dspg20190630_10q.htm
 

 



 

United States
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

___________

FORM 10-Q

 

(Mark One)

 

 

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

 

For the quarterly period ended June 30, 2019

 

or

 

 

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

 

For the transition period from             to

 

Commission File Number 1-35256

 

___________

 

DSP GROUP, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

94-2683643

(State or other jurisdiction of

incorporation or organization)

(I.R.S. employer identification number)

2055 Gateway Place, Suite 480, San Jose, California

95110

   
   

(Address of Principal Executive Offices)

(Zip Code)

 

Registrant’s telephone number, including area code: (408) 986-4300


 

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 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 of complying with any new or revised financial accounting standards provided pursuant to section 13(a) of the Exchange Act. ☐

 

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

 

As of August 2, 2019, there were 22,921,857 shares of Common Stock ($.001 par value per share) outstanding.

 

 

 

 

 

INDEX

 

DSP GROUP, INC.

 

 

Page No.

PART I. FINANCIAL INFORMATION

 
   

Item 1.

Financial Statements (Unaudited)

 
 

Condensed consolidated balance sheets—June 30, 2019 and December 31, 2018

2

 

Condensed consolidated statements of operations—Three and six month periods ended June 30, 2019 and 2018

4

 

Condensed consolidated statements of cash flows—Six month periods ended June 30, 2019 and 2018

7

 

Condensed consolidated statements of stockholders’ equity—Three and six month periods ended June 30, 2019 and 2018

9

 

Notes to condensed consolidated financial statements—June 30, 2019

11

Item 2.

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

27

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

39

Item 4.

Controls and Procedures

40

   

PART II. OTHER INFORMATION

 
   

Item 1.

Legal Proceedings

40

Item 1A.

Risk Factors

40

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

55

Item 3.

Defaults Upon Senior Securities

56

Item 4.

Mine Safety Disclosure

56

Item 5.

Other Information

56

Item 6.

Exhibits

56

   

SIGNATURES

57

 

1

 

 

 

PART 1. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

DSP GROUP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

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

 

   

June 30,

2019

   

December 31,

2018

 
   

Unaudited

   

Audited

 

ASSETS

               
                 

CURRENT ASSETS:

               

Cash and cash equivalents

  $ 13,197     $ 12,146  

Restricted deposit

    1,089       493  

Marketable securities and short-term deposits

    30,222       35,713  

Trade receivables

    17,149       13,475  

Other accounts receivable and prepaid expenses

    3,585       3,670  

Inventories

    9,193       9,819  
                 

TOTAL CURRENT ASSETS

    74,435       75,316  
                 

PROPERTY AND EQUIPMENT, NET

    5,858       2,748  
                 

NON-CURRENT ASSETS:

               

Long-term marketable securities

    77,380       75,538  

Operating lease right of use

    11,937       -  

Long-term prepaid expenses and lease deposits

    949       1,229  

Deferred income taxes

    4,879       3,580  

Severance pay fund

    15,120       14,158  

Intangible assets, net

    869       1,078  

Goodwill

    6,243       6,243  
                 
      117,377       101,826  

TOTAL NON-CURRENT ASSETS

               
                 

TOTAL ASSETS

  $ 197,670     $ 179,890  

 

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

 

2

 

 

DSP GROUP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

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

 

   

June 30,

2019

   

December 31,

2018

 
   

Unaudited

   

Audited

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

               
                 

CURRENT LIABILITIES:

               

Trade payables

  $ 7,990     $ 9,579  

Accrued compensation and benefits

    7,778       8,255  

Income tax accruals and payables

    1,912       1,404  

Operating lease liability

    2,088       -  

Accrued expenses and other accounts payable

    3,576       3,461  
                 

TOTAL CURRENT LIABILITIES

    23,344       22,699  
                 

NON-CURRENT LIABILITIES:

               

Deferred income taxes

    135       151  

Accrued severance pay

    15,310       14,348  

Operating lease liability

    10,362       -  

Accrued pensions

    830       827  
                 

TOTAL NON-CURRENT LIABILITIES

    26,637       15,326  
                 

STOCKHOLDERS’ EQUITY:

               

Capital stock:

               
                 

Common stock, $ 0.001 par value -

               

Authorized shares: 50,000,000 shares at June 30, 2019 and December 31, 2018;

               
Issued and outstanding shares: 22,803,425 and 22,265,971 shares at June 30, 2019 and December 31, 2018, respectively     23       22  

Additional paid-in capital

    382,849       378,855  

Treasury stock at cost

    (116,940 )     (122,325 )

Accumulated other comprehensive loss

    (946 )     (2,324 )

Accumulated deficit

    (117,297 )     (112,363 )
                 

TOTAL STOCKHOLDERS’ EQUITY

    147,689       141,865  
                 

TOTAL LIABILITIES AND STOCKHOLDERSEQUITY

  $ 197,670     $ 179,890  

 

 

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

 

3

 

 

DSP GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

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

 

   

Three months ended

   

Six months ended

 
   

June 30,

   

June 30,

 
   

2019

   

2018

   

2019

   

2018

 

Revenues

  $ 29,034     $ 30,651     $ 57,310     $ 58,762  

Cost of revenues (1)

    14,615       15,598       28,435       29,995  

Gross profit

    14,419       15,053       28,875       28,767  

Operating expenses:

                               

Research and development, net (2)

    8,559       8,891       17,481       17,889  

Sales and marketing (3)

    4,386       3,761       8,869       7,829  

General and administrative (4)

    2,674       2,669       5,229       5,250  

Intangible assets amortization

    104       425       208       850  

Total operating expenses

    15,723       15,746       31,787       31,818  

Operating loss

    (1,304 )     (693 )     (2,912 )     (3,051 )

Financial income

    400       403       713       799  

Loss before taxes on income

    (904 )     (290 )     (2,199 )     (2,252 )

Tax benefit

    (383 )     (2 )     (612 )     (211 )

Net loss

  $ (521 )   $ (288 )   $ (1,587 )   $ (2,041 )

Net loss per share:

                               

Basic

  $ (0.02 )   $ (0.01 )   $ (0.07 )   $ (0.09 )

Diluted

  $ (0.02 )   $ (0.01 )   $ (0.07 )   $ (0.09 )
                                 

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

                               

Basic

    22,757       22,681       22,650       22,680  

Diluted

    22,757       22,681       22,650       22,680  

 

 

(1)

Includes equity-based compensation expense in the amount of $122 and $108 for the three months ended June 30, 2019 and 2018, and $237 and $206 for the six months ended June 30, 2019 and 2018, respectively.

 

(2)

Includes equity-based compensation expense in the amount of $775 and $701 for the three months ended June 30, 2019 and 2018, respectively; and $1,525 and $1,353 for the six months ended June 30, 2019 and 2018, respectively.

