NOTE

ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Organization:

CEVA, Inc. (“CEVA” or the “Company”) was incorporated in Delaware on

November 22, 1999.

The Company was formed through the combination of Parthus Technologies plc (“Parthus”) and the digital signal processor (DSP) cores licensing business and operations of DSP Group, Inc. in

November 2002.

The Company had

business or operations prior to the combination.

CEVA licenses a family of signal processing IPs in

two

types of categories: wireless connectivity and smart sensing products. These products include comprehensive DSP-based platforms for

baseband processing in mobile and infrastructure, advanced imaging and computer vision for any camera-enabled device and audio/voice/speech and ultra-low power always-on/sensing applications for multiple IoT markets. For sensor fusion, following the acquisition of the business of Hillcrest Laboratories, Inc. (“Hillcrest Labs”) as discussed below, CEVA’s Hillcrest Labs sensor processing technologies provide a broad range of sensor fusion software and IMU solutions for AR/VR, robotics, remote controls, and IoT. For artificial intelligence, CEVA offers a family of AI processors capable of handling the complete gamut of neural network workload and on-device. For wireless IoT, CEVA offers the industry’s most widely adopted IPs for Bluetooth (low energy and dual mode), Wi-Fi

4/5/6

(

802.11n/ac/ax

) and NB-IoT.

CEVA’s technologies are licensed to leading semiconductor and original equipment manufacturer (OEM) companies. These companies design, manufacture, market and sell application-specific integrated circuits (“ASICs”) and application-specific standard products (“ASSPs”) based on CEVA’s technology to wireless, consumer electronics and automotive companies for incorporation into a wide variety of end products.

Acquisitions

July 2019,

the Company acquired the Hillcrest Labs business from InterDigital, Inc. (“InterDigital”). Hillcrest Labs is a leading global supplier of software and components for sensor processing in consumer and IoT devices. Under the terms of the agreement, the Company agreed to pay an aggregate of

$11,204

to purchase the Hillcrest Labs business, as well as non-exclusive rights to certain Hillcrest Labs’ patents retained by InterDigital, with

$10,000

paid at closing,

$204

of which is a contingent consideration that is expected to be paid during the

first

quarter of

2020,

and the remainder of

$1,000

held in escrow to satisfy indemnification claims, if any.

The milestone-based contingent payment is calculated based on payments to be received by the Company for certain products to be sold by the Company prior to

October 15, 2019.

These milestone-based contingent payments were measured at fair value on the closing date and recorded as a liability on the balance sheet in the amount of

$204.

In addition, the Company incurred acquisition-related expenses associated with the Hillcrest Labs transaction in a total amount of

$462,

which were included in general and administrative expenses for the year ended

December 31, 2019.

Acquisition-related costs included legal, accounting and consulting fees, and other external costs directly related to the acquisition.

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

The results of Hillcrest Labs’ operations have been included in the consolidated financial statements since

July 19, 2019.

Pro forma results of operations related to this acquisition have

not

been prepared because they are

not

material to the Company's consolidated statement of income.

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

Tangible assets (including inventory, property and equipment and other)	$	681
Intangible assets:
Developed technologies		2,475
Customer relationships		3,518
Customer backlog		72
Goodwill		4,458
Total assets	$	11,204

The acquisition of the Hillcrest Labs business has been accounted in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”)

No.

805,

“Business Combinations” (“ASC

805”

). Under the acquisition method of accounting, the total purchase price is allocated to the net tangible and intangible assets based on their fair values on the closing date.

August 2019,

the Company entered into a strategic agreement with a private company, Immervision, Inc. (“Immervision”), whereby the Company made a strategic technology investment for a total consideration of

$10,000

to secure exclusive licensing rights to Immervision’s advanced portfolio of patented wide-angle image processing technology and software. The Company considered this transaction as an asset acquisition. As a result, the estimated fair value of the assets acquired have been included in the accompanying balance sheet from the date of acquisition.

The consideration for the investment has been determined as follows:

Prepaid expenses	$	2,937
Intangible assets:
Core technologies		7,063
Total assets	$	10,000

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

Basis of presentation:

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

Recently Adopted Accounting Pronouncements

January 1, 2019,

the Company adopted Accounting Standards Update (“ASU”)

No.

2016

02,

Leases (“Topic

842”

), as amended, which supersedes the lease accounting guidance under Topic

840,

and generally requires lessees to recognize operating and financing lease liabilities and corresponding right-of-use (ROU) assets on the balance sheet and to provide enhanced disclosures surrounding the amount, timing and uncertainty of cash flows arising from leasing arrangements. The Company adopted the new guidance using the modified retrospective transition approach by applying the new standard to all leases existing on the date of initial application and

not

restating comparative periods. The most significant impact was the recognition of ROU assets and lease liabilities for operating leases. For information regarding the impact of Topic

842

adoption, see Note

hereafter – “Leases” and Note

- “Leases”.

