fluctuations in currency exchange rates.

 

A significant portion of our business is conducted outside the United States. Export sales to manufacturers in Europe and Asia, including Japan and Asia Pacific, represented 98% of our total revenues for 2020 and 96% of our total revenues for 2019 and 95% of our total revenues in 2018. Although most of our revenue and expenses are transacted in U.S. dollars, we may be exposed to currency exchange fluctuations in the future as business practices evolve and we are forced to transact business in local currencies. Moreover, part of our expenses in Israel are paid in Israeli currency, which subjects us to the risks of foreign currency fluctuations between the U.S. dollar and the New Israeli Shekel (NIS) and to economic pressures resulting from Israel’s general rate of inflation. Our primary expenses paid in NIS are employee salaries and lease payments on our Israeli facilities. Furthermore, a portion of our expenses for our European operations are paid in the Euro, which subjects us to the risks of foreign currency fluctuations between the U.S. dollar and the Euro. Our primary expenses paid in the Euro are employee salaries, lease and operational payments on our European facilities. As a result, an increase in the value of the NIS and Euro in comparison to the U.S. dollar could increase the cost of our technology development, research and development expenses and general and administrative expenses, all of which could harm our operating profit. From time to time, we use derivative instruments in order to minimize the effects of currency fluctuations, but our hedging positions may be partial, may not exist at all in the future or may not succeed in minimizing our foreign currency fluctuation risks. Our financial results may be harmed if the trend relating to the devaluation of the U.S. dollars continues for an extended period.

 

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

 

General trade tensions between the U.S. and China remain unresolved. While tariffs and other retaliatory trade measures imposed by other countries on U.S. goods have not yet had a significant impact on our business or results of operations, we cannot predict further developments, and such existing or future tariffs could have a material adverse effect on our consolidated results of operations, financial position and cash flows. Furthermore, changes in U.S. trade policy could trigger retaliatory actions by affected countries, which could impose restrictions on our ability to do business in or with affected countries or prohibit, reduce or discourage purchases of our products by foreign customers, leading to increased costs of components contained in our products, increased costs of manufacturing our products, and higher prices for our products in foreign markets. For example, there are risks that the Chinese government may, among other things, require the use of local suppliers, compel companies that do business in China to partner with local companies to conduct business and provide incentives to government-backed local customers to buy from local suppliers. Changes in, and responses to, U.S. trade and tariff policy could reduce the competitiveness of our products and cause our sales and revenues to drop, which could materially and adversely impact our business and results of operations.

 

Trends, Risks and Uncertainties Related to Intellectual Property

 

Third party claims of infringement or other claims against us could adversely affect our ability to market our products, require us to redesign our products or seek licenses from third parties, and seriously harm our operating results and disrupt our business.

 

As is typical in the semiconductor industry, we and our customers have been and may from time to time be notified of claims that we may be infringing patents or intellectual property rights owned by third parties. In addition, patent infringement claims are increasingly being asserted by patent holding companies (so-called patent “trolls”), which do not use technology and whose sole business is to enforce patents against companies, such as us, for monetary gain. Because such patent holding companies do not provide services or use technology, the assertion of our own patents by way of counter-claim may be ineffective. We have received claims that our products infringe upon the proprietary rights of such patent holding companies. In addition, third parties have asserted and may in the future assert intellectual property infringement claims against our customers, which we have agreed in certain circumstances to indemnify and defend against such claims. If litigation becomes necessary to determine the validity of any third party claims, it could result in significant expense to us and could divert the efforts of our technical and management personnel, whether or not the claim has merit and notwithstanding that the litigation is determined in our favor.

 

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If it appears necessary or desirable, we may try to obtain licenses for those patents or intellectual property rights that we are allegedly infringing. Although holders of these types of intellectual property rights commonly offer these licenses, we cannot assure you that licenses will be offered or that the terms of any offered licenses will be acceptable to us. Our failure to obtain a license for key intellectual property rights from a third party for technology used by us could cause us to incur substantial liabilities, suspend the manufacturing of products utilizing the technology or damage the relationship with our customers. Alternatively, we could be required to expend significant resources to develop non-infringing technology. We cannot assure you that we would be successful in developing non-infringing technology. The occurrence of any of these events could harm our business, financial condition or results of operations.

 

We may not be able to adequately protect or enforce our intellectual property rights, which could harm our competitive position.

 

Our success and ability to compete is in part dependent upon our internally-developed technology and other proprietary rights, which we protect through a combination of copyright, trademark and trade secret laws, as well as through confidentiality agreements and licensing arrangements with our customers, suppliers, employees and consultants. In addition, we have filed a number of patents in the United States and in other foreign countries with respect to new or improved technology that we have developed. However, the status of any patent involves complex legal and factual questions, and the breadth of claims allowed is uncertain. Accordingly, we cannot assure you that any patent application filed by us will result in a patent being issued, or that the patents issued to us will not be infringed by others. Also, our competitors and potential competitors may develop products with similar technology or functionality as our products, or they may attempt to copy or reverse engineer aspects of our product line or to obtain and use information that we regard as proprietary. Moreover, the laws of certain countries in which our products are or may be developed, manufactured or sold, including Hong Kong, Japan, Korea, China and Taiwan, may not protect our products and intellectual property rights to the same extent as the laws of the United States. Policing the unauthorized use of our products is difficult and may result in significant expense to us and could divert the efforts of our technical and management personnel. Even if we spend significant resources and efforts to protect our intellectual property, we cannot assure you that we will be able to prevent misappropriation of our technology. Use by others of our proprietary rights could materially harm our business and expensive litigation may be necessary in the future to enforce our intellectual property rights.

 

General Risk Factors

 

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

 

The general worldwide economic conditions remain uncertain which continues to make it difficult for our customers, the end-product customers, our vendors and us to accurately forecast and plan future business activities. Moreover, we operate within the semiconductor industry which experiences significant fluctuations in sales, availability and profitability. Downturns in the semiconductor industry are characterized by diminished product demand, excess customer inventories, accelerated erosion of prices and excess production capacity. These factors could cause substantial fluctuations in our revenues and in our results of operations. If global economic and market conditions remain uncertain or deteriorate, we could experience a material adverse impact on our business and results of operations.

 

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We may engage in future acquisitions that could dilute our stockholders equity and harm our business, results of operations and financial condition.

 

We have pursued, and will continue to pursue, growth opportunities through internal development and acquisition of complementary businesses, products and technologies. We are unable to predict whether or when any other prospective acquisition will be completed. The process of integrating an acquired business may be prolonged due to unforeseen difficulties and may require a disproportionate amount of our resources and management’s attention. There are no assurances that we will be able to successfully identify suitable acquisition candidates, complete acquisitions, integrate acquired businesses into our operations, or expand into new markets. Further, once integrated, acquisitions may not achieve comparable levels of revenues, profitability or productivity as our existing business or otherwise perform as expected. The occurrence of any of these events could harm our business, financial condition or results of operations. Future acquisitions may require substantial capital resources, which may require us to seek additional debt or equity financing. Future acquisitions by us could result in the following, any of which could seriously harm our results of operations or the price of our stock:

 

 

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

 

 

large one-time write-offs;

 

 

the incurrence of debt and contingent liabilities;

 

 

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

 

 

diversion of management’s attention from other business concerns;

 

 

contractual disputes;

 

 

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

 

 

potential loss of key employees of acquired organizations.

 

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

 

Most of our sales are on an open credit basis. Because of current conditions in the global economy, our exposure to credit risks relating to sales on an open credit basis has increased. We expect demand for enhanced open credit terms, for example, longer payment terms, to continue and believe that such arrangements are a competitive factor in obtaining business. Although we monitor and attempt to mitigate credit risks, including through insurance coverage from time to time, there can be no assurance that our efforts will be effective. Moreover, even if we attempt to mitigate credit risks through insurance coverage, such coverage may not be sufficient to cover all of our losses and we would be subject to a deductible under any insurance coverage. As a result, our future credit risk exposure may increase. Although any losses to date relating to credit exposure of our customers have not been material, future losses, if incurred, could harm our business and have a material adverse effect on our operating results and financial condition. Moreover, the loss of a customer due to its financial default also could harm our future business and potential growth.

 

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Our executive officers and key personnel are critical to our business, and because there is significant competition for personnel in our industry, we may not be able to attract and retain such qualified personnel.

 

Our success depends to a significant degree upon the continued contributions of our executive management team, and our technical, marketing, sales customer support and product development personnel. The loss of significant numbers of such personnel could significantly harm our business, financial condition and results of operations. We do not have any life insurance or other insurance covering the loss of any of our key employees. Because our products are specialized and complex, our success depends upon our ability to attract, train and retain qualified personnel, including qualified technical, marketing and sales personnel. However, the competition for personnel is intense and we may have difficulty attracting and retaining such personnel.

 

An unfavorable government review of our federal income tax returns or changes in our effective tax rates could adversely affect our operating results.

 

Our future effective tax rates could be adversely affected by earnings being lower than anticipated in countries where we have lower statutory rates and higher than anticipated in countries where we have higher statutory rates, by changes in the valuation of our deferred tax assets and liabilities, or by changes in tax laws, regulations, accounting principles or interpretations thereof. In addition, we are subject to the periodic examination of our income tax returns by the IRS and other tax authorities. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes, as an example, we are now under audit for one of our subsidiaries. The outcome from this examination may have an adverse effect on our operating results and financial condition.

 

Our business operations would be disrupted if the information technology systems we rely on fail to function properly.

 

We rely on complex information technology systems to manage our business which operates in many geographical locations. For example, to achieve short delivery lead times and superior levels of customer service while maintaining low levels of inventory, we frequently adjust our production schedules with manufacturers and subcontractors. We develop and adjust these schedules based on end customer demand as communicated by our customers and distributors and based on our inventory levels, manufacturing cycle times, component lead times, and projected production yields. We combine and distribute all of this information electronically over a complex global communications network. Our ability to estimate demand and to adjust our production schedules is highly dependent on this network. Any delay in the implementation of, or disruption in the transition to, new or enhanced processes, systems or controls, could adversely affect our ability to manage customer orders and manufacturing schedules, as well as generate accurate financial and management information in a timely manner. These systems are also susceptible to power and telecommunication disruptions and other system failures. Failure of our IT systems or difficulties in managing them could result in business disruption. Our business could be significantly disrupted and we could be subject to third party claims associated with such disruptions.

 

A breach of our information technology systems could subject us to liability, reputational damage or interrupt the operation of our business.