 

(3)

Includes equity-based compensation expense in the amount of $474 and $265 for the three months ended June 30, 2019 and 2018, respectively; and $876 and $671 for the six months ended June 30, 2019 and 2018, respectively.

 

(4)

Includes equity-based compensation expense in the amount of $689 and $586 for the three months ended June 30, 2019 and 2018, respectively; and $1,327 and $1,129 for the six months ended June 30, 2019 and 2018, respectively.

 

 

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

 

4

 

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED) (U.S. dollars in thousands)

 

   

Three months ended

June 30,

 
   

2019

   

2018

 
                 

Net loss:

  $ (521 )   $ (288 )

Other comprehensive loss:

               

Available-for-sale securities:

               

Changes in unrealized gains (losses)

    598       (161 )

Reclassification adjustments for (gains) losses included in net loss

    (3 )     38  

Net change

    595       (123 )

Cash flow hedges:

               

Changes in unrealized gains (losses)

    3       (29 )

Reclassification adjustments for (gains) losses included in net loss

    (23 )     9  
                 

Net change

    (20 )     (20 )
                 

Change in unrealized components of defined benefit plans:

               

Amortization of actuarial loss and prior service benefit

    4       5  
                 

Net change

    4       5  
                 

Foreign currency translation adjustments, net

    -       (43 )
                 

Other comprehensive income (loss)

    579       (181 )
                 

Comprehensive income (loss)

  $ 58     $ (469 )

 

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

 

5

 

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED) (U.S. dollars in thousands)

 

   

Six months ended

June 30,

 
   

2019

   

2018

 
                 

Net loss:

  $ (1,587 )   $ (2,041 )

Other comprehensive loss:

               

Available-for-sale securities:

               

Changes in unrealized gains (losses)

    1,350       (823 )

Reclassification adjustments for losses included in net loss

    43       37  

Net change

    1,393       (786 )

Cash flow hedges:

               

Changes in unrealized gains (losses)

    108       (29 )

Reclassification adjustments for (gains) losses included in net loss

    (105 )     9  
                 

Net change

    3       (20 )
                 

Change in unrealized components of defined benefit plans:

               

Amortization of actuarial loss and prior service benefit

    8       10  
                 

Net change

    8       10  
                 

Foreign currency translation adjustments, net

    (26 )     (28 )
                 

Other comprehensive income (loss)

    1,378       (824 )
                 

Comprehensive loss

  $ (209 )   $ (2,865 )

 

 

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

 

6

 

 

DSP GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(U.S. dollars in thousands)

 

   

Six months ended June 30,

 
   

2019

   

2018

 

Cash flows from operating activities:

               
                 

Net loss

  $ (1,587 )   $ (2,041 )

Adjustments required to reconcile net loss to net cash provided by (used in) operating activities:

               

Depreciation

    722       869  

Equity-based compensation expenses related to employees’ stock options, SARs and RSUs

    3,965       3,359  

Realized losses from sale of marketable securities, net

    43       37  

Capital loss from sale and disposal of property and equipment

    35       -  
                 

Amortization of intangible assets

    208       850  

Operating lease amortization expenses

    950       -  

Change in operating lease liability

    (437 )     -  

Accrued interest and amortization of premium on marketable securities and deposits

    24       356  

Change in operating assets and liabilities:

               

Deferred income tax assets and liabilities, net

    (1,315 )     (268 )

Trade receivables, net

    (3,678 )     (3,234 )

Other accounts receivable and prepaid expenses

    414       (47 )

Inventories

    624       1,030  

Long-term prepaid expenses and lease deposits

    80       (78 )

Trade payables

    (1,720 )     1,195  

Accrued compensation and benefits

    497       317  

Income tax accruals

    507       (59 )

Accrued expenses and other accounts payable

    119       (167 )

Accrued severance pay, net

    -       (67 )

Accrued pensions

    17       19  
                 

Net cash provided by (used in) operating activities

    (532 )     2,071  
                 

Cash flows from investing activities:

               
                 

Purchase of marketable securities

    (16,543 )     (14,379 )

Purchase of short-term deposits

    (3,000 )     (3,000 )

Proceeds from maturity of marketable securities

    13,555       8,455  

Proceeds from sales of marketable securities

    4,988       4,810  

Proceeds from redemption of short-term deposits

    5,974       3,000  

Proceeds from sale of fixed assets

    23       -  

Purchases of property and equipment

    (3,892 )     (778 )

Other investing activities

    -       (104 )
                 

Net cash provided by (used in) investing activities

  $ 1,105     $ (1,996 )

 

7

 

 

   

Six months ended June 30,

 
   

2019

   

2018

 

Cash flows from financing activities:

               
                 

Issuance of common stock and treasury stock upon exercise of stock options

  $ 1,097     $ 442  

Purchase of treasury stock

    -       (5,691 )
                 

Net cash provided by (used in) financing activities

    1,097       (5,249 )
                 

Increase (decrease) in cash and cash equivalents

    1,670       (5,174 )

Cash and cash equivalents at the beginning of the year

    12,639       21,848  

Erosion due to exchange rate differences

    (23 )     (25 )
                 

Cash and cash equivalents at the end of the year

  $ 14,286     $ 16,649  

 

 

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

 

8

 

 

DSP GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(UNAUDITED)

(U.S. dollars in thousands)

 

Three months ended June 30, 2018

 

Number of

common

stock

   

Common

stock

   

Additional

paid-In

capital

   

Treasury

stock

   

Accumulated deficit

   

Accumulated other

comprehensive

income (loss)

   

Total

stockholders’

equity

 

Balance at March 31, 2018

    22,729     $ 23     $ 373,740     $ (115,731 )   $ (109,265 )   $ (2,517 )   $ 146,250  

Net loss

    -       -       -       -       (288 )     -       (288 )

Change in accumulated other comprehensive income

    -       -       -       -       -       (181 )     (181 )

Purchase of treasury stock

    (384 )     (1 )     -       (4,613 )     -       -       (4,614 )
                                                         

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

    116       * )     10       1,144       (867 )     -       287  

Equity-based compensation

            -       1,660       -       -       -       1,660  

Balance at June 30, 2018

    22,461     $ 22     $ 375,410     $ (119,200 )   $ (110,420 )   $ (2,698 )   $ 143,114  

Three months ended June 30, 2019

                                                       

Balance at March 31, 2019

    22,701     $ 23     $ 380,777     $ (117,968 )   $ (115,894 )   $ (1,525 )   $ 145,413  

Net loss

    -       -       -       -       (521 )     -       (521 )

Change in accumulated other comprehensive income

    -       -       -       -       -       579       579  
                                                         

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

    102       * )     12       1,028       (882 )     -       158  

Equity-based compensation

            -       2,060       -       -       -       2,060  

Balance at June 30, 2019

    22,803     $ 23     $ 382,849     $ (116,940 )   $ (117,297 )   $ (946 )   $ 147,689  

 

(*)     Represents an amount lower than $1.