August 2017,

the FASB issued ASU

No.

2017

12,

“Derivatives and Hedging (Topic

815

): Targeted Improvements to Accounting for Hedging Activities,” amending the eligibility criteria for hedged items and transactions to expand an entity’s ability to hedge nonfinancial and financial risk components. The new guidance eliminates the requirement to separately measure and present hedge ineffectiveness and aligns the presentation of hedge gains and losses with the underlying hedge item. The new guidance also simplifies the hedge documentation and hedge effectiveness assessment requirements. The amended presentation and disclosure requirements must be adopted on a prospective basis, while any amendments to cash flow and net investment hedge relationships that exist on the date of adoption must be applied on a “modified retrospective” basis, meaning a cumulative effect adjustment to the opening balance of retained earnings as of the beginning of the year of adoption. The new guidance was effective for the Company on

January 1, 2019

and the adoption did

not

have a material impact on the Company’s consolidated financial statements.

Use of estimates

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

Financial statements in U.S. dollars

A majority of the revenues of the Company and its subsidiaries is generated in U.S. dollars (“dollars”). In addition, a portion of the Company and its subsidiaries’ costs are incurred in dollars. The Company’s management has determined that the dollar is the primary currency of the economic environment in which the Company and its subsidiaries principally operate. Thus, the functional and reporting currency of the Company and its subsidiaries is the dollar.

Accordingly, monetary accounts maintained in currencies other than the dollar are remeasured into dollars in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”)

No.

830,

“Foreign Currency Matters.” All transaction gains and losses from remeasurement of monetary balance sheet items are reflected in the consolidated statements of income as financial income or expenses, as appropriate, which is included in “financial income, net.” The foreign exchange losses arose principally on the EURO and the NIS monetary balance sheet items as a result of the currency fluctuations of the EURO and the NIS against the dollar.

Principles of consolidation

The consolidated financial statements incorporate the financial statements of the Company and all of its subsidiaries. All inter-company balances and transactions have been eliminated on consolidation.

Cash equivalents

Cash equivalents are short-term highly liquid investments that are readily convertible to cash with original maturities of

three

months or less from the date acquired.

Short-term bank deposits

Short-term bank deposits are deposits with maturities of more than

three

months but less than

one

year from the balance sheet date. The deposits are presented at their cost, including accrued interest. The deposits bear interest annually at an average rate of

1.85%,

2.16%

and

2.64%

during

2017,

2018

and

2019,

respectively.

Marketable securities

Marketable securities consist mainly of corporate bonds. The Company determines the appropriate classification of marketable securities at the time of purchase and re-evaluates such designation at each balance sheet date. In accordance with FASB ASC

No.

320

“Investments- Debt and Equity Securities,” the Company classifies marketable securities as available-for-sale. Available-for-sale securities are stated at fair value, with unrealized gains and losses reported in accumulated other comprehensive income (loss), a separate component of stockholders’ equity, net of taxes. Realized gains and losses on sales of marketable securities, as determined on a specific identification basis, are included in financial income, net. The amortized cost of marketable securities is adjusted for amortization of premium and accretion of discount to maturity, both of which, together with interest, are included in financial income, net. The Company has classified all marketable securities as short-term, even though the stated maturity date

may

one

year or more beyond the current balance sheet date, because it is probable that the Company will sell these securities prior to maturity to meet liquidity needs or as part of risk versus reward objectives.

The Company recognizes an impairment charge when a decline in the fair value of its investments in debt securities below the cost basis of such securities is judged to be 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. For securities that are deemed other-than-temporarily impaired (“OTTI”), the amount of impairment is recognized in the statement of income and is limited to the amount related to credit losses, while impairment related to other factors is recognized in other comprehensive income (loss). The Company did

not

recognize OTTI on its marketable securities in

2017,

2018

and

2019.

Long-term bank deposits

Long-term bank deposits are deposits with maturities of more than

one

year as of the balance sheet date. The deposits presented at their cost, including accrued interest. The deposits bear interest annually at an average rate of

2.26%,

2.57%

and

2.94%

during

2017,

2018

and

2019,

respectively.

