Note A - Basis of Presentation and Summary of Significant Accounting Policies

9 Months Ended

Sep. 30, 2020

Notes to Financial Statements

Significant Accounting Policies [Text Block]

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 nine months ended September 30, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020. 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, 2019.

The significant accounting policies applied in the annual consolidated financial statements of the Company as of December 31, 2019, contained in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 11, 2020, have been applied consistently in these unaudited interim condensed consolidated financial statements, except as noted below.

Recently Issued and Adopted Accounting Pronouncements

On January 1, 2020, the Company adopted Accounting Standards Update (“ASU”) No. 2016-13, “Financial Instruments – Credit Losses on Financial Instruments” (“ASU 2016-13”), 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 2016-13 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. Also, for available-for-sale debt securities with unrealized losses, the standard eliminates the concept of other-than-temporary impairments and requires allowances to be recorded instead of reducing the amortized cost of the investment. The adoption by the Company of the new guidance did not have any impact on the Company’s consolidated financial statements.

Recently Issued Accounting Pronouncements Not Yet Effective

In December 2019, the Financial Accounting Standards Board (“FASB”) issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which simplifies the accounting for income taxes. This guidance will be effective for the first quarter of 2021 on a prospective basis, with early adoption permitted. The Company does not expect the adoption of this guidance to have a material impact 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.

Acquisition of SoundChip

In July 2020, the Company completed the acquisition of SoundChip SA, a privately-held Swiss company (“SoundChip”).

SoundChip is a leading supplier of active noise cancellation (ANC) technology, engineering services, design tools and production-line test systems for headsets. The acquisition combines SoundChip’s proven capabilities in hybrid ANC with the Company’s SmartVoice™ advanced low-power voice processing platform, algorithms, and mixed-signal expertise to streamline the delivery of cutting-edge wireless and true wireless stereo (TWS) headsets, from concept through to manufacturing.

The Company paid an initial purchase price of approximately $15 million (with a portion held in escrow in accordance with the agreement terms) on July 1, 2020 (the “Initial Purchase Price”) and agreed to pay future contingent cash milestone payments of up to $6 million upon the achievement of certain customer and product sales milestones during the period from July 1, 2020 to December 31, 2022. Transaction costs related to this acquisition amounted to approximately $0.3 million and were included in general and administrative expenses.

The results of operations of SoundChip have been included in the Company’s consolidated financial statements since July 1, 2020. The Company did not provide pro forma financial statements in accordance with ASC 810 for the SoundChip acquisition due to the immateriality of such acquisition.

Based upon a valuation of the tangible and intangible assets acquired and liabilities assumed, the Company has allocated the total purchase price of the acquisition of SoundChip as follows:

	As of July 1, 2020
Cash	$	443
Property and equipment		456
Current assets		2,301
Other non-current assets		1,042
Current liabilities		(971	)
Other long-term liabilities		(1,945	)
Net tangible assets acquired		1,327
Deferred tax liability		(1,121	)
Intangible assets:
Developed technology		7,189
Backlog		54
Customer relationships		678
Total intangible assets		7,921
Goodwill		6,826
Net assets acquired	$	14,952

In performing the purchase price allocation, the Company considered, among other factors, the intention for future use of the acquired assets, analyses of historical financial performance and estimates of future performance of SoundChip’s products.  The fair value of the intangible assets was based on a valuation completed by a third-party valuation firm using an income approach and estimates and assumptions provided by management.

The Company is currently within the one-year measurement period with respect to the acquisition date, and thus, future material adjustments to these purchase accounting fair value adjustments are possible.

The amount allocated to developed technology was determined using the income approach, on the basis of the present value of cash flows attributable to the developed technology and is amortized on a straight-line basis over 6.5 years.

The amount allocated to customer relationships was determined using the income approach, on the basis of the present value of cash flows attributable to the existing customers and is amortized on a straight-line basis over 9.5 years.

The excess of the purchase price of $6,826 over the net tangible assets and identifiable intangible assets acquired in the acquisition of SoundChip is recognized as goodwill.  An acquired workforce and control premium that did not meet the separability criteria has been included in the amount assigned to goodwill.  The goodwill recognized represents mainly the synergies the Company expects from the acquisition, both in revenues and expenses, and the expected benefits to the Company of the acquisition. The goodwill recognized for this acquisition is related to the Company’s SmartVoice segment.