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 ~~March 31,~~June 30, 2020

☐

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 ~~class~~exchange on which registered
Common Stock, $.001 per share	~~Trading Symbol(s)~~DSPG	~~Name of each exchange on which registered~~The NASDAQ Stock Market LLC
~~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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting ~~company, or an emerging growth~~ company. See definition of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one).

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 ~~May 1,~~August 3, 2020, there were ~~23,207,806~~23,515,571 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—~~March 31,~~June 30, 2020 and December 31, 2019	2
	Condensed consolidated statements of operations—Three ~~months~~and six month periods ended ~~March 31,~~June 30, 2020 and 2019	4
	Condensed consolidated statements of ~~cash flows—~~comprehensive income—Three ~~months~~and six month periods ended ~~March 31,~~June 30, 2020 and 2019	65
	Condensed consolidated statements of cash flows—Six month periods ended June 30, 2020 and 2019	7
	Condensed consolidated statements of stockholders’ equity—Three ~~months~~and six month periods ended ~~March 31,~~June 30, 2020 and 2019	89
	Notes to condensed consolidated financial statements—~~March 31,~~June 30, 2020	911
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2226
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	3338
Item 4.	Controls and Procedures	3339

*PART II. OTHER INFORMATION*

Item 1.	Legal Proceedings	3439
Item 1A.	Risk Factors	3439
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	5055
Item 3.	Defaults Upon Senior Securities	5055
Item 4.	Mine Safety Disclosure	5055
Item 5.	Other Information	5055
Item 6.	Exhibits	5055

SIGNATURES		5256

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)

	March 31, 2020		December 31, 2019		June 30, 2020		December 31, 2019
	Unaudited		Audited		Unaudited		Audited
ASSETS

CURRENT ASSETS:
Cash and cash equivalents	$	35,285	$	28,737	$	38,198	$	28,737
Restricted deposit		500		518		512		518
Marketable securities and short-term deposits		40,595		39,141		50,645		39,141
Trade receivables		13,881		15,382		10,564		15,382
Other accounts receivable and prepaid expenses		3,553		3,551		3,829		3,551
Inventories		8,017		7,464		8,127		7,464

TOTAL CURRENT ASSETS		101,831		94,793		111,875		94,793

PROPERTY AND EQUIPMENT, NET		6,697		6,805		6,582		6,805

NON-CURRENT ASSETS:
Long-term marketable securities		51,974		62,884		48,171		62,884
Operating leases right of use		11,182		11,655
Operating lease right of use						10,987		11,655
Long-term prepaid expenses and lease deposits		820		707		850		707
Deferred income taxes		6,567		6,377		6,607		6,377
Severance pay fund		15,225		15,800		15,605		15,800
Intangible assets, net		557		661		452		661
Goodwill		6,243		6,243		6,243		6,243

		92,568		104,327		88,915		104,327
TOTAL NON-CURRENT ASSETS

TOTAL ASSETS	$	201,096	$	205,925	$	207,372	$	205,925

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

DSP GROUP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

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

March 31,
2020

December 31,
2019

Unaudited

Audited

LIABILITIES AND STOCKHOLDERS’ EQUITY

CURRENT LIABILITIES:

Trade payables
$ 9,041 $ 8,511
Accrued compensation and benefits
6,620 8,781
Income tax accruals and payables
3,375 3,061
Operating lease liability
2,388 2,569
Accrued expenses and other accounts payable
3,347 2,317

TOTAL CURRENT LIABILITIES
24,771 25,239

							June 30, 2020			December 31, 2019
							Unaudited			Audited
LIABILITIES AND STOCKHOLDERS’ EQUITY

CURRENT LIABILITIES:
Trade payables							$	9,127		$	8,511
Accrued compensation and benefits								9,193			8,781
Income tax accruals and payables								3,444			3,061
Operating lease liability								2,404			2,569
Accrued expenses and other accounts payable								3,560			2,317

TOTAL CURRENT LIABILITIES								27,728			25,239

NON-CURRENT LIABILITIES:
Deferred income taxes		101			119			82			119
Accrued severance pay		15,568			16,074			16,059			16,074
Operating lease liability		9,726			10,436			9,768			10,436
Accrued pensions		951			963			973			963