Property and equipment, net

Property and equipment are stated at cost, net of accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets, at the following annual rates:

	%
Computers, software and equipment	10	-	33
Office furniture and equipment	7	-	33
Leasehold improvements	10	-	25
	(the shorter of the expected lease term or useful economic life)

The Company’s long-lived assets are reviewed for impairment in accordance with FASB ASC

No.

360

35,

“Impairment or Disposal of Long-Lived Assets,” whenever events or changes in circumstances indicate that the carrying amount of an asset

may

not

be recoverable. Recoverability of the carrying amount of an asset to be held and used is measured by a comparison of its carrying amount to the future undiscounted cash flows expected to be generated by such asset. If such asset is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of such asset exceeds its fair value. In determining the fair value of long-lived assets for purposes of measuring impairment, the Company's assumptions include those that market participants would consider in valuations of similar assets.

An asset to be disposed is reported at the lower of its carrying amount or fair value less selling costs.

impairment was recorded in

2017,

2018

and

2019.

Leases

Effective as of

January

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,

which did

not

require recognition of operating lease assets and liabilities on the balance sheets.

The Company elected the package of practical expedients permitted under the transition guidance, which allowed the Company to carryforward the historical lease classification, the Company’s assessment on whether a contract was or contained a lease, and initial direct costs for any leases that existed prior to

January 1, 2019.

As a result of the adoption of Topic

842

January 1, 2019,

the Company recorded both operating lease ROU assets of

$9,785

and operating lease liabilities of

$9,498.

The ROU assets include adjustments for prepayments in the amount of

$287.

The adoption did

not

impact the Company’s beginning retained earnings, or its prior year 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: (

) whether the contract includes an identified asset, (

) whether the Company obtains substantially all of the economic benefits from the use of the asset throughout the period of use, and (

) 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

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 of the criteria above, the Company concluded that all of its lease contracts should be classified as operation leases.

ROU assets and liabilities are recognized on the commencement date based on the present value of remaining lease payments over the lease term. For this purpose, the Company considers only payments that are fixed and determinable at the time of commencement. As most of the Company's leases do

not

provide an implicit rate, the Company uses its incremental borrowing rate based on information available on the commencement date in determining the present value of lease payments. The ROU asset also includes any lease payments made prior to commencement and is recorded net of any lease incentives received. All ROU assets are reviewed for impairment. The lease terms

may

include options to extend or terminate the lease when it is reasonably certain that the Company will exercise such options.

The Company elected to

not

recognize a lease liability and a ROU asset for lease with a term of

twelve

months or less.

Goodwill

Goodwill is carried at cost and is

not

amortized but rather is tested for impairment at least annually or between annual tests in certain circumstances. The Company conducts its annual test of impairment for goodwill on

October

1st

of each year.

The Company operates in

one

operating segment and this segment comprises the only reporting unit.

ASC

350

allows an entity to

first

assess qualitative factors to determine whether it is necessary to perform the

two

-step quantitative goodwill impairment test. If the qualitative assessment does

not

result in a more likely than

not

indication of impairment,

further impairment testing is required. If it does result in a more likely than

not

indication of impairment, the

two

-step impairment test is performed. Alternatively, ASC

350

permits an entity to bypass the qualitative assessment for any reporting unit and proceed directly to performing the

first

step of the goodwill impairment test. For each of the

three

years in the period ended

December 31, 2019,

impairment of goodwill has been recorded.

Intangible assets, net

Acquired intangible assets with definite lives are amortized over their estimated useful lives. The Company amortizes intangible assets on a straight-line basis with definite lives over periods ranging from half a year to

seven

and a half years.

Intangible assets with definite lives are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset

may

not

be recoverable. Recoverability of these assets is measured by comparison of their carrying amounts to future undiscounted cash flows the assets are expected to generate. If such assets are considered to be impaired, the impairment to be recognized equals the amount by which the carrying value of the assets exceeds its fair market value. The Company did

not

record any impairments during the years ended

December 31, 2017,

2018

and

2019.

Investments in other company

The Company's non-marketable equity securities are investments in privately held companies without readily determinable market values.

Effective

January 1, 2018,

the Company adopted Accounting Standards Update (“ASU”)

2016

01,

which changed the way it accounts for non-marketable securities on a prospective basis. Under the new ASU, equity investments that do

not

have readily determinable fair values and do

not

qualify for the net asset value practical expedient are eligible for the measurement alternative. For the Company’s equity investment in private company equity securities which do

not

have readily determinable fair values, the Company has elected the measurement alternative defined as cost, less impairment, plus or minus adjustments resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. The investment is reviewed periodically to determine if its value has been impaired and adjustments are recorded as necessary.

