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

nine

months ended

September

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 below in “Recently 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

nine

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 the Company’s adoption of ASC

606

on the Company’s balance sheet was a decrease in accumulated deficit as of

January 1, 2018

$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 September 3 0 , 2018
	As Reported		Prior to Adoption of ASC 606			Effect of Change Higher/(Lower)
Income statement

Revenues	$	32,619	$	31,553		$	1,066
Cost of revenues		16,315		15,934			382
Gross margin:		16,304		15,619			684
Operating expenses:
Research and development, net		9,614		9,614			-
Sales and marketing		3,640		3,579			60
General and administrative		2,362		2,362			-
Intangible assets amortization		425		425			-
Total operating expenses:		16,041		15,980			60
Operating loss:		263		(361	)		624
Financial income		492		492			-
Loss before taxes on income		755		131			624
Taxes on income		350		350			-
Net income (loss)		405		(219	)		624

	For the nine months ended September 30, 2018
	As Reported			Prior to Adoption of ASC 606			Effect of Change Higher/(Lower)
Income statement

Revenues	$	91,381		$	89,335		$	2,046
Cost of revenues		46,311			45,553			758
Gross margin:		45,070			43,782			1,288
Operating expenses:
Research and development, net		27,503			27,503			-
Sales and marketing		11,468			11,357			111
General and administrative		7,612			7,612			-
Intangible assets amortization		1,276			1,276			-
Total operating expenses:		47,859			47,748			111
Operating loss:		(2,789	)		(3,966	)		1,177
Financial income		1,291			1,291			-
Loss before taxes on income		(1,498	)		(2,675	)		1,177
Taxes on income		139			139			-
Net loss		(1,637	)		(2,814	)		1,177

	September 3 0 , 2018
	As Reported			Prior to Adoption of ASC 606			Effect of Change Higher/(Lower)
Balance Sheet
Assets
Trade receivables	$	21,448		$	19,285		$	2,163
Inventories		8,247			9,023			(776	)
Other accounts receivable and prepaid expenses		2,843			2,959			(116	)


Liabilities
Accrued expenses and other accounts payable		(3,783	)		(3,783	)		-


Equity
Accumulated deficit		(110,873	)		(112,143	)		1,271

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 aggregate 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 for all periods presented effective as of

January 1, 2018.

Recent Accounting Pronouncements

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 non-employees. 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 the 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.