 

We rely upon our information technology systems and infrastructure for our business. We could experience theft of confidential information or reputational damage from industrial espionage attacks, malware or other cyber-attacks, which may compromise our system infrastructure or lead to data leakage, either internally or at our third-party providers. Similarly, data privacy breaches by those who access our systems may pose a risk that sensitive data, including intellectual property, trade secrets or personal information belonging to us, our patients, employees, customers or other business partners, may be exposed to unauthorized persons or to the public. Cyber-attacks are increasing in their frequency, sophistication and intensity, and have become increasingly difficult to detect. There can be no assurance that our efforts to protect our data and information technology systems will prevent breaches in our systems (or that of our third-party providers) that could adversely affect our business and result in financial and reputational harm to us, theft of trade secrets and other proprietary information, legal claims or proceedings, liability under laws that protect the privacy of personal information, and regulatory penalties.

 

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

 

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

 

Trends, Risks and Uncertainties Related to Our Common Stock

 

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

 

Our certificate of incorporation and bylaws contain provisions that may prevent or discourage a third party from acquiring us, even if the acquisition would be beneficial to our stockholders. Our board of directors also has the authority to fix the rights and preferences of shares of our preferred stock and to issue such shares without a stockholder vote. Our bylaws also place limitations on the authority to call a special meeting of stockholders. Our stockholders may take action only at a meeting of stockholders and not by written consent. We have advance notice procedures for stockholders desiring to nominate candidates for election as directors or to bring matters before an annual meeting of stockholders. In addition, these factors may also adversely affect the market price of our common stock, and the voting and other rights of the holders of our common stock.

 

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

 

Announcements of developments related to our business, announcements by competitors, quarterly fluctuations in our financial results, changes in the general conditions of the highly dynamic industry in which we compete or the national economies in which we do business, and other factors could cause the price of our common stock to fluctuate, perhaps substantially. In addition, in recent years, the stock market has experienced extreme price fluctuations, which have often been unrelated to the operating performance of affected companies. These factors and fluctuations could have a material adverse effect on the market price of our common stock.

 

Item 1B.         UNRESOLVED STAFF COMMENTS.

 

None.

 

Item 2.         PROPERTIES.

 

We are headquartered in San Jose, California, in a leased facilities of approximately 1,723 square feet pursuant to a lease agreement that terminates in December 2021. Our operations in Israel are located in leased facilities of approximately 43,282 square feet located in Herzliya, Israel. These facilities are leased for 10 years ending in April 2029. Our subsidiary in Tokyo, Japan has a lease that terminates in October 2022. Our subsidiary in Germany has facilities in Nuremberg and Straubing, which are under leases that terminate in December 2020 and December 2023, respectively. Our subsidiary in India has a lease that terminates in August 2025. Our subsidiary in China has two lease agreements for its facilities, one in Shenzhen that terminates in September 2023, and the other in Shanghai that terminates in February 2022. Our subsidiary in Hong Kong entered into a lease agreement that is effective until November 2022. Our subsidiary in South Korea has a lease that terminates in July 2022. Our subsidiary in UK has a lease that terminates in July 2023. We believe that our existing facilities are adequate to meet our needs for the immediate future.

 

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Item 3.         LEGAL PROCEEDINGS.

 

From time to time, we may become involved in litigation relating to claims arising from our ordinary course of business activities. Also, as is typical in the semiconductor industry, we have been and may from time to time be notified of claims that we may be infringing patents or intellectual property rights owned by third parties. We currently believe that there are no claims or actions pending or threatened against us, the ultimate disposition of which would have a material adverse effect on us.

 

Item 4.         MINE SAFETY DISCLOSURES.

 

Not applicable.

 

-28-

 

 

PART II

 

Item 5.         MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

 

Our common stock, par value $0.001, trades on the NASDAQ Global Select Market (NASDAQ symbol “DSPG”). As of March 4, 2021, there were 24,226,009 shares of common stock outstanding. As of March 4, 2021, the company had approximately 17 holders of record and we believe greater than 4,100 beneficial holders. We have never paid cash dividends on our common stock and presently intend to continue a policy of retaining any earnings for reinvestment in our business.

 

Equity Compensation Plan Information

 

Information relating to our equity compensation plans will be presented under the caption “Equity Compensation Plan Information” of our definitive proxy statement pursuant to Regulation 14A in connection with the annual meeting of stockholders to be held on June 14, 2021. The definitive proxy statement will be filed with the Securities and Exchange Commission no later than 120 days after the end of the fiscal year covered by this report. Such information is incorporated herein by reference.

 

-29-

 

 

Issuer Purchases of Equity Securities

 

Our board of directors has previously approved a number of share repurchase programs, including those in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934, for the repurchase of our common stock. In February 2019, our board authorized an increase of the existing share repurchase program to an aggregate of $10.0 million, inclusive of previously authorized amounts under the repurchase program. At December 31, 2020, 490,209 shares of our common stock were available for repurchase under our board authorized share repurchase program.

 

During 2020, we repurchased a total of 304,704 shares of our common stock at an average purchase price of $12.26 per share for approximately $3.7 million dollars. No repurchases were done in the fourth quarter of 2020.

 

The repurchase program is being affected from time to time, depending on market conditions and other factors, through Rule 10b5-1 plans, open market purchases and privately negotiated transactions. The repurchase program has no set expiration or termination date.

 

-30-

 

 

 

Stock Performance Graph

 

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

 

The graph below compares the cumulative total stockholder return on our common stock with the cumulative total return on the Standard & Poor’s 500 Index and Standard & Poor’s Information Technology Index. The period shown commences on December 31, 2015 and ends on December 31, 2020, the end of our last fiscal year. The graph assumes an investment of $100 on December 31, 2015, and the reinvestment of any dividends.

 

dspg20201231_10kimg001.gif

 

 

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

 

-31-

 

Item 6.         SELECTED FINANCIAL DATA.

 

The selected historical consolidated financial data presented below is derived from our consolidated financial statements. The selected consolidated financial data set forth below is qualified in its entirety by, and should be read in conjunction with, our consolidated financial statements for the year ended December 31, 2020, and the discussion of our business, operations and financial results in the section captioned, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

Year ended December 31,

                                       
   

2020

   

2019

   

2018

   

2017

   

2016

 
   

(U.S. dollars in thousands)

 

Statements of Operations Data:

                                       

Revenues

  $ 114,480     $ 117,613     $ 117,438     $ 124,753     $ 137,869  

Cost of revenues

    56,290       58,066       59,991       67,058       77,023  

Gross profit

    58,190       59,547       57,447       57,695       60,846  

Operating expenses

                                       

Research and development, net

    35,511       35,552       36,109       36,655       34,885  

General, administrative, sales and marketing

    29,715       27,982       25,278       24,104       22,873  

Amortization of intangible assets

    1,065       417       1,700       1,700       1,457  

Other income

    -       -       -       -       (2,549 )

Total operating expenses

    66,291       63,951       63,087       62,459       56,666  

Operating income (loss)

    (8,101 )     (4,404 )     (5,640 )     (4,764 )     4,180  
                                         

Financial income, net

    1,231       1,654       1,815       1,669       1,227  

Income (loss) before taxes

    (6,870 )     (2,750 )     (3,825 )     (3,095 )     5,407  

Income tax expense (benefit)

    (80 )     (1,560 )     (1,868 )     (92 )     594  

Net income (loss)

  $ (6,790 )   $ (1,190 )   $ (1,957 )   $ (3,003 )   $ 4,813  

Weighted average number of Common Stock outstanding during the period used to compute basic net earnings (loss) per share

    23,466       22,827       22,512       22,229       21,800  

Weighted average number of Common Stock outstanding during the period used to compute diluted net earnings (loss) per share

    23,466       22,827       22,512       22,229       22,887  

Basic net income (loss) per share

  $ (0.29 )   $ (0.05 )   $ (0.09 )   $ (0.14 )   $ 0.22  

Diluted net income (loss) per share

  $ (0.29 )   $ (0.05 )   $ (0.09 )   $ (0.14 )   $ 0.21  

Balance Sheet Data (end of year):

                                       

Cash, cash equivalents, marketable securities and bank deposits, including restricted deposits

  $ 128,553     $ 131,280     $ 123,890     $ 129,215     $ 124,945  

Working capital

  $ 62,217     $ 69,554     $ 52,617     $ 51,071     $ 52,102  

Total assets

  $ 216,473     $ 205,925     $ 179,890     $ 185,199     $ 185,944  

Total stockholders’ equity

  $ 156,238     $ 153,094     $ 141,865     $ 146,950     $ 145,547  

 

-32-

 

Year ended December 31,

                                                               

Fiscal Years by Quarter

 

2020

    2019  

Quarterly Data:

 

4th

   

3rd

   

2nd

   

1st

   

4th

   

3rd

   

2nd

   

1st

 
   

(Unaudited, U.S. dollars in thousands, except per share amount)

 

Revenues

  $ 31,885     $ 26,020     $ 28,336     $ 28,239     $ 29,261     $ 31,042     $ 29,034     $ 28,276  

Gross profit

  $ 16,342     $ 13,206     $ 14,261     $ 14,381     $ 14,892     $ 15,780     $ 14,419     $ 14,456  

Net income (loss)

  $ (1,357 )   $ (1,891 )   $ (1,077 )   $ (2,465 )   $ (87 )   $ 484     $ (521 )   $ (1,066 )

Net income (loss) per share — Basic and diluted

  $ (0.06 )   $ (0.08 )   $ (0.05 )   $ (0.11 )   $ (0.00 )   $ 0.02     $ (0.02 )   $ (0.05 )

 

Item 7.         MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

 

The following discussion and analysis is intended to provide an investor with a narrative of our financial results and an evaluation of our financial condition and results of operations. The discussion should be read in conjunction with our consolidated financial statements and notes thereto.

 

Business Overview

 

DSP Group is a leading global provider of wireless chipset solutions for converged communications, delivering system solutions that combine semiconductors and software with reference designs. We provide a broad portfolio of wireless chipsets integrating DECT, Wi-Fi, PSTN and VoIP technologies with state-of-the-art application processors. We also enable converged voice, audio and data connectivity across diverse consumer products – from cordless and VoIP phones to home gateways and connected multimedia screens. Our Home segment consists of cordless telephony products and SmartHome products, which are comprised of our home gateway and home automation products. Our Unified Communications segment consists of a comprehensive set of solutions for Unified Communications (VoIP office products). Our SmartVoice segment consists of products targeted at mobile, IoT and wearable device markets that incorporate our noise suppression and voice quality enhancement HDClear technology, as well as other third party advanced voice processing, always on and sensor hub functionalities.

 

In 2013, we defined three initiatives aimed at growing market verticals, which align well with our expertise. We called such initiatives Unified Communications, SmartHome, and SmartVoice, which together we referred as “growth initiatives.” Our past research and development investments paid off and our strategy with respect to such initiatives has proven successful. Starting in 2018, our growth initiatives accounted for a majority of our total revenues. Reflecting our success in turning growth initiatives into our core expertise, we changed the terminology for these market verticals that we operate in from “growth initiatives” to Internet of Audio Things or “IoAT” businesses.