 

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

 

9

 

 

DSP GROUP, INC.

CONDENSED STATEMENTS OF STOCKHOLDERS’ EQUITY

(UNAUDITED)

(U.S. dollars in thousands and shares in thousands)

 

   

Number

of

common

stock

   

Common

stock

   

Additional

paid-in

capital

   

Treasury

stock

   

Accumulate

deficit

   

Other

comprehensive

income

(loss)

   

Total

stockholders’

equity

 

Six months ended June 30, 2018

                                                       

Balance at December 31, 2017

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

Net loss

    -       -       -       -       (2,041 )     -       (2,041 )

Cumulative effect adjustment on retained earnings **)

            -       -       -       94       -       94  

Change in accumulated other comprehensive income

    -       -       -       -       -       (824 )     (824 )

Purchase of treasury stock

    (486 )     (1 )     -       (5,868 )     -       -       (5,869 )

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

    119       * )     -       1,168       (165 )     -       1,003  

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

    395       1       10       3,897       (3,466 )     -       442  

Equity-based compensation

    -       -       3,359       -       -       -       3,359  

Balance at June 30, 2018

    22,461     $ 22     $ 375,410     $ (119,200 )   $ (110,420 )   $ (2,698 )   $ 143,114  

Six months ended June 30, 2019

                                                       

Balance at December 31, 2018

    22,266     $ 22     $ 378,855     $ (122,325 )   $ (112,363 )   $ (2,324 )   $ 141,865  

Net loss

    -       -       -       -       (1,587 )     -       (1,587 )

Change in accumulated other comprehensive income

    -       -       -       -       -       1,378       1,378  

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

    102       * )     -       1,022       (51 )     -       971  

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

    435       1       29       4,363       (3,296 )     -       1,097  

Equity-based compensation

    -       -       3,965       -       -       -       3,965  

Balance at June 30, 2019

    22,803     $ 23     $ 382,849     $ (116,940 )   $ (117,297 )   $ (946 )   $ 147,689  

 

(*)     Represents an amount lower than $1.

 

(**)     Resulting from adoption of ASC 606.

 

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

 

10

 

 

 DSP GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2019

(UNAUDITED)

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

 

 

NOTE A—BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six months ended June 30, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019. For further information, reference is made to the consolidated financial statements and footnotes thereto included in the Annual Report on Form 10-K of DSP Group, Inc. (the “Company”) for the year ended December 31, 2018.

 

The significant accounting policies applied in the annual consolidated financial statements of the Company as of December 31, 2018, contained in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 11, 2019, have been applied consistently in these unaudited interim condensed consolidated financial statements, except as noted below.

 

Recently Issued Accounting Pronouncements Not Yet Effective

 

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). ASU 2016-13 amends the impairment model to utilize an expected loss methodology in place of the currently used incurred loss methodology, which will result in the more timely recognition of losses. ASU 2016-13 also applies to employee benefit plan accounting, with an effective date of the first quarter of fiscal 2022. The Company is currently assessing the impact that adopting this new accounting standard will have on its consolidated balance sheets, statements of operations and cash flows.

 

In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820) - Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement” (“ASU 2018-13”), which is designed to improve the effectiveness of disclosures by removing, modifying and adding disclosures related to fair value measurements. ASU No. 2018-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. ASU 2018-13 allows for early adoption in any interim period after issuance of the update. The adoption of ASU 2018-13 is not expected to have a significant impact on the Company’s consolidated financial statements.

 

11

 

 

In August 2018, the FASB issued ASU 2018-15, “Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract” (“ASU 2018-15”). ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The implementation costs incurred in a hosting arrangement that is a service contract should be presented as a prepaid asset on the balance sheet and expensed over the term of the hosting arrangement to the same line item in the statement of income as the costs related to the hosting fees. ASU 2018-15 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, and early adoption is permitted, including adoption in any interim period. ASU 2018-15 should be applied either retrospectively or prospectively to all implementation costs incurred after adoption. The Company is currently evaluating the impact that the standard will have on the consolidated financial statements and does not expect the adoption to have a material effect on the Company’s consolidated financial statements.

 

In August 2018, the FASB issued ASU 2018-14, “Compensation—Retirement Benefits—Defined Benefit Plans—General (Topic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans” (“ASU 2018-14”), which improves disclosure requirements for employers that sponsor defined benefit pension or other post-retirement plans. ASU 2018-14 is effective for fiscal years ending after December 15, 2020, for public business entities. Early adoption is permitted for all entities. Entities are to apply this standard on a retrospective basis for all periods presented. The Company is currently evaluating the impact that ASU 2018-14 will have on the Company’s consolidated financial statements and related disclosures.

 

Significant Accounting Policies- Leases

 

Effective as of January 1, 2019, the Company adopted Topic 842, which requires the recognition of lease assets and lease liabilities by lessees for leases classified as operating leases. The Company has adopted Topic 842 using the modified retrospective transition approach by applying the new standard to all leases existing on the date of initial application. Results and disclosure requirements for reporting periods beginning after January 1, 2019 are presented under Topic 842, while prior period amounts have not been adjusted and continue to be reported in accordance with the Company’s historical accounting under Topic 840. The Company elected the package of practical expedients permitted under the transition guidance, which allowed the Company to carryforward the historical lease classification, (ii) the Company’s assessment regarding whether a contract was or contains a lease, and (iii) not to reassess initial direct costs for any leases that existed prior to January 1, 2019. The Company also elected to keep leases with an initial term of 12 months or less off the balance sheet and recognized the associated lease payments in the consolidated statements of income on a straight-line basis over the lease term. As a result of the adoption of Topic 842, on January 1, 2019, the Company recorded both operating lease ROU assets of $12.5 million and operating lease liabilities of $12.5 million. The adoption did not impact the Company’s beginning retained earnings, or its prior year condensed consolidated statements of income and statements of cash flows.

 

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

 

Leases are classified as either finance leases or operating leases. A lease is classified as a finance lease if any one of the following criteria are met: the lease transfers ownership of the asset by the end of the lease term, the lease contains an option to purchase the asset that is reasonably certain to be exercised, the lease term is for a major part of the remaining useful life of the asset, the present value of the lease payments equals or exceeds substantially all of the fair value of the asset, or the underlying asset is of such a specialized nature that it is expected to have no alternative use to the lessor at the end of lease term. A lease is classified as an operating lease if it does not meet any one of these criteria. Since all of the Company’s lease contracts do not meet any one of the criteria above, the Company concluded that all of its lease contracts should be classified as operation leases. ROU assets and liabilities are recognized on the commencement date based on the present value of remaining lease payments over the lease term. For this purpose, the Company considers only payments that are fixed and determinable at the time of commencement. As most of the Company's leases do not provide an implicit rate, the Company hired a third party valuation firm to determine the incremental borrowing rate in determining the present value of lease payments. The ROU asset also includes any lease payments made prior to commencement and is recorded net of any lease incentives received. All ROU assets are reviewed for impairment. The lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise such options.

