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

-Q and Article

of Regulation S-

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,

2018

are

not

necessarily indicative of the results that

may

be expected for the year ending

December

31,

2018.

For further information, reference is made to the consolidated financial statements and footnotes thereto included in the Annual Report on Form

-K of DSP Group, Inc. (the "Company") for the year ended

December

31,

2017.

The significant accounting policies applied in the annual consolidated financial statements of the Company as of

December 31, 2017,

contained in the Company’s Annual Report on Form

-K filed with the Securities and Exchange Commission on

March 16, 2018,

have been applied consistently in these unaudited interim condensed consolidated financial statements, except for, changes associated with recent accounting standards for revenue recognition as detailed in Note

“Recent Adopted Accounting Pronouncements.”

Recent

Adopted

Accounting Pronouncements

May 2014,

the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”)

2014

09,

“Revenue from Contracts with Customers (Topic

606

)” (“ASU

2014

09”

), which amends the existing accounting standards for revenue recognition. On

January 1, 2018,

the Company adopted Accounting Standards Codification (“ASC”)

606,

“Revenue from Contracts with Customers” and all the related amendments (collectively “ASC

606”

) using the modified retrospective method. The Company recognized the cumulative effect of initially applying ASC

606

as an adjustment to the opening balance of retained earnings. The comparative information has

not

been restated and continues to be reported under the revenue recognition standards in effect for those periods. The reported results for the

first

six

months of

2018

reflect the application of ASC

606

guidance while the reported results for

2017

were prepared under the guidance of ASC

605,

"Revenue Recognition (ASC

605

)". The impact of our adoption of Topic

606

on our balance sheet was a decrease in accumulated deficit as of

January 1, 2018

of $

94.

Under ASC

606,

certain product sales through the Company’s distributors where revenue was previously deferred until the distributors resold the Company’s products to the end customers are now recognized when products are delivered to the distributor. Revenues are recognized when control of the promised goods or services are transferred to our customers in an amount that reflects the consideration that we expect 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’s contracts with customers for the sale of products generally include

one

performance obligation. The Company has concluded that revenue from sale of products should be recognized at the point in time when control of the asset is transferred to the customer, generally on delivery of the products.

In accordance with the ASC

606

requirements, the disclosure of the impact of adoption of ASC

606

on the Company’s consolidated income statement and balance sheet was as follows (in thousands):

	For the three months ended June 3 0 , 2018
	As Reported			Prior to Adoption of ASC 606			Effect of Change Higher/(Lower)
Income statement

Revenues	$	30,651		$	30,625		$	26
Cost of revenues		15,598			15,602			(4	)
Gross margin:		15,053			15,023			30
Operating expenses:
Research and development, net		8,891			8,891			-
Sales and marketing		3,761			3,763			(2	)
General and administrative		2,669			2,669			-
Intangible assets amortization		425			425			-
Total operating expenses:		15,746			15,748			(2	)
Operating loss:		(693	)		(725	)		32
Financial income		403			403			-
Loss before taxes on income		(290	)		(322	)		32
Taxes on income		(2	)		(2	)		-
Net Loss		(288	)		(320	)		32

	For the six months ended June 3 0 , 2018
	As Reported			Prior to Adoption of ASC 606			Effect of Change Higher/(Lower)
Income statement

Revenues	$	58,762		$	57,782		$	980
Cost of revenues		29,995			29,619			376
Gross margin:		28,767			28,163			604
Operating expenses:
Research and development, net		17,889			17,889			-
Sales and marketing		7,829			7,778			51
General and administrative		5,250			5,250			-
Intangible assets amortization		850			850			-
Total operating expenses:		31,818			31,767			51
Operating loss:		(3,051	)		(3,604	)		553
Financial income		799			799			-
Loss before taxes on income		(2,252	)		(2,805	)		553
Taxes on income		(211	)		(211	)		-
Net Loss		(2,041	)		(2,594	)		553

	June 3 0 , 2018
	As Reported			Prior to Adoption of ASC 606			Effect of Change Higher/(Lower)
Balance Sheet
Assets
Trade receivables	$	16,622		$	15,526		$	1,096
Inventories		8,366			8,760			(394	)
Other accounts receivable and prepaid expenses		3,196			3,251			(55	)


Liabilities
Accrued expenses and other accounts payable		(2,746	)		(2,746	)		-


Equity
Accumulated deficit		(110,420	)		(111,067	)		647

August 2016,

FASB issued ASU

2016

15,

Statement of Cash Flows (Topic

230

) Classification of Certain Cash Receipts and Cash Payments. ASU

2016

eliminates the diversity in practice related to the classification of certain cash receipts and payments for debt prepayment or extinguishment costs, the maturing of a

zero

coupon bond, the settlement of contingent liabilities arising from a business combination, proceeds from insurance settlements, distributions from certain equity method investees and beneficial interests obtained in a financial asset securitization. ASU

2016

designates the appropriate cash flow classification, including requirements to allocate certain components of these cash receipts and payments among operating, investing and financing activities. The retrospective transition method, requiring adjustment to all comparative periods presented, is required unless it is impracticable for some of the amendments, in which case those amendments would be prospectively as of the earliest date practicable. The Company adopted the standard effective as of

January 1, 2018,

and the adoption of this standard did

not

have an impact on the Company's consolidated financial statements.

November 2016,

FASB issued ASU

2016

18,

Statement of Cash Flows (Topic

230

): Restricted Cash. This standard requires the presentation of the statement of cash flows to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents. The standard is effective for fiscal years and the interim periods within those fiscal years beginning after

December 15, 2017.

The Company adopted the standard retrospectively to all periods presented effective as of

January 1, 2018.

February 2016,

FASB issued ASU

2016

-Leases (ASC

842

), which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e. lessees and lessors). The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or

not

the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than

twelve

months regardless of their classification. Leases with a term of

twelve

months or less will be accounted for similar to existing guidance for operating leases. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. ASC

842

supersedes the previous leases standard, ASC

840.

The standard is effective on

January 1, 2019,

with early adoption permitted. The Company currently anticipates adopting the new standard effective

January 1, 2019

and is evaluating the impact of the adoption of this standard on its consolidated financial statements.

June 2018,

FASB issued ASU

2018

to expand the scope of ASC Topic

718,

Compensation - Stock Compensation, to include share-based payment transactions for acquiring goods and services from nonemployees. The pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning after

December 15, 2018,

with early adoption permitted. The Company is evaluating the effects of this standard on its consolidated financial statements.

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.