 

In July 2020, we completed the acquisition of SoundChip SA, a privately-held Swiss company (“SoundChip”) for an initial purchase price of approximately $15 million and agreed to pay future contingent cash milestone payments of up to $6 million upon the achievement of certain customer and product sales milestones. SoundChip is a leading supplier of active noise cancellation (ANC) technology, engineering services, design tools and production-line test systems for headsets. The acquisition combines SoundChip’s proven capabilities in hybrid ANC with our SmartVoice™ advanced low-power voice processing platform, algorithms, and mixed-signal expertise to streamline the delivery of cutting-edge wireless and true wireless stereo (TWS) headsets, from concept through to manufacturing. SoundChip operations were consolidated as of July 1, 2020 and are included in the SmartVoice segment.

 

-33-

 

We believe our innovative technical solutions are well-positioned to play a pivotal role in the technological trends that are accelerating as a result of the pandemic. For instance, with more employees working remotely, and offices reconfiguring workspaces to cater to social distancing requirements, high-quality voice-centric communication is essential. In particular, our business is directly benefitting from increased adoption of voice user interfaces, a surge in voice call traffic, and demand for intuitive, seamless, and reliable collaboration tools. Although there was a short-term slowdown in the Unified Communications market due to reduced spending in enterprise IT infrastructure as a result of work-from-home activities, for the long term, a shift to hybrid working models that combine on-premise and remote work and other trends emerging from COVID-19 could create an increased demand for Unified Communications products such as headsets, phones, video conferencing and conferencing systems to enhance workforce’s efficiency and productivity. Also, individuals worldwide have recently become sensitive to the health risks of touching commonly-used surfaces, which accelerates the adoption of voice as a user interfaces (VUIs) for a broad array of products to address the increasing preference for contactless, germ-free, voice-enabled human-machine interface. Moreover, amid the pandemic, voice call volume increased significantly, which could drive demand for the integration of DECT/ULE in home gateways to ensure quality of service and full home coverage. We believe we are uniquely positioned to leverage our leadership in Unified Communications, SmartVoice and SmartHome markets with world class technologies and innovative solutions that address the increasing demands of these markets.

 

During 2020, revenues from our IoAT businesses were $68.2 million and accounted for 60% of our total revenues, as compared to 63% of our total revenues in 2019, and represented a decrease of 8% year-over-year. The decrease was primarily attributable to a decrease in revenues from Unified Communications products. Revenues from our Unified Communications products represented 27% and 32% of our total revenues in 2020 and 2019, respectively. Revenues from our SmartVoice products represented 18% and 16% of our total revenues in 2020 and 2019, respectively. Revenues from SmartHome products accounted for 15% and 14% of our revenues in 2020 and 2019, respectively.

 

In 2020 as compared to 2019, revenues from the SmartVoice segment grew by 4% and revenues from SmartHome products increased by 3%. Revenues from the Unified Communications segment decreased by 18%. Based on a strong pipeline of design wins, our current mix of growth initiatives products and anticipated commercialization schedules of customers incorporating such products, we anticipate annual revenues generated from our IoAT businesses to increase in 2021 as compared to 2020. The expected increase in revenues from our IoAT businesses will be driven mainly by our Unified Communications segment. We anticipate that the Unified Communications market will recover in 2021 based on customers’ feedback and major design wins we have secured.

 

Our revenues were $114.5 million for 2020, a decrease of 3% in comparison to 2019. The decrease for 2019 was primarily as a result of a decrease in our Unified Communications products which was partially offset by an increase in sales of our SmartVoice, SmartHome and cordless telephony products.

 

Our gross margin increased to 50.8% of our total revenues for 2020 from 50.6% for 2019, primary due to (i) a decrease in slow moving inventory provisions in 2020 as compared to 2019, (ii) an improvement in production yield and direct contribution of certain of our products and (iii) a change in the mix of products sold and the mix of customers, mostly the shifting to revenues with higher gross margins in our SmartVoice segment, offset to some extent by an increase in royalties to the Israeli Innovation Authority (“IIA”) and to other IP vendors for 2020 as compared to 2019. We anticipate that our gross margin on an annual basis will continue to increase in the foreseeable future as our product mix shifts in favor of new products, which generally have higher gross margins.

 

Our operating loss was $8.1 million for 2020, as compared to an operating loss of $4.4 million for 2019. The increase in our operating loss is attributed to a decrease in our revenues in 2020 as compared to 2019 and an increase of 4% in our operating expenses to $66.3 million in 2020 as compared to $64.0 million in 2019, mainly due to an increase in sales and marketing and general and administrative expenses in 2020 as compared to 2019, as well as an increase of intangible assets amortization expenses in 2020 as compared to 2019.

 

-34-

 

As of December 31, 2020, our principal source of liquidity consisted of cash and cash equivalents of $16.9 million and marketable securities and short and long-term deposits of $111.1 million, totaling $128.0 million.

 

COVID-19

 

Throughout the COVID-19 outbreak, we have continued to supply our chipsets and serve customers. We have taken a number of precautionary health and safety measures to safeguard our employees while maintaining business continuity. We are monitoring and assessing orders issued by applicable governments to ensure compliance with evolving COVID-19 guidelines. Nonetheless, prolonged measures to contain the spread of coronavirus poses uncertainty for economic activities, and 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 2021.  We experienced some short-term slowdown in the Unified Communications market due to reduced spending in enterprise IT infrastructure as a result of work-from-home activities. Furthermore, there are certain industry-wide supply chain constraints that are placing certain limitations on our product deliveries. Therefore, while we are confident about our engagement pipeline and the long-term prospects of our IoAT businesses, we may face some near-term challenges that will negatively impact our revenues for 2021.

 

In light of the uncertain and rapidly evolving situation relating to the pandemic, we have taken a number of precautionary measures to manage our resources conservatively to mitigate the adverse impact of the pandemic. We will continue to closely monitor our exposure levels and align them to the dynamics we will experience in the coming months. We will assess our business during the crisis to make strategic decisions for our business in the best interests of stockholders.

 

Critical Accounting policies

 

Our consolidated financial statements are prepared in accordance with U.S. GAAP. In connection with the preparation of the financial statements, we are required to make assumptions and estimates about future events, and apply judgment that affect the reported amounts of assets, liabilities, revenue, expenses and the related disclosure. We base our assumptions, estimates and judgments on historical experience, current trends and other factors that management believes to be relevant at the time the consolidated financial statements are prepared. On a regular basis, management reviews our accounting policies, assumptions, estimates and judgments to ensure that our financial statements are presented fairly and in accordance with U.S. GAAP. However, because future events and their effects cannot be determined with certainty, actual results could differ from our assumption and estimates, and such differences could be material.

 

Our significant accounting policies are discussed in Note 2, Significant Accounting Policies, of the notes to our consolidated financial statements for the year ended December 31, 2020.

 

Additionally, the COVID-19 pandemic has created, and may continue to create, significant uncertainty in macroeconomic conditions, and the extent of its impact on our operational and financial performance will depend on certain developments, including the duration and spread of the outbreak and the impact of the pandemic on our customers and sales cycles. We considered the impact of COVID-19 on our estimates and assumptions and determined that there were no material adverse impact on the consolidated financial statements for the period ended December 31, 2020. As events continue to evolve and additional information becomes available, our estimates and assumptions may change materially in future periods.

 

-35-

 

Management believes that the following accounting policies require management’s most difficult, subjective and complex judgments, resulting from the need to make estimates about the effect of matters that are inherently uncertain. Management has reviewed these critical accounting policies and related disclosures with our independent auditors and audit committee.

 

Description

Judgments and Uncertainties

Effect if Actual Results Differ from Assumptions

Tax Contingencies:

Like most companies, domestic and foreign tax authorities periodically audit our income tax returns. These audits include questions regarding our tax filing positions, including the timing and amount of deductions and the allocation of income among various tax jurisdictions. In evaluating the exposure associated with our various tax filing positions, including state, foreign and local taxes, we record reserves for probable exposures. A number of years may elapse before a particular matter, for which we have established a reserve, is audited and fully resolved.

 

We report a liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return. We recognize interest and penalties, if any, related to unrecognized tax benefits in income tax expense.

The estimate of our tax contingency reserve contains uncertainty because management must use judgment to estimate the exposure associated with our various tax filing positions.

 

According to Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) No. 740, “Income Taxes,” the first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount which is more than 50% likely of being realized upon ultimate settlement.

Although management believes that its estimates and judgments about tax contingencies are reasonable, actual results could differ, and we may be exposed to gains or losses that could be material. To the extent we prevail in matters for which reserve has been established, or are required to pay amounts in excess of the reserve, our effective tax rate for a given financial statement period could be materially affected. An unfavorable tax settlement would require use of our cash and result in an increase in our effective tax rate for the year of resolution. A favorable tax settlement would be recognized as a reduction in our effective tax rate for the year of resolution.

Tax Valuation Allowance:

We have a valuation allowance for some of our deferred tax assets based on the determination that it is more likely than not that some of these assets will not be realized.

Our management inherently must make estimates to determine the ultimate realization of these assets. The estimate of our tax valuation allowance contains uncertainty because management must use judgment to estimate the expected results for tax purposes.

Although management believes that its estimates and judgments about expected results for tax purposes are reasonable, actual results could differ, and we may be required to record an additional valuation allowance for our deferred tax assets.

 

-36-

 

Description

Judgments and Uncertainties

Effect if Actual Results Differ from Assumptions

Valuation of Long-Lived Assets, Intangible Assets and Goodwill:

Goodwill represents the excess of purchase price over the fair value of identifiable net assets acquired in business combination. The goodwill on our consolidated balance sheet is a result of our acquisition of BoneTone and a private company in Asia. The identifiable intangible asset included on our consolidated balance sheet is technology acquired in the BoneTone acquisition and customer relationship in the form of a distribution agreement acquired in the acquisition of a private company in Asia.

 

We perform our annual impairment analysis of goodwill and indefinite-lived intangible assets in the fourth quarter of each fiscal year, or more often if there are indicators of impairment.  We review intangible assets with finite useful life for potential impairment when events or changes in circumstances indicate the carrying value of those intangible assets may be impaired. We may obtain an appraisal from an independent valuation firm to determine the amount of impairment, if any. In addition to the use of an independent valuation firm, we perform internal valuation analyses and consider other publicly available market information.

We determine fair value using widely accepted valuation techniques, including discounted cash flow and market multiple analyses. These types of analyses require us to make assumptions and estimates regarding industry economic factors and the profitability of future business strategies. It is our policy to conduct impairment testing based on our current business strategy in light of present industry and economic conditions, as well as future expectations.