 

12

 

 

Use of Estimates

 

The preparation of the interim condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates, judgments and assumptions. The Company’s management believes that the estimates, judgments and assumptions used are reasonable based upon information available at the time they are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the dates of the interim condensed consolidated financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

 

 

NOTE B— Operating Leases

 

The Company has entered into various non-cancelable operating lease agreements of its offices and car leases. The Company's leases have original lease periods expiring between 2019 and 2030. Many leases include one or more options to renew. The Company does not assume renewals in the determination of the lease term unless the renewals are deemed to be reasonably assured at lease commencement date. The Company's lease agreements do not contain any material residual value guarantees or material restrictive covenants.

 

Total operating lease cost during the three and six months ended June 30, 2019 was $744 and $1,486, respectively, out of which an amount of $507 and $1,249 represented the total cash paid for amounts included in the measurement of operating lease liabilities during the three and six months ended June 30, 2019, respectively.

 

During the six months ended June 30, 2019, total new lease liability amounted to $434.

 

Other information about lease amounts recognized in the Company’s consolidated financial statements is summarized as follows:

 

   

June 30, 2019

 
         

Weighted-average remaining lease term – operating leases (in years)

    8.32  

Weighted-average discount rate – operating leases

    4.98 %

 

As of June 30, 2019, the Company’s lease liabilities were as follows:

 

   

Operating

Leases

 
         

Gross lease liabilities

  $ 15,512  
         

Less: imputed interest

    (3,062

)

         

Present value of lease liabilities

    12,450  

Less: current portion of lease liabilities

    (2,088

)

Total long-term lease liabilities

  $ 10,362  

 

13

 

 

 

NOTE C—INVENTORIES

 

Inventories are stated at the lower of cost or net realizable value. The Company periodically evaluates the quantities on hand relative to current and historical selling prices, and historical and projected sales volume. Based on these evaluations, provisions are made in each period to write inventory down to its net realizable value. Inventories are composed of the following:

 

   

June 30,

2019

   

December 31,

2018

 
   

(Unaudited)

   

(Audited)

 
                 

Work-in-process

  $ 5,045     $ 4,993  

Finished goods

    4,148       4,826  
                 
    $ 9,193     $ 9,819  

 

 

For the six months ended June 30, 2019, the Company recorded $144 of income due to the utilization of inventory that was written off in the past.

 

Inventory write-off amounted to $32 for the six months ended June 30, 2018.

 

 

NOTE D—NET LOSS PER SHARE

 

Basic net loss per share are computed based on the weighted average number of shares of common stock outstanding during the period. For the same periods, diluted net loss per share further include the effect of dilutive stock options, stock appreciation rights and restricted share units outstanding during the period, all in accordance with FASB ASC No. 260 “Earnings per Share.” The following table sets forth the computation of basic and diluted net loss per share:

 

   

Three months ended June 30,

   

Six months ended June 30,

 
   

2019

   

2018

   

2019

   

2018

 
   

Unaudited

 

Net loss

  $ (521 )   $ (288 )   $ (1,587 )   $ (2,041 )

Loss per share:

                               

Basic

  $ (0.02 )   $ (0.01 )   $ (0.07 )   $ (0.09 )

Diluted

  $ (0.02 )   $ (0.01 )   $ (0.07 )   $ (0.09 )

Weighted average number of shares of common stock outstanding during the period used to compute basic net loss per share (in thousands)

    22,757       22,681       22,650       22,680  

Incremental shares attributable to exercise of outstanding options, stock appreciation rights and restricted stock units (assuming proceeds would be used to purchase treasury stock) (in thousands)

    -       -       -       -  

Weighted average number of shares of common stock used to compute diluted net loss per share (in thousands)

    22,757       22,681       22,650       22,680  

 

14

 

 

 

NOTE E — MARKETABLE SECURITIES and time deposits

 

The Company accounts for investments in marketable securities in accordance with FASB ASC No. 320-10 “Investments in Debt and Equity Securities.” Management determines the appropriate classification of its investments in government and corporate marketable debt securities at the time of purchase and reevaluates such determinations at each balance sheet date.

 

The Company classifies marketable securities as available-for-sale. Available-for-sale securities are carried at fair value, with the unrealized gains and losses, net of taxes, reported in other comprehensive income. The amortized cost of marketable securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization and interest are included in financial income, net. Interest and dividends on securities are included in financial income, net. The following is a summary of available-for-sale securities at June 30, 2019 and December 31, 2018:

 

   

Amortized cost

   

Unrealized losses, net

   

Fair value

 
   

June 30,

2019

   

December 31,

2018

   

June 30,

2019

   

December 31,

2018

   

June 30,

2019

   

December 31,

2018

 
   

(Unaudited)

   

(Audited)

   

(Unaudited)

   

(Audited)

   

(Unaudited)

   

(Audited)

 
                                                 

Short-term deposits

    5,467     $ 8,349     $ -       -       5,467     $ 8,349  

Long-term deposits

    5,188       5,130       -       -       5,188       5,130  

U.S. GSE securities

    17,158       21,550       (41 )     (253 )     17,117       21,297  

Corporate obligations

    80,031       77,857       (201 )     (1,382 )     79,830       76,475  
                                                 
    $ 107,844     $ 112,885     $ (242 )   $ (1,635 )   $ 107,602     $ 111,251  

 

The amortized cost of marketable debt securities and term deposits at June 30, 2019, by contractual maturities, is shown below:

 

           

Unrealized gains (losses)

         
   

Amortized

cost

   

Gains

   

Losses

   

Fair value

 
                                 

Due in one year or less

  $ 30,188     $ 49     $ (15 )   $ 30,222  

Due after one year to five years

    77,656       127       (403 )     77,380  
                                 
    $ 107,844     $ 176     $ (418 )   $ 107,602  

 

The actual maturity dates may differ from the contractual maturities because debtors may have the right to call or prepay obligations without penalties.

 

Management believes that as of June 30, 2019, the unrealized losses in the Company’s investments in all types of marketable securities were temporary and no impairment loss was realized in the Company’s condensed consolidated statement of income.

 

The unrealized losses related to corporate obligations were primarily due to changes in interest rates. Because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at June 30, 2019.

 

The total fair value of marketable securities with outstanding unrealized losses as of June 30, 2019 amounted to $65,438, while the unrealized losses for these marketable securities amounted to $418. Of the $418 unrealized losses outstanding as of June 30, 2019, a portion of which in the amount of $417 related to marketable securities that were in a loss position for more than 12 months and the remaining portion in the amount of $1 was related to marketable securities that were in a loss position for less than 12 months.