During the year ended

December

31,

2019,

impairment loss was identified. During the year ended

December 31, 2018,

the Company recorded a loss of

$870

related to revaluation of its investment in a private company based on observable price changes. During the year ended

December

31,

2017,

impairment loss was identified.

Revenue recognition

Effective as of

January

2018,

the Company has followed the provisions of ASC Topic

606,

Revenue from Contracts with Customers

(“ASC

606”

). The guidance provides a unified model to determine how revenue is recognized. See Note

for further details.

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

The Company determines revenue recognition through the following steps:

●

identification of the contract with a customer;

●

identification of the performance obligations in the contract;

●

determination of the transaction price;

●

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

●

recognition of revenue when, or as, the Company satisfies a performance obligation.

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

The Company generates its revenues from (

) licensing intellectual properties, which in certain circumstances are modified for customer-specific requirements, (

) royalty revenues, and (

) other revenues, which include revenues from support, training and sale of development systems and chips, which are included in licensing and related revenue in the accompanying consolidated statements of income.

The Company accounts for its IP license revenues and related services, which provide the Company's customers with rights to use the Company's IP, in accordance with ASC

606.

A license

may

be perpetual or time limited in its application. In accordance with ASC

606,

the Company will recognize revenue from IP license at the time of delivery when the customer accepts control of the IP, as the IP is functional without professional services, updates and technical support. The Company has concluded that its IP license is distinct as the customer can benefit from the software on its own.

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

When contracts involve a significant financing component, the Company adjusts the promised amount of consideration for the effects of the time value of money if the timing of payments agreed to by the parties to the contract (either explicitly or implicitly) provide the customer with a significant benefit of financing, unless the financing period is under

one

year and only after the products or services were provided, which is a practical expediency permitted under ASC

606.

Revenues from contracts that involve significant customization of the Company’s IP to customer-specific specifications are performance obligations the Company generally accounts for as performance obligations satisfied over time. The Company’s performance does

not

create an asset with alternative use, and the Company has an enforceable right to payment. The Company recognizes revenue on such contracts using cost based input methods, which recognize revenue and gross profit as work is performed based on a ratio between actual costs incurred compared to the total estimated costs for the contract. Provisions for estimated losses on uncompleted contracts are made during the period in which such losses are

first

determined, in the amount of the estimated loss on the entire contract.

Revenues that are derived from the sale of a licensee’s products that incorporate the Company’s IP are classified as royalty revenues. Royalty revenues are recognized during the quarter in which the sale of the product incorporating the Company’s IP occurs. Royalties are calculated either as a percentage of the revenues received by the Company’s licensees on sales of products incorporating the Company’s IP or on a per unit basis, as specified in the agreements with the licensees. For a majority of the Company’s royalty revenues, the Company receives the actual sales data from its customers after the quarter ends and accounts for it as unbilled receivables. When the Company does

not

receive actual sales data from the customer prior to the finalization of its financial statements, royalty revenues are recognized based on the Company’s estimation of the customer’s sales during the quarter.

In addition to license fees, contracts with customers generally contain an agreement to provide for training and post contract support, which consists of telephone or e-mail support, correction of errors (bug fixing) and unspecified updates and upgrades. Fees for post contract support, which takes place after delivery to the customer, are specified in the contract and are generally mandatory for the

first

year. After the mandatory period, the customer

may

extend the support agreement on similar terms on an annual basis. The Company considers the post contract support performance obligation as a distinct performance obligation that is satisfied over time, and as such, it recognizes revenue for post contract support on a straight-line basis over the period for which technical support is contractually agreed to be provided to the licensee, typically

months. Training services are considered performance obligations satisfied over-time, and revenues from training services are recognized as the training is performed.

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

Deferred revenues, which represent a contract liability, include unearned amounts received under license agreements, unearned technical support and amounts paid by customers

not

yet recognized as revenues.

The Company capitalizes sales commission as costs of obtaining a contract when they are incremental and, if they are expected to be recovered, amortized in a manner consistent with the pattern of transfer of the good or service to which the asset relates. If the expected amortization period is

one

year or less, the commission fee is expensed when incurred.

Cost of revenue

Cost of revenue includes the costs of products, services and royalty expense payments to the Israeli Innovation Authority of the Ministry of Economy and Industry in Israel (the “IIA“) (refer to Note

for further details). Cost of product revenue includes materials, subcontractors, amortization of acquired assets (NB-IoT and Immervision technologies) and the portion of development costs associated with product development arrangements. Cost of service revenue includes salary and related costs for personnel engaged in services, training and customer support, and travel, office expenses and other support costs.