If management’s estimates or related assumptions change in the future, we may be required to record impairment charges for our intangible assets.

 

-37-

 

Description

Judgments and Uncertainties

Effect if Actual Results Differ from Assumptions

Contingencies and Other Accrued Expenses:

We are from time to time involved in legal proceedings and other claims. We are required to assess the likelihood of any adverse judgments or outcomes to these matters, as well as potential ranges of probable losses.

A determination of the amount of reserve required, if any, for any contingencies and accruals is made after careful analysis of each individual issue. The required reserve may change due to future developments, such as a change in the settlement strategy in dealing with any contingencies, which may result in higher net losses.

If actual results are not consistent with management’s assumptions and judgments, we may be exposed to gains or losses that could be material.

Inventory Write-Off:

We value our inventory at the lower of the cost of the inventory or fair market value through the establishment of write-off and inventory loss reserve. We have not made any changes in the accounting methodology used to establish our markdown or inventory loss reserves during the past four fiscal years.

Our write-off represents the excess of the carrying value, typically cost, over the amount we expect to realize from the ultimate sale or other disposal of inventory based upon our assumptions regarding forecasted consumer demand, the promotional environment, inventory aging and technological obsolescence.

If management’s estimates regarding consumer demand are inaccurate or changes in technology affect demand for certain products in an unforeseen manner, we may be exposed to losses or gains in excess of our established write-off that could be material.

Equity-Based Compensation Expense:

Equity-based compensation expense is measured on the grant date based on the fair value of the award and is recognized as an expense over the requisite service periods.

Determining the fair value of equity-based awards on the grant date requires the exercise of judgment, including the amount of equity-based awards that are expected to be forfeited. We consider many factors when estimating expected forfeitures, including types of awards, employee class, and historical experience. Actual results, and future changes in estimates, may differ substantially from our current estimates.

 

We estimate the fair value of equity-based awards using a binomial option pricing model. The fair value of an award is affected by our stock price on the date of grant as well as other assumptions, including expected stock price volatility and the expected term of the equity-based award. The risk-free interest rate is based on the yield from U.S. treasury bonds with an equivalent term. Expected volatility is calculated based upon actual historical stock price movements. The expected term of the equity-based award granted is based upon historical experience and represents the period of time that the award granted is expected to be outstanding. Our expected dividend rate is zero since we do not currently pay cash dividends and do not anticipate doing so in the foreseeable future.

Although management believes that their estimates and judgments about equity-based compensation expense are reasonable, actual results could differ.

 

-38-

 

Description

Judgments and Uncertainties

Effect if Actual Results Differ from Assumptions

Marketable Securities:

Management determines the appropriate classification for our investments in debt and equity securities at the time of purchase and re-evaluates such determination at each balance sheet date.

The marketable securities are periodically reviewed for impairment. Starting on January 1, 2020, as a result of the adoption of ASC No. 326, “Financial Instruments – Credit Losses,” marketable securities with an amortized cost basis in excess of estimated fair value are assessed to determine what amount of that difference, if any, is caused by expected credit losses. Expected credit losses on marketable securities are recognized in financial income, net, on our consolidated statements of income (loss), and any remaining unrealized losses, net of taxes, are included in accumulated other comprehensive income (loss) in stockholders' equity. Factors that are considered in making such a determination include the duration and severity of the impairment, the reason for the decline in value and the potential recovery period, and our intent to sell, or whether it is more likely than not that we will be required to sell, the investment before recovery of its cost basis.

Although management believes that their considerations and judgments about fair value and whether a credit loss on marketable security should be recorded, actual results could differ from management estimation. Given current market conditions and uncertainty, management’s judgments could prove to be wrong, and companies with relatively high credit ratings and solid financial conditions may not be able to fulfill their obligations and thereby cause a credit loss on marketable security.

 

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Results of Operations:

 

Total Revenues.

 

The following tables represent our total revenues and our revenues by product family for the years ended December 31, 2020, 2019 and 2018 (dollars in millions):

 

 

2020

YoY Change

2019

YoY Change

2018

Total Revenues (1,2)

$114.5

(3)%

$117.6

0%

$117.4

Cordless (3,4)

$46.3

6%

$43.9

(18)%

$53.2

Percentage of total revenues

40%

 

37%

 

45%

SmartHome (5,)

$16.8

3%

$16.3

12%

$14.5

Percentage of total revenues

15%

 

14%

 

12%

Unified Communications (6,7)

$31.2

(18)%

$38.1

(2)%

$38.8

Percentage of total revenues

27%

 

32%

 

33%

SmartVoice (8)

$20.2

4%

$19.3

78%

$10.9

Percentage of total revenues

18%

 

16%

 

9%

  1.

The decrease in revenues in 2020 as compared to 2019 was primarily as a result of decreased sales of our Unified Communications products, offset to some extent by increased sales of our cordless, SmartVoice and SmartHome products.

 

  2.

The increase in revenues in 2019 as compared to 2018 was primarily as a result of increased sales of our SmartVoice and SmartHome products, offset to some extent by decreased sales of our cordless and Unified Communications products.

 

  3.

The increase in cordless revenues in 2020 as compared to 2019 was mainly attributable to increased demand from our customers stimulated by the pandemic which stimulated a resurgence in voice traffic and propelled demand for cordless products.

 

  4.

The decrease in cordless revenues in 2019 as compared to 2018 was mainly attributable to decreased demand from our customers in all markets due to an overall reduction in demand for cordless phones.

 

  5.

The increase of our SmartHome product sales in both comparable periods was mainly attributable to higher demand for our home gateway and home automation products.

 

  6.

The decrease in our Unified Communications sales in 2020 as compared to 2019 was mainly attributable to decreased demand due to the fundamental change in the workforce environment during 2020 as a result of the pandemic.

 

  7.

The decrease in our Unified Communications sales in 2019 as compared to 2018 is mainly attributable to a delay in the timing of orders originating from uncertainties relating to trade war concerns, as well as weakness in enterprise IT spending by businesses.

 

  8.

The increase in our SmartVoice revenues for the comparable periods was attributable to an increase in the number of customers and design wins in this segment, as well as the integration of SoundChip revenues starting from July 1, 2020.

 

 

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The following table shows the breakdown of revenues for all product lines for the periods indicated by geographic location based on the geographic location of our customers (in thousands):

 

   

Year ended December 31,

 
   

2020

   

2019

   

2018

 

United States

  $ 2,605     $ 4,947     $ 5,876  

Hong Kong

    35,723       31,692       36,666  

Japan

    13,014       11,249       14,284  

Europe

    6,913       9,546       9,022  

China

    22,172       22,813       16,107  

Taiwan

    27,216       26,634       23,940  

Korea

    4,890       7,285       7,341  

Other

    1,947       3,447       4,202  

Total revenues

  $ 114,480     $ 117,613     $ 117,438  

 

Sales to our customers in the United States decreased for 2020 as compared 2019, representing a decrease of 47% in absolute dollars. The decrease in our sales to the United States for the comparable periods resulted mainly from a decrease in sales to one of our U.S. customers. Sales to our customers in United States decreased for 2019 as compared 2018, representing a decrease of 16% in absolute dollars. The decrease in our sales to the United States for the comparable periods resulted mainly from a decrease in sales to one of our U.S. customers.

 

Sales to our customers in Hong Kong increased for 2020 as compared to 2019, representing an increase of 13% in absolute dollars. The increase in our sales to Hong Kong for the comparable periods resulted mainly from an increase in sales to VTech of 6% when comparing 2020 to 2019, and an increase in sales to SGW Global of 28% when comparing 2020 to 2019, mostly resulting from increased sales of our cordless products.

 

Sales to our customers in Hong Kong decreased for 2019 as compared to 2018, representing a decrease of 14% in absolute dollars. The decrease in our sales to Hong Kong for the comparable periods resulted mainly from a decrease in sales to VTech of 13% when comparing 2019 to 2018, and a decrease in sales to CCT Technology of 57% when comparing 2019 to 2018, mostly resulting from the expected decline in cordless sales.

 

Sales to our customers in Japan increased for 2020 as compared to 2019, representing an increase of 16% in absolute dollars, which resulted mainly from an increase in sales through our distributor, Nexty Electronics, to Panasonic of 18% for the comparable periods.

 

The decrease in our sales to Japan in 2019 as compared to 2018 resulted mainly from a decrease in sales through our distributor, Nexty Electronics, to Panasonic of 20% for the comparable periods.

 

Sales to our customers in Europe decreased in 2020 as compared to 2019, representing a 28% decrease in absolute dollars. The decrease in our sales to Europe in 2020 resulted mainly from a decrease in demand from our customers, especially sales to Gigaset of 17% in absolute dollars, as well as other customers in Europe.

 

Sales to our customers in China increased in 2019 as compared to 2018, representing a 42% increase in absolute dollars. The increase in our sales to China in 2019 resulted mainly from an increase in demand from our customers, especially sales of our SmartVoice products to OPPO Mobile Telecommunications Corp. Ltd, one of China’s top mobile OEMs, as well as an increase in the number of our Chinese customers.

 

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Sales to our customers in Taiwan increased for 2019 as compared to 2018, representing an increase of 11% in absolute dollars. The increase in our sales to Taiwan for the comparable periods resulted mainly from an increase in sales to Cisco, as well as other customers in Taiwan through our distributor, Ascend Technology, offset to some extent by a decrease in our sales to Avaya Holdings Corporation through Ascend Technology.

 

Sales to our customers in South Korea decreased in 2020 as compared to 2019, representing a 33% decrease in absolute dollars. The decrease in our sales to Korea resulted from a decrease in sales of 32% in absolute dollars to Samsung.

 

Sales to our other customers decreased for 2020 as compared to 2019, representing a decrease of 44% in absolute dollars. The decrease in our sales to other customers resulted from a decrease in sales to one of our customers in South America.

 

As our products are generally incorporated into consumer electronics products sold by our OEM customers, our revenues are affected by seasonal buying patterns of consumer electronics products sold by our OEM customers that incorporate our products.

 

Significant Customers. The following table represents our sales, as a percentage of our total revenues, through our main customers for the years ended December 31, 2020, 2019 and 2018:

 

   

Year ended December 31,

 

Major Customers

 

2020

   

2019

   

2018

 

Vtech

  23%     21%     24%  
                   

Cisco

  12%     10%     8%  

 

The following table represents our sales, as a percentage of our total revenues, through our main distributors Nexty Electronics and Ascend Technology for the years ended December 31, 2020, 2019 and 2018:

 

   

Year ended December 31,

 

Major Distributors

 

2020

   

2019

   

2018

 

Nexty Electronics (1)

  11%     9%     11%  
                   

Ascend Technology (2)

  29%     27%     26%  

 

 

(1)

Nexty Electronics sells our products to a limited number of customers. None of those customers accounted for 10% of our total revenues for the years ended December 31, 2020, 2019 and 2018, respectively.