 

15

 

 

Proceeds from maturity of available-for-sale marketable securities during the six months ended June 30, 2019 and 2018 were $13,555 and $8,455, respectively. Proceeds from sales of available-for-sale marketable securities during the six months ended June 30, 2019 and 2018 were $4,988 and $4,810, respectively. Net realized losses from the sale of available-for-sale securities for the six months ended June 30, 2019 were $43 compared to net realized losses for the six months ended June 30, 2018 of $37. The Company determines realized gains or losses on the sale of marketable securities based on a specific identification method.

 

Marketable securities are periodically reviewed for impairment. If management concludes that any marketable security is impaired, management determines whether such impairment is other-than-temporary. Factors considered in making such a determination include the duration and severity of the impairment, the reason for the decline in value and the potential recovery period, and the Company’s intent to sell, or whether it is more likely than not that the Company will be required to sell the marketable security before recovery of cost basis. If any impairment is considered other-than-temporary, the marketable security is written down to its fair value through a corresponding charge to financial income, net.

 

 

NOTE F—TAXES ON Income

 

The effective tax rate used in computing the provision for income taxes is based on projected fiscal year income before taxes, including estimated income by tax jurisdiction.

 

The total amount of net unrecognized tax benefits was $2,655 and $2,040 at June 30, 2019 and December 31, 2018, respectively. The Company accrues interest and penalties, relating to unrecognized tax benefits, in its provision for income taxes. At June 30, 2019 and December 31, 2018, the Company had accrued interest and penalties relating to unrecognized tax benefits of $163 and $115, respectively.

 

The Company intends to permanently reinvest earnings of its foreign operations and its current operating plans do not demonstrate a need to repatriate foreign earnings to fund the Company’s U.S. operations. However, if these funds were needed for the Company’s operations in the United States, the Company would be required to accrue and pay taxes in several countries to repatriate these funds. The determination of the amount of additional taxes related to the repatriation of these earnings is not practicable, as it may vary based on various factors such as the location of the cash and the effect of regulation in the various jurisdictions from which the cash would be repatriated.

 

 

NOTE G—SIGNIFICANT CUSTOMERS

 

The Company sells its products primarily through distributors and directly to original equipment manufacturers (OEMs) and original design manufacturers (ODMs) who incorporate the Company’s products into consumer products. The Company’s future performance will depend, in part, on the continued success of its distributors in marketing and selling its products. The loss of the Company’s distributors and the Company’s inability to obtain satisfactory replacements in a timely manner may harm the Company’s sales and results of operations. In addition, the Company expects that a limited number of customers, varying in identity from period-to-period, will account for a substantial portion of its revenues in any period. The loss of, or reduced demand for products from, any of the Company’s major customers could have a material adverse effect on the Company’s business, financial condition and results of operations.

 

16

 

 

The following table represents the Company’s sales, as a percentage of the Company’s total revenues, for the three and six month periods ended June 30, 2019 and 2018, of the Company’s significant customers:

 

   

Three months ended June 30,

   

Six months ended June 30,

 
   

Unaudited

 

Major customers/ distributors

 

2019

   

2018

   

2019

   

2018

 

VTech Holdings Ltd.

    23 %     25 %     22 %     25 %
                                 

Nexty Electronics ¹ ²

    7 %     12 %     9 %     11 %
                                 

Ascend Technology Inc. ¹ ³

    25 %     25 %     26 %     26 %

 

¹ Distributor.

 

² Nexty Electronics sells the Company’s products to a limited number of customers; one of those customers – Panasonic, accounted for 6% and 10% of the Company’s total revenues for the three month periods ended June 30, 2019 and 2018, and 7% and 9% of the Company’s total revenues for the six month periods ended June 30, 2019 and 2018.

 

³ Ascend Technology sells the Company’s products to a limited number of customers; one of those customers Cisco Systems accounted for 10% and 9% for the three month periods ended June 30, 2019 and 2018, and 10% and 8% of the Company’s total revenues for the six month periods ended June 30, 2019 and 2018.

 

 

NOTE H—DERIVATIVE INSTRUMENTS

 

In accordance with FASB ASC No. 815 “Derivatives and Hedging,” for derivative instruments that are designated and qualify as a cash flow hedge (i.e. hedging the exposure to variability in expected future cash flows that is attributable to a particular risk), the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Any gain or loss on a derivative instrument in excess of the cumulative change in the present value of future cash flows of the hedged item is recognized in current earnings during the period of change.

 

As of June 30, 2019, the Company had no outstanding option and foreign exchange forward contracts.

 

The fair value of derivative assets and derivative liabilities were both $0 at June 30, 2019.

 

The amount recorded as income in research and development expenses, sales and marketing expenses and general and administrative expenses in the condensed consolidated statements of income for the six months ended June 30, 2019 that resulted from the above referenced hedging transactions was $83, $8 and $14, respectively.

 

The fair value of the outstanding derivative instruments at June 30, 2019 and December 31, 2018 is summarized below (unaudited):

 

 

       

Fair value of derivative instruments

 

Derivative Assets (Liabilities)

 

Balance Sheet Location

 

June 30,

2019

   

December 31,

2018

 
       

Unaudited

   

Audited

 
                     

Foreign exchange forward and option contracts

 

Other accounts receivable and prepaid expenses (other accounts payable)

  $ -     $ (3 )

 

17

 

 

The effect of derivative instruments in cash flow hedging transactions on income and other comprehensive income (“OCI”) for the three and six months ended June 30, 2019 and 2018 is summarized below (unaudited):

 

   

Gains (Losses) on Derivatives Recognized in OCI

 
   

for the three months

ended June 30,

   

for the six months

ended June 30,

 
   

Unaudited

 
   

2019

   

2018

   

2019

   

2018

 

Foreign exchange forward and option contracts

  $ 3     $ (29 )   $ 108     $ (29 )

 

 

 

Gains (Losses) Reclassified from OCI into Income

 
     

for the three months

ended June 30

   

for the six months

ended June 30,

 
     

Unaudited

 
 

Location

 

2019

   

2018

   

2019

   

2018

 

Foreign exchange forward and option contracts

Operating expenses

  $ 23     $ (9 )   $ 105     $ (9 )

 

 

 

NOTE I—CONTINGENCIES

 

From time to time, the Company may become involved in litigation relating to claims arising from its ordinary course of business. In addition, as is typical in the semiconductor industry, the Company has been and may from time to time be notified of claims that the Company may be infringing patents or intellectual property rights owned by third parties. The Company currently believes that there are no claims or actions pending or threatened against it, the ultimate disposition of which would have a material adverse effect on the Company.