Income taxes

The Company recognizes income taxes under the liability method. It recognizes deferred income tax assets and liabilities for the expected future consequences of temporary differences between the financial reporting and tax bases of assets and liabilities. These differences are measured using the enacted statutory tax rates that are expected to apply to taxable income for the years in which differences are expected to reverse. The effect of a change in tax rates on deferred income taxes is recognized in the statements of income during the period that includes the enactment date.

Valuation allowance is recorded to reduce the deferred tax assets to the net amount that the Company believes is more likely than

not

to be realized. The Company considers all available evidence, both positive and negative, including historical levels of income, expectations and risks associated with estimates of future taxable income and ongoing tax planning strategies, in assessing the need for a valuation allowance.

The Company accounts for uncertain tax positions in accordance with ASC

740.

ASC

740

contains a

two

-step approach to recognizing and measuring uncertain tax positions. The

first

step is to evaluate the tax position taken or expected to be taken in a tax return by determining if the weight of available evidence indicates that it is more likely than

not

that, on an evaluation of the technical merits, the tax position will be sustained on audit, including resolution of any related appeals or litigation processes. The

second

step is to measure the tax benefit as the largest amount that is more than

50%

(cumulative probability) likely to be realized upon ultimate settlement. The Company accrues interest and penalties related to unrecognized tax benefits under taxes on income.

Research and development

Research and development costs are charged to the consolidated statements of income as incurred.

Government grants and tax credits

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

The Company recorded grants in the amounts of

$4,137,

$3,352

and

$5,643

for the years ended

December 31, 2017,

2018

and

2019,

respectively. The Company’s Israeli subsidiary is obligated to pay royalties amounting to

3.5%

of the sales of certain products the development of which received grants from the IIA in previous years. The obligation to pay these royalties is contingent on actual sales of the products. Grants received from the IIA

may

become repayable if certain criteria under the grants are

not

met.

The French Research Tax Credit, Crédit d’Impôt Recherche (“CIR”), is a French tax incentive to stimulate research and development (“R&D”) which is relevant for the Company's French subsidiaries (RivieraWaves and CEVA France). Generally, the CIR offsets the income tax to be paid and the remaining portion (if any) can be refunded. The CIR is calculated based on the claimed volume of eligible R&D expenditures by the Company. As a result, the CIR is presented as a deduction to “Research and development expenses” in the consolidated statements of income. During the years ended

December 31, 2017,

2018

and

2019,

the Company recorded CIR benefits in the amount of

$1,555,

$2,065

and

$2,312,

respectively.

Employee benefit plan

Certain of the Company’s employees are eligible to participate in a defined contribution pension plan (the “Plan”). Participants in the Plan

may

elect to defer a portion of their pre-tax earnings into the Plan, which is run by an independent party. The Company makes pension contributions at rates varying up to

10%

of the participant’s pensionable salary. Contributions to the Plan are recorded as an expense in the consolidated statements of income.

The Company’s U.S. operations maintain a retirement plan (the “U.S. Plan”) that qualifies as a deferred salary arrangement under Section

401

(k) of the Internal Revenue Code. Participants in the U.S. Plan

may

elect to defer a portion of their pre-tax earnings, up to the Internal Revenue Service annual contribution limit. The Company matches

100%

of each participant’s contributions up to a maximum of

of the participant’s base pay. Each participant

may

contribute up to

15%

of base remuneration. Contributions to the U.S. Plan are recorded during the year contributed as an expense in the consolidated statements of income.

Total contributions for the years ended

December 31, 2017,

2018

and

2019

were

$988,

$1,048

and

$1,189,

respectively.

Accrued severance pay

The liability of CEVA’s Israeli subsidiary for severance pay for employees hired prior to

August 1, 2016

is calculated pursuant to Israeli severance pay law based on the most recent salary of each employee multiplied by the number of years of employment for that employee as of the balance sheet date. The Israeli subsidiary’s liability is fully provided for by monthly deposits with severance pay funds, insurance policies and an accrual. The deposited funds include profits and losses accumulated up to the balance sheet date. The deposited funds

may

be withdrawn only upon the fulfillment of the obligation pursuant to Israeli severance pay law or labor agreements. The value of these policies is recorded as an asset on the Company’s consolidated balance sheets.

Effective

August 1, 2016,

the Israeli subsidiary’s agreements with new employees in Israel are under Section

of the Severance Pay Law,

1963.

The Israeli subsidiary’s contributions for severance pay have extinguished its severance obligation. Upon contribution of the full amount based on the employee’s monthly salary for each year of service,

additional obligation exists regarding the matter of severance pay, and

additional payments is made by the Israeli subsidiary to the employee. Furthermore, the related obligation and amounts deposited on behalf of the employee for such obligation are

not

stated on the balance sheet, as the Israeli subsidiary is legally released from any obligation to employees once the required deposit amounts have been paid.