 

 

(2)

Ascend Technology sells our products to a limited number of customers. One of those customers - Cisco – accounted for 12%, 10% and 8% of our total revenues for the years ended December 31, 2020, 2019 and 2018, respectively.

 

Significant Products. Revenues from our digital cordless telephony products represented 40%, 37% and 45% of our total revenues for 2020, 2019 and 2018, respectively.

 

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Revenues from our Unified Communications products represented 27%, 32% and 33% of our total revenues for 2020, 2019 and 2018, respectively.

 

Revenues from our SmartHome products represented 15%, 14% and 12% of our total revenues for 2020, 2019 and 2018, respectively.

 

Revenues from our SmartVoice products represented 18%, 16% and 9% of our total revenues for 2020, 2019 and 2018, respectively.

 

Gross Profit. Gross profit as a percentage of revenues was 50.8% for 2020, 50.6% for 2019 and 48.9% for 2018. The increase in our gross profit for 2020 as compared to 2019 was primary due to (i) a decrease in slow moving inventory provisions in 2020 as compared to 2019, (ii) an improvement in production yield and direct contribution of certain of our products, and (iii) a change in the mix of products sold and the mix of customers, mostly the shifting to revenues with higher gross margins in our SmartVoice segment, offset to some extent by an increase in royalties to the Israeli Innovation Authority (“IIA”) and other IP vendors for 2020 as compared to 2019. We anticipate that our gross margin on an annual basis will continue to increase in the foreseeable future as our product mix shifts in favor of new products, which generally have higher gross margins.

 

The increase in our gross profit for 2019 as compared to 2018 was primary due to (i) a change in the mix of products sold and mix of customers, (ii) an improvement in production yield and direct contribution of certain of our products, and (iii) lower provisions for slow moving inventories in 2019 as compared to 2018. Those factors were partially offset by an increase in royalties, mostly paid to the IIA in 2019, as compared to 2018.

 

Cost of goods sold consists primarily of costs of wafer manufacturing and fabrication, assembly and testing of integrated circuit devices and related overhead costs, and compensation and associated expenses related to manufacturing and testing support, inventory obsolesce and logistics personnel.

 

Operating Expenses. Our operating expenses were $66.3 million for 2020, $64.0 million for 2019 and $63.1 million for 2018. The increase in operating expenses for 2020 as compared to 2019 was primarily attributable to (i) an increase in general and administrative expenses in the amount of $1.2 million, mostly attributable to an increase in equity-based compensation and professional expenses , (ii) an increase of $0.5 million in sales and marketing expenses, mostly attributable to an increase in equity-based compensation, and (iii) an increase of $0.6 million in amortization expenses of intangible assets in 2020 as compared to 2019, mainly due to an increase in amortization of intangible assets related to the SoundChip acquisition in July 2020.

 

The increase in operating expenses for 2019 as compared to 2018 was primarily attributable to (i) an increase of $2.3 million in selling and marketing expenses, mostly attributable to an increase in employee-related expenses, and (ii) an increase in general and administrative expenses in the amount of $0.4 million, mostly attributable to an increase in equity-based compensation and professional expenses. These increases were partially offset by a decrease in the amount of $0.6 million in research and development expenses, mostly attributable to a decrease in IP and tape-out expenses in 2019 as compared to 2018, partially offset by an increase in development tools expenses in 2019 as compared to 2018, and a decrease of $1.3 million in amortization expenses of intangible assets in 2019 as compared to 2018, mainly due to the cessation of amortization of intangible assets related to previous acquisitions.

 

Our operating loss was $8.1 for 2020, as compared to an operating loss of $4.4 million in 2019 and an operating loss of $5.6 million for 2018. The increase in operating loss in 2020 as compared to 2019 was mainly due to a decrease in revenues in 2020 as compared to 2019 and an increase in operating expenses in 2020 as compared to 2019, both partially offset by the increase in gross margin.

 

The decrease in operating loss in 2019 as compared to 2018 was mainly due to an increase in gross margin in 2019 as compared to 2018, partially offset by an increase in operating expenses in 2019 as compared to 2018.

 

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Research and Development Expenses. Our research and development expenses, net, were $35.5 million for 2020, $35.6 million for 2019 and $36.1 million for 2018. The decrease for 2020 in research and development expenses, net, as compared to 2019, was mainly due to an increase of $1.0 million in funding received from the IIA in the comparable periods, a decrease of $0.6 million in development tools expenses in 2020 as compared to 2019 and a decrease of $0.4 million in travel expenses in 2020 as compared to 2019. The factors contributing to the decrease were partially offset by an increase in tape-out and IP expenses in 2020 as compared to 2019 in the amount of $1.0 million, an increase of $0.6 million in equity-based compensation expenses in 2020 as compared to 2019 and an increase in salaries and related expenses in 2020 as compared to 2019, mainly due to the devaluation of the U.S dollar against the NIS.

 

The decrease for 2019 in research and development expenses, net, as compared to 2018, was mainly due to a decrease in tape-outs and IP expenses in 2019 as compared to 2018 in the amount of $1.0 million, partially offset by an increase in development tools expenses in the amount of $0.4 million in 2019 as compared to 2018.

 

IIA funding is recognized as a deduction of our research and development expenses, net. As a result of receipt of IIA funding, royalties may be payable to the IIA in the future based on a percentage of revenues derived from sales of products whose development was facilitated by the IIA funding. The obligation to pay these royalties is contingent on actual sales of these products.

 

Our research and development expenses, net, as a percentage of our total revenues were 31%, 30% and 31% for the years ended on December 31, 2020, 2019 and 2018, respectively. The increase in research and development expenses, net, as a percentage of total revenues for 2020 as compared to 2019 was mainly due to a decrease in revenues in 2020 as compared to 2019. The decrease in research and development expenses, net, as a percentage of total revenues for 2019 as compared to 2018 was mainly due to a decrease in research and development expenses for 2019, as compared to 2018.

 

Research and development expenses consist mainly of payroll expenses to employees involved in research and development activities, expenses related to tape-out and mask work, subcontracting, labor contractors and engineering expenses, depreciation and maintenance fees related to equipment and software tools used in research and development, and facilities expenses associated with and allocated to research and development activities.

 

Sales and Marketing Expenses. Our sales and marketing expenses were $18.2 million for 2020, $17.7 million for 2019 and $15.3 million for 2018. The increase in sales and marketing expenses between 2020 and 2019 was mainly attributable to (i) an increase in sales commissions in the amount of $0.25 million for 2020 as compared to 2019, (ii) an increase in equity-based compensation expenses of $0.7 million in 2020 compared to 2019, and (iii) an amortization of employees retention expenses of $0.3 million related to the acquisition of SoundChip. The factors contributing to the increase were partially offset by a decrease in travel expenses in the amount of $0.6 million as compared to 2019.

 

The increase in sales and marketing expenses between 2019 and 2018 was mainly attributable to (i) an increase in employee-related expenses in the amount of $2.0 million as compared to 2018, (ii) an increase in equity-based compensation expenses of $0.5 million in 2019 compared to 2018, and (iii) an increase in subcontracting and consultant expenses in the amount of $0.1 million as compared to 2018. These increases were partially offset by a decrease in sales commissions in the amount of $0.4 million as compared to 2018.

 

Our sales and marketing expenses as a percentage of our total revenues were 16%, 15% and 13% for 2020, 2019 and 2018, respectively. The increase in sales and marketing expenses as a percentage of total revenues for 2020 as compared to 2019 was mainly due to an increase in sales and marketing expenses and a decrease in revenues for 2020 as compared to 2019. The increase in sales and marketing expenses as a percentage of total revenues for 2019 as compared to 2018 was mainly due to an increase in sales and marketing expenses for 2019 as compared to 2018.

 

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Sales and marketing expenses consist mainly of sales commissions, payroll expenses to direct sales and marketing employees, travel, trade show expenses, and facilities expenses associated with and allocated to sales and marketing activities.

 

General and Administrative Expenses. Our general and administrative expenses were $11.5 million, $10.3 million and $10.0 million for 2020, 2019 and 2018, respectively. The increase in general and administrative expenses for 2020 as compared to 2019 was mainly due to (i) an increase in equity-based compensation expenses of $0.7 million in 2020 as compared to 2019, (ii) an increase in professional expenses in the amount of $0.7 million in 2020 as compared to 2019, and (iii) $0.25 million of transaction expenses related to the acquisition of SoundChip. These were partially offset by a decrease in employee related expenses and travel expenses in the amount of $0.4 in 2020 as compared to 2019.

 

The increase in general and administrative expenses for 2019 as compared to 2018 was mainly due to an increase in equity-based compensation expenses of $0.3 million in 2019 as compared to 2018.

 

General and administrative expenses as a percentage of our total revenues were 10%, 9% and 8% for the three years ended December 31, 2020, 2019 and 2018, respectively. The increase in general and administrative expenses as a percentage of total revenues for 2020 as compared to 2019 was mainly due to an increase in general and administrative expenses and a decrease in revenues for 2020 as compared to 2019.

 

The increase in general and administrative expenses as a percentage of total revenues for 2019 as compared to 2018 was mainly due to an increase in general and administrative expenses for 2019 as compared to 2018.

 

Our general and administrative expenses consist mainly of payroll expenses for management and administrative employees, accounting and legal fees, expenses related to investor relations, as well as facilities expenses associated with general and administrative activities.

 

Amortization of Intangible Assets. During 2020, 2019 and 2018, we recorded an expense of $1.1 million, $0.4 million and $1.7 million, respectively, relating to the amortization of intangible assets associated with prior acquisitions. The increase in 2020 was attributable to the amortization of intangible assets related to our acquisition of SoundChip in July 2020.

 

The decrease in 2019 was attributable to the cessation of amortization of intangible assets related to a prior acquisition.

 

Financial Income, net. Financial income, net, was $1.2 million, $1.7 million and $1.8 million for the three years ended December 31, 2020, 2019 and 2018, respectively. The decrease in financial income in 2020 as compared to 2019 was mainly due to a decrease of $0.7 million in marketable securities and deposits interest in 2020 as compared to 2019, resulting from a decrease in interest rates. This decrease was partially offset by (i) a decrease of $0.2 million in 2020 as compared to 2019 in foreign currency exchange rate expenses related to the lease liability created under the lease accounting standard, resulting from the devaluation of the U.S. dollar against the NIS and (ii) an increase of $0.1 million of realized gains from the sale of marketable securities in 2020 as compared to 2019.