 

 

NOTE J—EQUITY-BASED COMPENSATION

 

Grants for the three months ended June 30, 2019 and 2018:

 

The weighted average estimated fair value of employee restricted stock units (“RSUs”) granted during the three months ended June 30, 2019 and 2018 was $12.58 and $11.34 per share, respectively (using the weighted average pre vest cancellation rate of 4.62% and 3.69% for the three months ended June 30, 2019 and 2018, respectively, on an annual basis).

 

There were no grants of employee stock options and stock appreciation rights (“SARs”) during the three months ended June 30, 2019.

 

18

 

 

The weighted-average estimated fair value of employee stock options and stock appreciation rights (“SARs”) granted during the three months ended June 30, 2018 was $3.49 per stock option and SAR, using the binomial model with the following weighted-average assumptions (annualized percentages):

 

   

Three months ended June 30,

 
   

2019

   

2018

 

Volatility

    -       45.08%  

Risk-free interest rate

    -       2.93%  

Dividend yield

    -       0%  

Pre-vest cancellation rate

    -       3.65%  

Post-vest cancellation rate

    -       3.21%  

Suboptimal exercise factor

    -       1.205  

 

The expected life of employee stock options and SARs is impacted by all of the underlying assumptions used in the Company’s model. The binomial model assumes that employees’ exercise behavior is a function of the remaining contractual life of the stock option or SAR and the extent to which the stock option or SAR is in-the-money (i.e., the average stock price during the period is above the exercise price of the stock option or SAR). The binomial model estimates the probability of exercise as a function of these two variables based on the history of exercises and cancellations on past award grants made by the Company. The expected life for stock options and SARs granted during the three months ended June 30, 2018 derived from the binomial model was 4.73 years.

 

Employee stock benefit plans

 

As of June 30, 2019, the Company had two equity incentive plans from which the Company may grant future equity awards and three expired equity incentive plans from which no future equity awards may be granted but had outstanding equity awards granted prior to expiration. The Company also had one employee stock purchase plan. As of June 30, 2019, approximately 377,000 shares of common stock remain available for grant under the Company’s employee stock purchase plan and approximately 1,728,000 shares of common stock remain available for grant under the Company’s equity incentive plans.

 

19

 

 

The table below presents a summary of information relating to the Company’s stock option, RSU and SAR grants pursuant to its equity incentive plans:

 

   

Number of

Options/SARs/

RSUs

   

Weighted

average

exercise price

   

Weighted average

remaining contractual term

(years) (3)

   

Aggregate value

(**)

 
   

in thousands

                   

in thousands

 

Outstanding at March 31, 2019

    2,092     $ 3.55       4.60          

Options granted

    -       -                  

SARs Granted

    -       -                  

RSUs granted

    (* )     -                  

Options / SARs / RSUs cancelled/forfeited/expired

    (30 )     1.04                  

Options / SARs exercised and RSUs vested

    (111 )   $ 2.50                  

Outstanding at June 30, 2019 (1)

    1,951     $ 3.64       4.41     $ 20,915  

Exercisable at June 30, 2019 (2)

    626     $ 9.64       4.32     $ 2,957  

 

(*)     Represents an amount lower than $1.

 

(**) Calculation of aggregate intrinsic value is based on the share price of the Company’s common stock on June 30, 2019 ($14.36 per share).

 

(1) Due to the ceiling imposed on the SAR grants, the outstanding amount above can be exercised for a maximum of 1,875 thousands shares of the Company’s common stock as of June 30, 2019. SAR grants made on or after January 1, 2012 are convertible for a maximum number of shares of the Company’s common stock equal to 50% of the SARs subject to the grant.

 

(2) Due to the ceiling imposed on the SAR grants, the exercisable amount above can be exercised for a maximum of 588 thousands shares of the Company’s common stock as of June 30, 2019.

 

(3) Calculation of weighted average remaining contractual term does not include RSUs that were granted, which have indefinite contractual term.

 

Additional information about stock options, SARs and RSUs outstanding and exercisable at June 30, 2019 with exercise prices above $14.36 per share (the closing price of the Company’s common stock on June 30, 2019) is as follows:

 

   

Exercisable

   

Unexercisable

   

Total

 

Exercise prices

 

Number of

Options/

SARs / RSUs

(in

thousands)

   

Weighted

average

exercise

price

   

Number of

Options/

SARs / RSUs

(in

thousands)

   

Weighted

average

exercise

price

   

Number of

Options/

SARs /

RSUs (in

thousands)

   

Weighted

average

exercise

price

 
                                                 

Less than $14.36

    626     $ 9.64       1,325     $ 0.81       1,951     $ 3.64  

Above $14.36

    -     $ -       -     $ -       -     $ -  

Total

    626     $ 9.64       1,325     $ 0.81       1,951     $ 3.64  

 

 

The Company’s aggregate equity-based compensation expense for the three months ended June 30, 2019 and 2018 totaled $2,060 and $1,660, respectively.

 

20

 

 

As of June 30, 2019, there was $8,681 of total unrecognized equity-based compensation expense related to unvested equity-based compensation awards granted under the Company’s equity incentive plans. This amount is expected to be recognized during the period from 2019 through 2023.

 

 

NOTE K—Pension Liability

 

The information in this note represents the net periodic pension and post-retirement benefit costs and related components in accordance with FASB ASC No. 715 “Employers’ Disclosures about Pensions and Other Post-Retirement Benefits.” The components of net pension and post-retirement periodic benefit cost (income) for the six months ended June 30, 2019 and 2018 are as follows:

 

   

Six months ended June 30,

 
   

2019

   

2018

 

Components of net periodic benefit cost:

               

Service cost and amortization of loss

  $ 10     $ 12  

Interest cost

    8       8  
                 
                 

Net periodic benefit cost

  $ 18     $ 20  

 

The net pension liability as of June 30, 2019 amounted to $830.

 

 

NOTE L—FAIR VALUE MEASUREMENTS

 

Assets and liabilities measured at fair value on a recurring basis:

 

The Company measures its cash equivalents, short-term deposits, marketable securities and foreign currency derivative contracts at fair value. Cash equivalents, short-term deposits and marketable securities are classified within Level 1 or Level 2 value hierarchies as they are valued using quoted market prices or alternative pricing sources and models utilizing market observable inputs. Foreign currency derivative contracts are classified within Level 2 value hierarchy as the valuation inputs are based on quoted prices and market observable data of similar instruments.