Severance pay expenses, net of related income, for the years ended

December 31, 2017,

2018

and

2019,

were

$1,413,

$1,818

and

$1,826,

respectively.

Equity-based compensation

The Company accounts for equity-based compensation in accordance with FASB ASC

No.

718,

“Stock Compensation” which requires the recognition of compensation expenses based on estimated fair values for all equity-based awards made to employees and non-employee directors. Equity-based compensation primarily includes restricted stock units (“RSUs”), as well as options, stock appreciation right (“SAR”), performance-based stock units (“PSUs”) and employee stock purchase plan awards.

Effective as of

January 1, 2017,

the Company adopted Accounting Standards Update

2016

09,

“Compensation-Stock Compensation (Topic

718

)” (“ASU

2016

09”

) on a modified, retrospective basis. Upon adoption of ASU

2016

09,

the Company elected to change its accounting policy to account for forfeitures as they occur.

The Company estimates the fair value of options and SAR awards on the date of grant using an option-pricing model. The value of the portion of an award that is ultimately expected to vest is recognized as an expense over the requisite service period in the Company’s consolidated statements of income. The Company recognizes compensation expenses for the value of its options and SARs, which have graded vesting based on the accelerated attribution method over the requisite service period of each of the awards.

The Company recognizes compensation expenses for the value of its RSU awards, based on the straight-line method over the requisite service period of each of the awards, and for its PSU awards based on the accelerated attribution method over the requisite service period of each of the awards. The fair value of each RSU and PSU is the market value as determined by the closing price of the common stock on the day of grant.

The Company uses the Monte-Carlo simulation model for options and SARs granted. The Monte-Carlo simulation model uses the assumptions noted below. Expected volatility was calculated based upon actual historical stock price movements over the most recent periods ending on the grant date, equal to the expected option and SAR term. The Company has historically

not

paid dividends and has

foreseeable plans to pay dividends. The risk-free interest rate is based on the yield from U.S. Treasury

zero

-coupon bonds with an equivalent term. The Monte-Carlo model also considers the suboptimal exercise multiple which is based on the average exercise behavior of the Company's employees over the past years, the contractual term of the options and SARs, and the probability of termination or retirement of the holder of the options and SARs in computing the value of the options and SARs. Neither options nor SARs were granted during

2017,

2018

and

2019.

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

	2017			2018			2019

Expected dividend yield		0%			0%			0%
Expected volatility	28%	-	46%	35%	-	42%	42%	-	43%
Risk-free interest rate	0.5%	-	1.1%	0.7%	-	2.2%	2.0%	-	2.5%
Expected forfeiture		0%			0%			0%
Contractual term of up to (months)		24			24			24

During the years ended

December 31, 2017,

2018

and

2019,

the Company recognized equity-based compensation expense related to stock options, SARs, RSUs, PSUs and employee stock purchase plan as follows:

	Year ended December 31,
	2017		2018		2019

Cost of revenue	$	459	$	588	$	630
Research and development, net		3,839		5,141		5,857
Sales and marketing		1,428		1,587		1,495
General and administrative		2,967		3,051		2,736
Total equity-based compensation expense	$	8,693	$	10,367	$	10,718

As of

December 31, 2019,

there was

$97

of unrecognized compensation expense related to unvested stock options, SARs and employee stock purchase plan. This amount is expected to be recognized over a weighted-average period of

1.0

years. As of

December 31, 2019,

there was

$13,969

of unrecognized compensation expense related to unvested RSUs and PSUs. This amount is expected to be recognized over a weighted-average period of

1.5

years.

Fair value of financial instruments

The carrying amount of cash, cash equivalents, short term bank deposits, trade receivables, other accounts receivable, trade payables and other accounts payable approximates fair value due to the short-term maturities of these instruments. Marketable securities and derivative instruments are carried at fair value. See Note

for more information.

Comprehensive income (loss)

The Company accounts for comprehensive income (loss) in accordance with FASB ASC

No.

220,

“Comprehensive Income.” This statement establishes standards for the reporting and display of comprehensive income (loss) and its components in a full set of general purpose financial statements. Comprehensive income (loss) generally represents all changes in stockholders’ equity during the period except those resulting from investments by, or distributions to, stockholders. The Company determined that its items of other comprehensive income (loss) relate to unrealized gains and losses, net of tax, on hedging derivative instruments and marketable securities.