 

The decrease in financial income in 2019 as compared to 2018 was mainly due to $0.8 million of foreign currency exchange rate expenses related to the lease liability created under the new lease accounting standard, resulting from the devaluation of the U.S. dollar against the New Israeli Shekel, This decrease was partially offset by an increase of $0.4 million in marketable securities and deposits interest in 2019 as compared to 2018, resulting from an increase in interest rates, and an increase in foreign currency exchange rate income of $0.3 million in 2019 (related to New Israeli Shekel assets), as compared to 2018.

 

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Our total cash, cash equivalents, marketable securities and short and long-term deposits, including restricted deposits, were $128.6 million as of December 31, 2020, as compared to $131.3 million as of December 31, 2019.

 

Provision for Income Taxes. In 2020, we had tax benefit of $0.1 million as compared to tax benefit of $1.6 million in 2019 and tax benefit of $1.9 million for 2018.

 

The tax benefit for 2020 was mainly attributable to (i) income from changes in deferred taxes related to equity-based compensation expenses in the amount of $0.4 million, and (ii) income from the amortization of deferred tax liability related to intangible assets acquired in connection with prior acquisitions in the amount of $0.2 million, offset to some extent by $0.45 million of current tax expenses. The tax benefit for 2019 was mainly attributed to (i) income in the amount of $1.0 million from changes in other deferred taxes, mainly related to Israeli research and development expenses that were capitalized for tax purposes and will be utilized in the future at higher tax rates less current tax expenses, (ii) income from changes in deferred taxes related to equity-based compensation expenses in the amount of $0.5 million, and (iii) income from amortization of deferred tax liability related to intangible assets acquired in connection with prior acquisitions in the amount of $0.1 million,

 

The tax benefit for 2018 was mainly attributed to (i) income from changes in deferred taxes related to equity-based compensation expenses in the amount of $0.8 million, (ii) income in the amount of $0.7 million from changes in other deferred taxes mainly related to Israeli research and development expenses that were capitalized for tax purposes and will be utilized in the future at higher tax rates less current tax expenses, and (iii) income from amortization of deferred tax liability related to intangible assets acquired in connection with prior acquisitions in the amount of $0.4 million,

 

Description of Segments.

 

We operate under three reportable segments.

 

Our segment information has been prepared in accordance with ASC 280, “Segment Reporting.” Operating segments are defined as components of an enterprise engaging in business activities about which separate financial information is available that is evaluated regularly by the company’s chief operating decision-maker (“CODM”) in deciding how to allocate resources and assess performance. Our CODM is our Chief Executive Officer, who evaluates the Company’s performance and allocates resources based on segment revenues and operating income.

 

Our operating segments are as follows: Home, Unified Communications and SmartVoice. The classification of our business segments is based on a number of factors that management uses to evaluate, view and run the company’s business operations, which include, but are not limited to, customer base, homogeneity of products and technology. Prior to fiscal year 2019, the Unified Communications segment was titled the Office segment.

 

A description of the types of products provided by each business segment is as follows:

 

Home - Wireless chipset solutions for converged communication at home. Such solutions include integrated circuits targeted for cordless phones sold in retail or supplied by telecommunication service providers, home gateway devices supplied by telecommunication service providers which integrate the DECT/CAT-iq functionality, integrated circuits addressing home automation applications, as well as fixed-mobile convergence solutions. During 2017, we consolidated our home gateway and home automation products into a new product line called SmartHome. In this segment, (i) revenues from cordless telephony products amounted to 40%, 37% and 45% of our total revenues for 2020, 2019 and 2018, respectively, and (ii) revenues from our SmartHome products amounted to 15%, 14% and 12% of our total revenues for 2020, 2019 and 2018, respectively.

 

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Unified Communications - Comprehensive solution for Unified Communications products, including office solutions that offer businesses of all sizes VoIP terminals with converged voice and data applications. Revenues from our Unified Communications products represented 27%, 32% and 33% of our total revenues for 2020, 2019 and 2018, respectively. No revenues derived from other products in the Unified Communications segment exceeded 10% of our total consolidated revenues for the years 2020, 2019 and 2018.

 

SmartVoice - Products for the SmartVoice market that provide voice activation and recognition, voice enhancement, always-on and far-end noise elimination that target mobile phones, mobile headsets and other devices that incorporate our noise suppression and voice quality enhancement HDClear technology. Revenues derived from products in the SmartVoice segment represented 18% and 16% of our total revenues for 2020 and 2019, respectively, but did not exceed 10% of our total revenues for 2018. No revenue derived from other products in the SmartVoice segment exceeded 10% of our total consolidated revenues for the years 2020, 2019 and 2018.

 

Segment data:

 

We derive the results of our business segments directly from our internal management reporting system and by using certain allocation methods. The accounting policies we use to derive business segment results are substantially the same as those we use for consolidation of our financial statements. The Chief Operating Decision Maker (“CODM”) measures the performance of each business segment based on several metrics, including earnings from operations. The CODM uses these results, in part, to evaluate the performance of, and to assign resources to, each of the business segments. We do not allocate to our business segments certain operating expenses, which we manage separately at the corporate level. These unallocated costs include primarily amortization of purchased intangible assets, equity-based compensation expenses, and certain corporate governance costs.

 

We do not allocate any assets to segments and, therefore, no amount of assets is reported to management and disclosed in the financial information for segments. Selected operating results information for each business segment was as follows for the years ended December 31, 2020, 2019 and 2018:

 

   

Year ended December 31

 
   

Revenues

   

Income (loss) from operations

 
   

2020

   

2019

   

2018

   

2020

   

2019

   

2018

 

Home

  $ 63,121     $ 60,153     $ 67,741     $ 18,446     $ 16,821     $ 14,206  

Unified Communications

  $ 31,200     $ 38,123     $ 38,817     $ 10,792     $ 12,555     $ 12,147  

SmartVoice

  $ 20,159     $ 19,337     $ 10,880     $ (23,693 )   $ (23,657 )   $ (21,476 )

Total

  $ 114,480     $ 117,613     $ 117,438     $ 5,545     $ 5,719     $ 4,877  

 

Sales to our customers in the Home segment increased for 2020 as compared to 2019, representing an increase of 5% in absolute dollars and decreased in 2019 as compared to 2018, representing a decrease of 11% in absolute dollars. The increase in our Home segment sales for 2020 as compared to 2019 was mainly attributable to (i) an increased demand in cordless telephony products from our customers stimulated by the pandemic which stimulated a resurgence in voice traffic, and (ii) an increased demand for our SmartHome products. The decrease in our Home segment sales for 2019 as compared to 2018 was mainly attributable to a decline in market demands for our cordless telephony products, offset to some extent by an increase in market demands for our SmartHome products.

 

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Sales to our customers in the Unified Communications segment decreased for 2020 as compared to 2019, representing a decrease of 18% in absolute dollars. The decrease in sales in the Unified Communications segment for the comparable periods was attributable to a decreased demand due to the fundamental change in the workforce environment during 2020 as a result of the pandemic.

 

Sales to our customers in the Unified Communications segment decreased for 2019 as compared to 2018, representing a decrease of 2% in absolute dollars. The decrease in sales in the Unified Communications segment for the comparable periods was attributable to delay in the timing of orders originating from uncertainties relating to trade war concerns as well as weakness in enterprise IT spending by businesses.

 

Sales to our customers in the SmartVoice segment increased for 2020 as compared to 2019, representing an increase of 4% in absolute U.S. dollars. The increase in our SmartVoice sales for 2020 as compared to 2019 was mainly attributable to an increase in the number of customers and design wins in this segment, as well as the integration of SoundChip revenues starting from July 1, 2020.

 

Sales to our customers in the SmartVoice segment increased for 2019 as compared to 2018, representing an increase of 78% in absolute U.S. dollars. The increase in our SmartVoice sales in 2019 as compared to 2018 was mainly attributed to an increase in the number of customers in the segment, as well as increased demands from our customers.

 

The reconciliation of segment operating results information to our consolidated financial information is included in Note 17 to our consolidated financial statements.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Operating Activities. We generated $14.6, $10.5 and $8.7 million of cash and cash equivalents from our operating activities during 2020, 2019 and 2018, respectively. The increase in net cash generated by operating activities for 2020, as compared to 2019, was mainly as a result of changes in working capital such as: (i) an increase in accounts payable in the amount of $2.1 million during 2020 as compared to a decrease of $1.2 million in 2019, (ii) an increase in accrued expenses in the amount of $0.9 million in 2020, as compared to a decrease of $0.6 million in 2019, and (iii) an increase in accounts receivable of $4.8 million in 2020 as compared to a decrease of $1.9 million in 2019. These increases were partially offset by (a) an increase in inventories in the amount of $1.6 million as compared to a decrease of $2.3 million in 2019 and (b) an increase in net loss in 2020 as compared to 2019.

 

The increase in net cash generated by operating activities for 2019, as compared to 2018, was mainly as a result of a decrease in net loss in 2019 as compared to 2018 and of changes in working capital such as: (i) a decrease in inventories in the amount of $2.3 million during 2019 as compared to an increase of $0.4 million in 2018, and (ii) an increase in income taxes payable of $1.7 million in 2019 as compared to an increase of $0.2 million in 2018. These increases were partially offset by (a) a decrease in accounts payable in the amount of $1.2 million in 2019, as compared to an increase of $0.9 million in 2018, and (b) a decrease in accrued expenses in the amount of $0.6 million as compared to an increase of $0.8 million in 2018.

 

Investing Activities. We invest excess cash in marketable securities of varying maturities, depending on our projected cash needs for operations, capital expenditures and other business purposes. During 2020, we purchased $111.5 million of investments in marketable securities and deposits, as compared to $73.5 million during 2019 and $36.2 million during 2018. During the same periods, $59.3 million, $44.4 million and $20.5 million, respectively, of investments in marketable securities matured and were called by the issuer. During the same periods, $27.5 million, $25.1 million and $5.1 million, respectively, of investments in marketable securities were sold. Additionally, during 2020, 2019 and 2018, $15.5 million, $14.4 million and $5.7 million, respectively, of short and long-term deposits matured.

 

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During the third quarter of 2020, we completed the acquisition of SoundChip. As part of the acquisition, we paid $13.9 million (net of cash existing in the company on the date of the acquisition) to SoundChip’s shareholders.

 

As of December 31, 2020, the amortized cost of our marketable securities and deposits was approximately $110.7 million and their stated market value was approximately $111.1 million, representing an unrealized gain of approximately $0.4 million.