 

The following table provides information by value level for assets and liabilities that are measured at fair value on a recurring basis as of June 30, 2019:

 

   

Balance as of

   

Fair value measurements

 
   

June 30, 2019

   

Level 1

   

Level 2

   

Level 3

 

 

 

(Unaudited)

                         
Description                                

Assets:

                               

Cash equivalents:

                               

Money market mutual funds

  $ 854     $ 854       -       -  
                                 

Short-term marketable securities:

                               

U.S. GSE securities

  $ 590             $ 590          

Corporate debt securities

  $ 24,165       -     $ 24,165       -  
                                 

Long-term marketable securities:

                               

U.S. GSE securities

  $ 16,527       -     $ 16,527       -  

Corporate debt securities

  $ 55,665       -     $ 55,665       -  

 

21

 

 

The following table provides information by value level for assets and liabilities that are measured at fair value on a recurring basis as of December 31, 2018.

 

    Balance as of    

Fair value measurements

 

Description

 

December 31,

2018

   

Level 1

   

Level 2

   

Level 3

 
   

(Audited)

                         

Assets

                               
                                 

Cash equivalents

                               

Money market mutual funds

  $ 773     $ 773       -       -  
                                 

Short-term marketable securities

                               

U.S. GSE securities

  $ 1,785       -     $ 1,785       -  

Corporate debt securities

  $ 25,579       -     $ 25,579       -  
                                 

Long-term marketable securities

                               

U.S. GSE securities

  $ 19,512       -     $ 19,512       -  

Corporate debt securities

  $ 50,896       -     $ 50,896       -  
                                 
                                 

Derivative liabilities

  $ 3       -     $ 3       -  

 

In addition to the assets and liabilities described above, the Company’s financial instruments also include cash and cash equivalents, restricted and short-term deposits, trade receivables, other accounts receivable, trade payables, accrued expenses and other payables. The fair value of these financial instruments was not materially different from their carrying values at June 30, 2019 due to the short-term maturity of these instruments.

 

 

NOTE M—STOCKHOLDERS’ EQUITY

 

During the first six months of 2019, the Company did not repurchase any shares of common stock.

 

During the first six months of 2018, the Company repurchased 486,422 shares of common stock at an average purchase price of $12.07 per share for an aggregate purchase price of $5,869. As of June 30, 2019, 794,913 shares of common stock remained authorized for repurchase under the Company's board-authorized share repurchase program.

 

Repurchases of common stock are accounted for as treasury stock, and result in a reduction of stockholders’ equity. The Company reissues treasury shares pursuant to its stock purchase plan, upon exercise of options and upon vesting of restricted stock units. Reissuance of treasury shares is accounted for in accordance with ASC No. 505-30 whereby gains are credited to additional paid-in capital and losses are charged to additional paid-in capital to the extent that previous net gains are included therein; otherwise losses are charged to retained earnings.

 

During the first six months of 2019, the Company issued approximately 537,000 shares of common stock out of treasury stock to employees who exercised their stock options, SARs or vested RSUs, or purchased shares from the Company’s 1993 Employee Stock Purchase Plan.

 

22

 

 

 

NOTE NSEGMENT INFORMATION

 

Description of segments:

 

The Company operates under three reportable segments.

 

The Company's 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. The Company's CODM is its Chief Executive Officer, who evaluates the Company's performance and allocates resources based on segment revenues and operating income.

 

The Company's operating segments are as follows: Home, Unified Communications and SmartVoice. The classification of the Company’s business segments is based on a number of factors that management uses to evaluate, view and run its 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, the Company consolidated its home gateway and home automation products into a new product line called SmartHome. In this segment, (i) revenues from cordless telephony products exceeded 10% of the Company’s total revenues, and amounted to 38% and 49% of the Company’s total revenues for the first half of 2019 and 2018, respectively, and 39% and 48% of the Company’s total revenues for the second quarter of 2019 and 2018, respectively, and (ii) revenues from SmartHome products amounted to 14% and 13% of the Company’s total revenues for the first six months of 2019 and 2018, respectively, and 13% and 12% of the Company’s total revenues for the second quarter of 2019 and 2018, respectively.

 

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 the Company’s unified communications products represented 32% and 31% of its total revenues for the first half of 2019 and 2018, respectively, and 30% and 32% of the Company’s revenues for the second quarter of 2019 and 2018, respectively. No revenues derived from other products in the Unified Communications segment exceeded 10% of the Company’s total consolidated revenues for both the first six months and the second quarter of 2019 and 2018.

 

SmartVoice - Products for the SmartVoice market that provide voice activation and recognition, voice enhancement, always-on and far-end noise elimination targeted for mobile phone, mobile headsets and other devices that incorporate the Company’s noise suppression and voice quality enhancement HDClear technology. Revenues derived from products in the SmartVoice segment represented 17% and 6% of the Company’s total revenues for the first half of 2019 and 2018, respectively, and 18% and 7% of the Company’s total revenues for the second quarter of 2019 and 2018, respectively. No revenues derived from other products in the mobile segment exceeded 10% of the Company’s total consolidated revenues for both the first six months and the second quarter of 2019 and 2018.

 

23

 

 

Segment data:

 

The Company derives the results of its business segments directly from its internal management reporting system and by using certain allocation methods. The accounting policies the Company uses to derive business segment results are substantially the same as those the Company uses for consolidation of its financial statements. The 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. The Company does not allocate to its business segments certain operating expenses, which it manages separately at the corporate level. These unallocated costs include primarily amortization of purchased intangible assets, equity-based compensation expenses, and certain corporate governance costs.

 

Selected operating results information for each business segment was as follows for the three months ended June 30, 2019 and 2018 (unaudited):

 

   

Three months ended June 30,

 
   

Revenues

   

Income (loss) from operations

 
   

2019

   

2018

   

2019

   

2018

 

Home

  $ 14,918     $ 18,658     $ 4,167     $ 3,955  

Unified Communications

  $ 8,797     $ 9,791     $ 2,696     $ 3,110  

SmartVoice

  $ 5,319     $ 2,202     $ (5,465 )   $ (5,096 )

Total

  $ 29,034     $ 30,651     $ 1,398     $ 1,969  

 

Selected operating results information for each business segment was as follows for the six months ended June30, 2019 and 2018 (unaudited):

 

   

Six months ended June 30,

 
   

Revenues

   

Income (loss) from operations

 
   

2019

   

2018

   

2019

   

2018

 

Home

  $ 29,648     $ 36,839     $ 8,237     $ 7,762  

Unified Communications

  $ 18,206     $ 18,144     $ 5,551     $ 5,263  

SmartVoice

  $ 9,456     $ 3,779     $ (11,526 )   $ (10,771 )

Total

  $ 57,310     $ 58,762     $ 2,262     $ 2,254  

 

The reconciliation of segment operating results information to the Company’s consolidated financial information was as follows for the three and six months periods ended June 30, 2019:

 

   

Three months

   

Six months

 

Income from operations

  $ 1,398     $ 2,262  

Unallocated corporate, general and administrative expenses

    (538 )     (1,001 )

Equity-based compensation expenses

    (2,060 )     (3,965 )

Intangible assets amortization expenses

    (104 )     (208 )