Concentration of credit risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash, cash equivalents, bank deposits, marketable securities, foreign exchange contracts and trade receivables. The Company invests its surplus cash in cash deposits and marketable securities in financial institutions and has established guidelines relating to diversification and maturities to maintain safety and liquidity of the investments.

The majority of the Company’s 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 bank deposits

may

be redeemed on demand and therefore minimal credit risk exists with respect to them. Nonetheless, deposits with these banks exceed the Federal Deposit Insurance Corporation (“FDIC”) insurance limits or similar limits in foreign jurisdictions, to the extent such deposits are even insured in such foreign jurisdictions. Generally, these cash equivalents

may

be redeemed upon demand and, therefore management believes that it bears a lower risk. The short-term and long-term bank deposits are held in financial institutions which management believes are institutions with high credit standing, and accordingly, minimal credit risk from geographic or credit concentration. Furthermore, the Company holds an investment portfolio consisting principally of corporate bonds. The Company has the ability to hold such investments until recovery of temporary declines in market value or maturity; accordingly, as of

December

31,

2019,

the Company believes the losses associated with its investments are temporary and

impairment loss was recognized during

2019.

However, the Company can provide

assurance that it will recover declines in the market value of its investments.

The Company is exposed primarily to fluctuations in the level of U.S. interest rates. To the extent that interest rates rise, fixed interest investments

may

be adversely impacted, whereas a decline in interest rates

may

decrease the anticipated interest income for variable rate investments.

The Company is exposed to financial market risks, including changes in interest rates. The Company typically does

not

attempt to reduce or eliminate its market exposures on its investment securities because the majority of its investments are short-term.

The Company’s trade receivables are geographically diverse, mainly in the Asia Pacific, and also in the United States and Europe. Concentration of credit risk with respect to trade receivables is limited by credit limits, ongoing credit evaluation and account monitoring procedures. The Company performs ongoing credit evaluations of its customers and to date has

not

experienced any material losses. The Company makes judgments on its ability to collect outstanding receivables and provides allowances for the portion of receivables for which collection becomes doubtful. Provisions are made based upon a specific review of all significant outstanding receivables. In determining the provision, the Company considers the expected collectability of receivables.

	Balance at beginning of period		Additions		Deduction		Balance at end of period
Year ended December 31, 2019
Allowance for doubtful accounts	$	—	$	327	$	—	$	327

Year ended December 31, 2018
Allowance for doubtful accounts	$	—	$	—	$	—	$	—

Year ended December 31, 2017
Allowance for doubtful accounts	$	—	$	—	$	—	$	—

The Company has

off-balance-sheet concentration of credit risk.

Derivative and hedging activities

The Company follows the requirements of FASB ASC

No.

815,”

Derivatives and Hedging” which requires companies to recognize all of their derivative instruments as either assets or liabilities in the statement of financial position at fair value. The accounting for changes in fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging transaction and further, on the type of hedging transaction. For those derivative instruments that are designated and qualify as hedging instruments, a company must designate the hedging instrument, based upon the exposure being hedged, as a fair value hedge, cash flow hedge, or a hedge of a net investment in a foreign operation. Due to the Company’s global operations, it is exposed to foreign currency exchange rate fluctuations in the normal course of its business. The Company’s treasury policy allows it to offset the risks associated with the effects of certain foreign currency exposures through the purchase of foreign exchange forward or option contracts (“Hedging Contracts”). The policy, however, prohibits the Company from speculating on such Hedging Contracts for profit. To protect against the increase in value of forecasted foreign currency cash flow resulting from salaries paid in currencies other than the U.S. dollar during the year, the Company instituted a foreign currency cash flow hedging program. The Company hedges portions of the anticipated payroll of its non-U.S. employees denominated in the currencies other than the U.S. dollar for a period of

one

twelve

months with Hedging Contracts. Accordingly, when the dollar strengthens against the foreign currencies, the decline in present value of future foreign currency expenses is offset by losses in the fair value of the Hedging Contracts. Conversely, when the dollar weakens, the increase in the present value of future foreign currency expenses is offset by gains in the fair value of the Hedging Contracts. These Hedging Contracts are designated as cash flow hedges.

For derivative instruments that are designated and qualify as a cash flow hedge (i.e., hedging the exposure to variability in expected future cash flows that is attributable to a particular risk), the gain or loss on the derivative instrument is reported as a component of other comprehensive income (loss) and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings.