 

Our capital equipment purchases for 2020, consisting primarily of research and development software tools, computers and other peripheral equipment, engineering test and lab equipment, leasehold improvements, furniture and fixtures, totaled $1.0 million, as compared to $5.6 million for 2019, and $1.2 million for 2018. The increase in capital equipment spending in 2019 as compared to the previous year was mainly due to the renovation of our Israeli subsidiary’s new facilities in Israel due to the new 10 year lease agreement initiated during 2019.

 

Financing Activities. During 2020, we repurchased approximately 0.3 million shares of our common stock at an average purchase price of $12.75 per share for an aggregate amount of $3.7 million. No shares of common stock were repurchased during 2019.

 

In addition, during 2020 and 2019, we received $1.6 million and $1.4 million, respectively, upon the exercise of employee stock options.

 

Our board of directors has previously approved a number of share repurchase programs, including those in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934, for the repurchase of our common stock. At December 31, 2020, 490,000 shares of our common stock are available for repurchase under our board-authorized share repurchase program. As of December 31, 2020, we had cash and cash equivalents totaling approximately $16.9 million and marketable securities and time deposits of approximately $111.1 million. Out of total cash, cash equivalents and marketable securities of $128.0 million, $117.1 million was held by foreign entities. Our intent is to permanently reinvest earnings of our foreign operations 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 repatriated to the United States, we would be required to accrue and pay taxes in several countries to repatriate these funds. The determination of the amount of 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.

 

Our working capital at December 31, 2020 was approximately $62.2 million, as compared to $69.6 million as of December 31, 2019. The decrease in working capital was mainly due to (i) net cash of $13.9 million used for the acquisition of SoundChip in 2020, (ii) purchase of capital equipment in the amount of $1.0 million during 2020, and (iii) the repurchase of our common stock in the amount of $3.7 million during 2020. The above-mentioned decreases were offset to some extent by the net cash of $14.6 million generated by operating activities during 2020. We believe that our current cash, cash equivalents, cash deposits and market securities will be sufficient to meet our cash requirements for both the short and long term.

 

In addition, as part of our business strategy, we may evaluate potential acquisitions of businesses, products and technologies. Accordingly, a portion of our available cash may be used at any time for the acquisition of complementary products or businesses. 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 candidates, complete acquisitions, integrate acquired businesses into our current operations, or expand into new markets. Furthermore, we cannot assure you that additional financing will be available to us in any required time frame and on commercially reasonable terms, if at all. See the section of the risk factors entitled “We may engage in future acquisitions that could dilute our stockholdersequity and harm our business, results of operations and financial condition.” for more detailed information.

 

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Contractual Obligations

 

The following table aggregates our material expected obligations and commitments as of December 31, 2020 (in thousands):

 

   

Payment Due By Period

 

Contractual Obligations

 

Total

   

Less

Than

1 Year

   

23 Years

   

45 Years

   

More Than

5 Years

 

Operating Lease Commitments (1)

  $ 14,608     $ 2,960     $ 4,264     $ 3,027     $ 4,357  

Net Pension Liability (2)

    1,393       11       40       57       1,285  

Development tools lease and other (3)

    4,893       2,053       2,840       -       -  

Total Contractual Obligations

  $ 20,894     $ 5,024     $ 7,144     $ 3,084     $ 5,642  

 

 

(1)

Represents mainly operating lease payments for facilities and vehicles under non-cancelable lease agreements.

 

 

(2)

Includes estimates of gross contributions and future payments required to meet the requirements of several defined benefit plans. The amounts presented in the table are not discounted and do not take into consideration staff turnover assumptions.

 

 

(3)

Represents lease payments for development tools and other non-cancelable lease agreements.

 

At December 31, 2020, we had a liability for unrecognized tax benefits and an accrual for the payment of related interests totaling $3.4 million. Due to uncertainties related to those tax matters, we currently are unable to make a reasonably reliable estimate of when cash settlement with a taxing authority will occur. We believe a change in the amount of unrecognized tax benefit is reasonably possible in the next 12 months due to the examination of the tax returns of one of our subsidiaries. We currently cannot provide an estimate of the range of change in the amount of the unrecognized tax benefits due to the ongoing status of the examination.

 

Off-Balance Sheet Arrangements.

 

We do not have any off-balance sheet arrangements, as such term is defined in recently enacted rules by the Securities and Exchange Commission, that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.

 

Item 7A.         QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

Interest Rate Risk. It is our policy not to enter into interest rate derivative financial instruments, except for hedging of foreign currency exposures discussed below. We do not currently have any significant interest rate risk since we do not have any financial obligations.

 

The majority of our cash and cash equivalents are invested in high grade certificates of deposits with major U.S., European and Israeli banks. Generally, cash and cash equivalents and short term deposits may be redeemed and therefore minimal credit risk exists with respect to them. Nonetheless, cash deposits with these banks exceed the Federal Deposit Insurance Corporation (“FDIC”) insurance limits in the U.S. or similar limits in foreign jurisdictions to the extent such deposits are even insured in such foreign jurisdictions. While we monitor on a systematic basis the cash balances and adjust the balances as appropriate, these balances could be impacted if one or more of the financial institutions with which we deposit our funds fails or is subject to other adverse conditions in the financial or credit markets. To date we have experienced no loss of principal or lack of access to our cash; however, we can provide no assurances that access to our cash will not be affected if the financial institutions that we hold our cash fail or if there is significant instability in the financial and credit markets.

 

-50-

 

We hold an investment portfolio of marketable securities consisting principally of debentures of U.S. and European corporations, and state and political subdivisions of the U.S. government. We intend, and have the ability, to hold investments in marketable securities with a decline in fair value until an anticipated recovery of any temporary declines in their market value. We typically do not attempt to reduce or eliminate our market exposures on our investment securities because the majority of our investments are short-term. However, we can provide no assurances that we will recover present declines in the market value of our investments.

 

Interest rate fluctuations relating to our cash and cash equivalents and within our investment portfolio have not had, and we do not currently anticipate such fluctuations will have, a material effect on our financial position on an annual or quarterly basis.

 

Foreign Currency Exchange Rate Risk. A significant part of our sales and expenses are denominated in U.S. dollars. Part of our expenses in Israel are paid in NIS, which subjects us to the risks of foreign currency fluctuations between the U.S. dollar and the NIS. Our primary expenses paid in NIS are employee salaries and lease payments on our Israeli facilities. Furthermore, a portion of our expenses for our European operations are paid in the Euro, which subjects us to the risks of foreign currency fluctuations between the U.S. dollar and the Euro. Our primary expenses paid in Euro are employee salaries, lease and operational payments on our European facilities. To partially protect the company against an increase in value of forecasted foreign currency cash flows resulting from salary and lease payments denominated in NIS during 2020, we instituted a foreign currency cash flow hedging program. The option and forward contracts used are designated as cash flow hedges, as defined by FASB ASC No. 815,” Derivatives and Hedging,” and are all effective as hedges of these expenses. For more information about our hedging activity, see Note 2 to our notes to our consolidated financial statements for the year ended December 31, 2020. An increase in the value of the NIS and the Euro in comparison to the U.S. dollar could increase the cost of our research and development expenses and general and administrative expenses, all of which could harm our operating profit. Although we currently are using a hedging program to minimize the effects of currency fluctuations relating to the NIS, our hedging position is partial, may not exist at all in the future and may not succeed in minimizing our foreign currency fluctuation risks.

 

-51-

 

 

Item 8.         FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

 

 

 

CONSOLIDATED FINANCIAL STATEMENTS

 

 

AS OF DECEMBER 31, 2020

 

 

IN U.S. DOLLARS

 

 

 

 

INDEX

 

 

 

Page

   

Reports of Independent Registered Public Accounting Firm

52

   

Consolidated Balance Sheets

57

   

Consolidated Statements of Operations

59

   

Consolidated Statements of Comprehensive Income (Loss)

60

   

Statements of Changes in Stockholders Equity

61

   

Consolidated Statements of Cash Flows

63

   

Notes to Consolidated Financial Statements

67

 

 

 

 

- - - - - - - - - -

 

-52-

 

eylogo.jpg

Kost Forer Gabbay & Kasierer

144 Menachem Begin Road, Building A

Tel-Aviv 6492102, Israel

 

Tel: +972-3-6232525

Fax: +972-3-5622555

ey.com

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and the Board of Directors of DSP GROUP, Inc.

 

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheets of DSP GROUP, Inc. and its subsidiaries (the “Company”) as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive loss, change in stockholders' equity and cash flows for each of the three years in the period ended December 31, 2020, and the related notes (collectively referred to as the “financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company at December 31, 2020 and 2019, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 15, 2021 expressed an unqualified opinion thereon.

 

Basis for Opinion

 

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

Critical Audit Matters

 

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

 

-53-

 

   

Valuation of SmartVoice goodwill

     

Description of the Matter

 

As described in Note 2(k) of the consolidated financial statements, goodwill is tested by the Company’s management for impairment at least annually at the reporting unit level and more frequently when indicators of potential impairment are identified. At December 31, 2020, the goodwill recorded in the SmartVoice reporting unit was $13.1 million. The estimation of the fair value of the SmartVoice reporting unit is contingent on future cash flows and market expectations and there is a risk that, if these cash flows and market outcomes do not meet the Company’s expectations, the goodwill might be impaired. The fair value of the SmartVoice reporting unit was determined using multiple approaches including discounted future cash flows analysis and a market-based approach.

 

Auditing the valuation of goodwill for the SmartVoice reporting unit was complex due to the significant estimation uncertainty and judgment applied by management in determining their fair value. The significant estimation uncertainty was primarily due to the sensitivity of the underlying key assumptions to the future cash flows and the significant effect that changes in these assumptions would have on the fair value of the SmartVoice reporting unit. The significant assumptions used to estimate the fair value of the SmartVoice reporting unit included discount rates and certain forward-looking assumptions (e.g., revenue growth rates, terminal growth rates, and profitability metrics) that could be affected by future economic and market conditions.

     

How We Addressed the Matter in Our Audit

 

We obtained an understanding, evaluated the design and tested the operating effectiveness of the Company’s controls relating to the determination of the fair value of the reporting unit, including controls over management’s review of the significant assumptions described above.

 

To test the fair value of the SmartVoice reporting unit, we involved our valuation specialists to review the valuation methodology used by management and to assist in our evaluation of the discount rate used in the fair value estimate. We also performed audit procedures that included, among others, testing the significant assumptions discussed above and the underlying data used by the Company in its analysis (discounted rate, terminal growth and ect.). We compared the significant assumptions used by management to available industry and historical trends and evaluated whether changes to the significant assumptions would impact the impairment conclusion. In addition, we tested management’s reconciliation of the fair value of the SmartVoice reporting unit to the market capitalization of the Company and reviewed the related disclosure in the consolidated financial statements.