Financial income, net

    400       713  

Total consolidated loss before taxes

  $ (904 )   $ (2,199 )

 

 

The reconciliation of segment operating results information to the Company’s consolidated financial information was as follows for the three and six months ended June 30, 2018:

 

   

Three months

   

Six months

 

Income from operations

  $ 1,969     $ 2,254  

Unallocated corporate, general and administrative expenses

    (577 )     (1,096 )

Equity-based compensation expenses

    (1,660 )     (3,359 )

Intangible assets amortization expenses

    (425 )     (850 )

Financial income, net

    403       799  

Total consolidated loss before taxes

  $ (290 )   $ (2,252 )

 

24

 

 

 

NOTE O —ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

 

The following table summarizes the changes in accumulated balances of other comprehensive income for the three months ended June 30, 2019:

 

   

Unrealized

gains (losses)

on available-

for-sale

marketable

securities

   

Unrealized

gains

(losses) on

cash flow

hedges

   

Unrealized

gains (losses)

on components

of defined

benefit plans

   

Unrealized

losses on

foreign

currency

translation

   

Total

 
                                         

Beginning balance

  $ (836 )   $ 20     $ (357 )   $ (352 )   $ (1,525 )

Other comprehensive income before reclassifications

    598       3       -       -       601  

Losses (gains) reclassified from accumulated other comprehensive income

    (3 )     (23 )     4       -       (22 )
                                         

Net current period other comprehensive income (loss)

    595       (20 )     4       -       579  
                                         

Ending balance

  $ (241 )   $ -     $ (353 )   $ (352 )   $ (946 )

 

The following table provides details about reclassifications out of accumulated other comprehensive income for the three months ended June 30, 2019:

 

Details about accumulated other comprehensive income (loss) components

 

Losses (gains)

reclassified

from

accumulated

other

comprehensive

income (loss)

 

Affected line item in the

statement of income (loss)

             

Gains on available-for-sale marketable securities

  $ (3 )

Financial income, net

 
      -  

Provision for income taxes

 
      (3 )

Total, net of income taxes

 

Gains on cash flow hedges

           
      (18 )

Research and development

 
      (2 )

Sales and marketing

 
      (3 )

General and administrative

 
      (23 )

Total, before income taxes

 
      -  

Provision for income taxes

 
             
      (23 )

Total, net of income taxes

 
             

Losses on components of defined benefit plans

    3  

Research and development

 
      1  

Sales and marketing

 
             
      4  

Total, before income taxes

 
             
      -  

Provision for income taxes

 
             
      4  

Total, net of income taxes

 
             

Total reclassifications for the period

  $ (22 )

Total, net of income taxes

 

 

25

 

 

The following table summarizes the changes in accumulated balances of other comprehensive income (loss) for the six months ended June 30, 2019:

 

   

Unrealized

gains

(losses) on

available-

for-sale

marketable

securities

   

Unrealized

gains

(losses) on

Cash Flow

Hedges

   

Unrealized

gains

(losses) on

components

of defined

benefit

plans

   

Unrealized

gains

(losses) on

foreign

currency

translation

   

Total

 

Beginning balance

  $ (1,634 )   $ (3 )   $ (361 )   $ (326 )   $ (2,324 )

Other comprehensive income (loss) before reclassifications

    1,350       108       -       (26 )     1,432  

Losses reclassified from accumulated other comprehensive income (loss)

    43       (105 )     8       -       (54 )

Net current period other comprehensive income (loss)

    1,393       3       8       (26 )     1,378  
                                         

Ending balance

  $ (241 )   $ -     $ (353 )     (352 )   $ (946 )

 

The following table provides details about reclassifications out of accumulated other comprehensive income for the six months ended June 30, 2019:

 

Details about accumulated other comprehensive income (loss) components

 

Losses (gains)

reclassified from

accumulated other

comprehensive

income (loss)

 

Affected line item in the

statement of income (loss)

           

Losses on available-for-sale marketable securities

  $ 43  

Financial income, net

      -  

Provision for income taxes

      43  

Total, net of income taxes

           

Gains on cash flow hedges

         
      (83 )

Research and development

      (8 )

Sales and marketing

      (14 )

General and administrative

      (105 )

Total, before income taxes

      -  

Provision for income taxes

      (105 )

Total, net of income taxes

           

Losses on components of defined benefit plans

    6  

Research and development

      2  

Sales and marketing

      8  

Total, before income taxes

      -  

Provision for income taxes

      8  

Total, net of income taxes

           

Total reclassifications for the period

  $ (54 )

Total, net of income taxes

 

26

 

 

 

NOTE PGOVERNMENT GRANTS

 

Government grants received by the Company’s Israeli subsidiary relating to categories of operating expenditures are credited to the consolidated statements of income during the period during which the expenditure to which they relate is charged. Royalty and non-royalty-bearing grants from the Israeli Innovation Authority ("IIA") for funding certain approved research and development projects are recognized at the time when the Company’s Israeli subsidiary is entitled to such grants, on the basis of the related costs incurred, and are included as a deduction from research and development expenses, net.

 

The Company recorded grants in the amount of $633 and $500 for the three month periods ended June 30, 2019 and 2018, respectively.

 

The Company recorded grants in the amount of $1,001 and $1,000 for the six month periods ended June 30, 2019 and 2018, respectively.

 

The Company’s Israeli subsidiary is obligated to pay royalties amounting to 5% of the sales of certain products, the development of which benefited from grants received from the IIA in previous years. The obligation to pay these royalties is contingent on actual sales of such products. Grants received from the IIA may become repayable if certain criteria under the grants are not met. In addition, the grants may be required to be repaid with a multiple of up to six times the initial grant amount in case the technology that was developed using these grants are transferred, directly or indirectly, to a third party.

 

 

ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

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 growth initiatives, primarily Unified Communications and SmartVoice products, will increase in 2019 as compared to 2018 and expect such revenues will represent two thirds of our total revenues for 2019;

 

27

 

 

  Our expectation of near term softness in our Unified Communications segment due to inventory adjustments by VoIP customers;
     
 

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 our past research and development investments in new technologies are paying off;

 

 

Our belief that new communication access methods, including mobile, wireless broadband, cable and other connectivity, 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;

 

 

Our belief that sales of digital cordless telephony products will continue to represent a substantial percentage of our revenues for 2019;

 

 

Our belief that the market will remain price sensitive for 2019 for our traditional cordless telephony products and expect that price erosion and the decrease in the average selling prices of such products to continue; and

 

 

Our belief that our available cash and cash equivalents at June 30, 2019 should be sufficient to finance our operations for the foreseeable future.

 

All forward-looking statements included in this Quarterly Report on Form 10-Q 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, but are not limited to, our dependence on one primary distributor, our OEM relationships and competition, as well as those risks described in Part II Item 1A Risk Factors of this Form 10-Q.

&