As a result of adopting the new accounting guidance discussed in Note

" Recently adopted accounting pronouncements," beginning on

January 1, 2019,

gains and losses on derivative instruments that are designated and qualify as a cash flow hedge are recorded in accumulated other comprehensive income (loss) and reclassified into earnings during the same accounting period in which the designated forecasted transaction or hedged item affects earnings. Prior to

January 1, 2019,

cash flow hedge ineffectiveness was separately measured and reported immediately in earnings. Cash flow hedge ineffectiveness was immaterial during

2017

and

2018.

As of

December

31,

2018

and

2019,

the notional principal amount of the Hedging Contracts to sell U.S. dollars held by the Company was

$9,100

and

$5,500,

respectively.

Advertising expenses

Advertising expenses are charged to consolidated statements of income as incurred. Advertising expenses for the years ended

December 31, 2017,

2018

and

2019

were

$1,118,

$1,080

and

$996,

respectively.

Treasury stock

The Company repurchases its common stock from time to time pursuant to a board-authorized share repurchase program through open market purchases and repurchase plans.

The repurchases of common stock are accounted for as treasury stock, and result in a reduction of stockholders’ equity. When treasury shares are reissued, the Company accounts for the reissuance in accordance with FASB ASC

No.

505

30,

“Treasury Stock” and charges the excess of the repurchase cost over issuance price using the weighted average method to retained earnings. The purchase cost is calculated based on the specific identified method. In the case where the repurchase cost over issuance price using the weighted average method is lower than the issuance price, the Company credits the difference to additional paid-in capital.

Net earnings

per share of common stock

Basic net earnings per share is computed based on the weighted average number of shares of common stock outstanding during each year. Diluted net earnings per share is computed based on the weighted average number of shares of common stock outstanding during each year, plus dilutive potential shares of common stock considered outstanding during the year, in accordance with FASB ASC

No.

260,

“Earnings Per Share.”

	Year ended December 31,
	2017		2018		2019
Numerator :
Net income	$	17,028	$	574	$	28
Denominator (in thousands) :
Basic weighted-average common stock outstanding		21,771		22,034		21,932
Effect of stock-based awards		790		469		391
Diluted weighted-average common stock outstanding		22,561		22,503		22,323

Basic net earnings per share	$	0.78	$	0.03	$	0.00
Diluted net earnings per share	$	0.75	$	0.03	$	0.00

The weighted-average number of shares related to outstanding options, SARs, RSUs and PSUs excluded from the calculation of diluted net income per share, since their effect was anti-dilutive, were

29,892,

161,362

and

184,947

shares for the years ended

December

31,

2017,

2018

and

2019,

respectively.

Recently Issued Accounting Pronouncement

January 2016,

the FASB issued ASU

2016

13,

“Financial Instruments – Credit Losses on Financial Instruments,” which requires that expected credit losses relating to financial assets be measured on an amortized cost basis and available-for-sale debt securities be recorded through an allowance for credit losses. ASU

2016

limits the amount of credit losses to be recognized for available-for-sale debt securities to the amount by which carrying value exceeds fair value and also requires the reversal of previously recognized credit losses if fair value increases. The new standard will be effective for interim and annual periods beginning after

January 1, 2020,

and early adoption is permitted. The Company does

not

expect that this new guidance will have a material impact on the Company's consolidated financial statements.

January 2017,

the FASB issued ASU

No.

2017

04,

Intangibles: Goodwill and Other: Simplifying the Test for Goodwill Impairment. To simplify the subsequent measurement of goodwill, the amendments eliminate Step

from the goodwill impairment test. The annual, or interim, goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should

not

exceed the total amount of goodwill allocated to that reporting unit. In addition, the income tax effects of tax deductible goodwill on the carrying amount of the reporting unit should be considered when measuring the goodwill impairment loss, if applicable. The amendments also eliminate the requirements for any reporting unit with a

zero

or negative carrying amount to perform Step

of the goodwill impairment test. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the qualitative impairment test is necessary. The amendments should be applied on a prospective basis. The nature of and reason for the change in accounting principle should be disclosed upon transition. The amendments in this update should be adopted for annual or any interim goodwill impairment tests in fiscal years beginning after

December

15,

2019.

Early adoption is permitted on testing dates after

January

2017.

The Company does

not

expect that this new guidance will have a material impact on the Company's consolidated financial statements.

December 2019,

the FASB issued Accounting Standard Update

No.

2019

12,

Income Taxes (Topic

740

): Simplifying the Accounting for Income Taxes (ASU

2019

), which simplifies the accounting for income taxes. ASU

2019

is effective for annual reporting periods, and interim periods within those years, beginning after

December 15, 2020.

The Company is currently evaluating the impact of the new guidance on the Company’s consolidated financial statements.