     
   

Acquisition accounting for SoundChip business combination

     

Description of the Matter

 

As described in Notes 1 to the consolidated financial statements, on July 1, 2020, the Company acquired 100% of the outstanding common shares and voting rights of SoundChip for a net consideration of $15 million (the “SoundChip Acquisition”). The SoundChip Acquisition was accounted for as a business combination in accordance with ASC 805 “Business Combinations”.

 

Auditing the Company’s accounting for the SoundChip Acquisition was complex due to the significant estimation uncertainty in the Company's determination of the fair value of identified intangible assets of $14.7 million, which principally consisted of developed technology, customer relationship and backlog. The significant estimation was primarily due to the complexity of the valuation model used to measure the fair value of the developed technology intangible asset in the amount of $7.2 million, as well as the sensitivity of the respective fair value to the underlying significant assumptions. The Company used a discounted cash flow model to measure the developed technology intangible asset. The significant assumptions used to estimate the fair value of the developed technology intangible asset included discount rates and certain assumptions that form the basis of the forecasted results, such as revenue growth rates and profitability margins. These significant assumptions are forward-looking and could be affected by future economic and market conditions.

 

-54-

 

How We Addressed the Matter in Our Audit

 

We obtained an understanding, evaluated the design and tested the operating effectiveness of internal controls over the accounting for acquisitions. This included testing controls over the estimation process supporting the recognition and measurement of identified intangible assets, and management’s judgment and evaluation of underlying assumptions and estimates with regards to the fair values of the identified intangible assets.

 

To test the estimated fair value of the developed technology intangible asset, we performed audit procedures that included, among others, evaluating the Company’s selection of the valuation methodology, evaluating the methods and significant assumptions used by the Company’s valuation specialist and evaluating the completeness and accuracy of the underlying data supporting the significant assumptions and estimates. For example, we compared the revenue growth rates and technology migration curves to current industry, market and economic trends. We involved our valuation specialists to assist with our evaluation of the methodology used by the Company and significant assumptions included in the fair value estimates.

 

We also evaluated the appropriateness of the related disclosures included in Note 1 to the consolidated financial statements in relation to the SoundChip Acquisition.

 

/s/ Kost Forer Gabbay & Kasierer, a Member of Ernst & Young Global

 

 

   

Tel-Aviv, Israel

 

March 15, 2021

 

We have served as the Company's auditor since 1998.

 

 

-55-

 

eylogo.jpg

Kost Forer Gabbay & Kasierer

144 Menachem Begin Road, Building A

Tel-Aviv 6492102, Israel

 

Tel: +972-3-6232525

Fax: +972-3-5622555

ey.com

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders of DSP GROUP, Inc.

 

Opinion on Internal Control over Financial Reporting

 

We have audited DSP GROUP, Inc.`s (the “Company”) internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on the COSO criteria.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2020 and 2019, and the related consolidated statements of loss, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 2020 and the related notes, and our report dated March 15, 2021 expressed an unqualified opinion thereon. 

 

Basis for Opinion

 

The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.

 

Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures, as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

 

Definition and Limitations of Internal Control Over Financial Reporting

 

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

-56-

 

eylogo.jpg

Kost Forer Gabbay & Kasierer

144 Menachem Begin Road, Building A

Tel-Aviv 6492102, Israel

 

Tel: +972-3-6232525

Fax: +972-3-5622555

ey.com

 

/s/ Kost Forer Gabbay & Kasierer, a Member of Ernst & Young Global

 

 

Tel-Aviv, Israel

 

March 15, 2021

 
 

 

-57-

DSP GROUP, INC.

 

 

CONSOLIDATED BALANCE SHEETS


U.S. dollars in thousands

 

  

December 31,

 
  

2020

  

2019

 

ASSETS

        
         

CURRENT ASSETS:

        

Cash and cash equivalents

 $16,936  $28,737 

Restricted deposits

  548   518 

Marketable securities and short-term deposits (Note 3)

  50,615   39,141 

Trade receivables

  11,003   15,382 

Other accounts receivable and prepaid expenses (Note 5)

  3,460   3,551 

Inventories (Note 6)

  9,061   7,464 
         
         

Total current assets

  91,623   94,793 
         

PROPERTY AND EQUIPMENT, NET (Note 7)

  6,574   6,805 
         

NON-CURRENT ASSETS:

        

Long-term marketable securities (Note 3)

  60,454   62,884 

Long-term prepaid expenses

  2,888   707 

Deferred income taxes (Note 15)

  6,893   6,377 

Severance pay fund

  16,285   15,800 

Operating leases: right-of-use assets (Note 4)

  11,102   11,655 

Intangible assets, net (Note 8)

  7,549   661 

Goodwill

  13,105   6,243 
         

Total non-current assets

  118,276   104,327 
         

Total assets

 $216,473  $205,925 

 

 

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

 

-58-

DSP GROUP, INC.

 

CONSOLIDATED BALANCE SHEETS


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

 

  

December 31,

 
  

2020

  

2019

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

        
         

CURRENT LIABILITIES:

        

Trade payables

 $10,708  $8,511 

Operating lease liability (Note 4)

  2,974   2,569 

Accrued compensation and benefits

  8,728   8,781 

Income tax accruals and payables

  3,620   3,061 

Accrued expenses and other accounts payable (Note 10)

  2,993   2,317 

Short-term bank loans

  211   - 

Deferred income

  172   - 
         

Total current liabilities

  29,406   25,239 
         

NON-CURRENT LIABILITIES:

        

Deferred income taxes, net (Note 15)

  1,073   119 

Accrued severance pay

  16,647   16,074 

Operating lease liability (Note 4)

  10,075   10,436 

Earn-out liability

  1,945   - 

Accrued pensions (Note 11)

  1,089   963 
         

Total non-current liabilities

  30,829   27,592 
         

COMMITMENTS AND CONTINGENCIES (Note 14)

          
         

STOCKHOLDERS’ EQUITY (Note 13):

        

Capital stock:

        

Common stock, $0.001 par value -

        

Authorized: 50,000,000 shares at December 31, 2020 and 2019; Issued and outstanding: 23,709,924 and 23,110,631 shares at December 31, 2020 and 2019, respectively

  24   23 

Additional paid-in capital

  396,335   386,534 

Treasury stock at cost

  (108,509)  (113,862)

Accumulated other comprehensive loss

  (637)  (889)

Accumulated deficit

  (130,975)  (118,712)
         

Total stockholders equity

  156,238   153,094 
         

Total liabilities and stockholders equity

 $216,473  $205,925 

 

 

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

 

-59-

DSP GROUP, INC.
 

 

CONSOLIDATED STATEMENTS OF OPERATIONS


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

 

  

Year ended December 31,

 
  

2020

  

2019

  

2018

 
             

Revenues

 $114,480  $117,613  $117,438 

Costs of revenues (1)

  56,290   58,066   59,991 
             

Gross profit

  58,190   59,547   57,447 
             

Operating expenses:

            

Research and development, net (2)

  35,511   35,552   36,109 

Sales and marketing (3)

  18,205   17,665   15,323 

General and administrative (4)

  11,510   10,317   9,955 

Amortization of intangible assets

  1,065   417   1,700 
             

Total operating expenses

  66,291   63,951   63,087 
             

Operating loss

  (8,101)  (4,404)  (5,640)

Financial income, net (Note 12)

  1,231   1,654   1,815 
             

Loss before income tax benefit

  (6,870)  (2,750)  (3,825)

Income tax benefit (Note 15)

  80   1,560   1,868 
             

Net loss

 $(6,790) $(1,190) $(1,957)
             

Net loss per share:

            

Basic and diluted

 $(0.29) $(0.05) $(0.09)
             

Weighted average number of shares used in per share computations of:

            

Basic and diluted net loss per share

  23,466   22,827   22,512 

 

(1)         Includes equity-based compensation expense in the amount of $524, $448 and $428 for the years ended December 31, 2020, 2019 and 2018, respectively.

 

(2)         Includes equity-based compensation expense in the amount of $3,448, $2,842 and $2,873 for the years ended December 31, 2020, 2019 and 2018, respectively.

 

(3)         Includes equity-based compensation expense in the amount of $2,426, $1,758 and $1,248 for the years ended December 31, 2020, 2019 and 2018, respectively.

 

(4)         Includes equity-based compensation expense in the amount of $3,315, $2,583 and $2,255 for the years ended December 31, 2020, 2019 and 2018, respectively.

 

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

 

-60-

DSP GROUP, INC.
 

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)


U.S. dollars in thousands

 

 

   

Year ended December 31,

 
   

2020

   

2019

   

2018

 
                         

Net loss:

  $ (6,790 )   $ (1,190 )   $ (1,957 )

Other comprehensive income (loss):

                       

Available-for-sale securities:

                       

Changes in unrealized income (loss)

    470       1,494       (465 )

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

    (44 )     73       41  

Net change

    426       1,567       (424 )

Cash flow hedges:

                       

Changes in unrealized gains (losses)

    52       108       (19 )

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

    (52 )     (105 )     16  

Net change

    -       3       (3 )

Change in unrealized components of defined benefit plans:

                       

Gains (losses) arising during the period

    (28 )     (141 )     29  

Amortization of actuarial loss and prior service benefit

    23       16       19  

Net change

    (5 )     (125 )     48  

Foreign currency translation adjustments, net

    (169 )     (10 )     (71 )

Other comprehensive income (loss)

    252       1,435       (450 )

Comprehensive income (loss)

  $ (6,538 )   $ 245     $ (2,407 )

 

-61-

DSP GROUP, INC.
 

 

STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY


U.S. dollars and shares in thousands

 

  

Number of

shares of

common

stock

  

Common

stock

amount

  

Additional

paid-in

capital

  

Treasury

stock at cost

  

Accumulated

other

comprehensive

income (loss)

  

Accumulated

deficit

  

Total

stockholders

equity

 

Balance at December 31, 2017

  22,433  $22  $372,041  $(118,397) $(1,874) $(104,842) $146,950 
                             

Issuance of treasury stock upon purchase of common stock under employee stock purchase plan

  230   *)  -   -   2,275   -   (271)  2,004 

Issuance of treasury stock upon exercise of stock options, stock appreciation rights and restricted stock units by employees and directors

  618   1   10   6,114   -   (5,387)  738 

Adoption of accounting standard

  -   -   -   -   -   94   94 

Purchase of treasury stock

  (1,015)  (1)  -   (12,317)  -   -   (12,318)

Equity-based compensation expenses

      -   6,804   -   -   -   6,804 

Net loss

      -   -   -   -   (1,957)  (1,957)

Change in accumulated other comprehensive loss

      -   -   -   (450)  -   (450)
                             

Balance at December 31, 2018

  22,266  $