TOTAL NON-CURRENT LIABILITIES		26,346			27,592			26,882			27,592


STOCKHOLDERS’ EQUITY:
Capital stock:

Common stock, $ 0.001 par value -
Authorized shares: 50,000,000 shares at March 31, 2020 (unaudited) and December 31, 2019;
Issued and outstanding shares: 23,204,867 and 23,110,631 shares at March 31, 2020 (unaudited) and December 31, 2019, respectively		23			23
Authorized shares: 50,000,000 shares at June 30, 2020 and December 31, 2019;
Issued and outstanding shares: 23,410,026 and 23,110,631 shares at June 30, 2020 and December 31, 2019, respectively								23			23
Additional paid-in capital		388,387			386,534			390,734			386,534
Treasury stock at cost		(113,532	)		(113,862	)		(111,532	)		(113,862	)
Accumulated other comprehensive loss		(1,124	)		(889	)		(554	)		(889	)
Accumulated deficit		(123,775	)		(118,712	)		(125,909	)		(118,712	)

TOTAL STOCKHOLDERS’ EQUITY		149,979			153,094			152,762			153,094

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	201,096		$	205,925		$	207,372		$	205,925

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

DSP GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

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

	Three months ended
	March 31,						Three months ended						Six months ended
	2020			2019			June 30,						June 30,
							2020			2019			2020			2019
Revenues	$	28,239		$	28,276		$	28,336		$	29,034		$	56,575		$	57,310
Cost of revenues (1)		13,858			13,820			14,075			14,615			27,934			28,435

Gross profit		14,381			14,456			14,261			14,419			28,641			28,875
Operating expenses:
Research and development, net (2)		10,354			8,922			8,455			8,559			18,809			17,481
Sales and marketing (3)		5,011			4,483			4,435			4,386			9,446			8,869
General and administrative (4)		2,348			2,555			2,627			2,674			4,975			5,229
Intangible assets amortization		104			104			104			104			208			208
Total operating expenses		17,817			16,064			15,621			15,723			33,438			31,787
Operating loss		(3,436	)		(1,608	)		(1,360	)		(1,304	)		(4,797	)		(2,912	)
Financial income, net		903			313
Loss before income tax benefit		(2,533	)		(1,295	)
Income tax benefit		68			229

Financial income								289			400			1,192			713
Loss before taxes on income								(1,071	)		(904	)		(3,605	)		(2,199	)
Tax on income (tax benefit)								6			(383	)		(62	)		(612	)
Net loss	$	(2,465	)	$	(1,066	)	$	(1,077	)	$	(521	)	$	(3,543	)	$	(1,587	)
Net loss per share:
Basic and diluted	$	(0.11	)	$	(0.05	)
Basic and Diluted							$	(0.05	)	$	(0.02	)	$	(0.15	)	$	(0.07	)

Weighted average number of shares used in per share computations of net loss
Basic and diluted		23,342			22,542


Weighted average number of shares used in per share computations of net loss:
Basic and Diluted								23,301			22,757			23,321			22,650

(1)	Includes equity-based compensation expense in the amount of ~~$120~~$129 and ~~$115~~$122 for the three months ended ~~March 31,~~June 30, 2020 and 2019, and $249 and $237 for the six months ended June 30, 2020 and 2019, respectively.

(2)	Includes equity-based compensation expense in the amount of ~~$751~~$826 and ~~$750~~$775 for the three months ended ~~March 31,~~June 30, 2020 and 2019, respectively; and $1,577 and $1,525 for the six months ended June 30, 2020 and 2019, respectively.

(3)	Includes equity-based compensation expense in the amount of ~~$555~~$620 and ~~$402~~$474 for the three months ended ~~March 31,~~June 30, 2020 and 2019, respectively; and $1,175 and $876 for the six months ended June 30, 2020 and 2019, respectively.

(4)	Includes equity-based compensation expense in the amount of ~~$406~~$706 and ~~$638~~$689 for the three months ended ~~March 31,~~June 30, 2020 and 2019, respectively; and $1,112 and $1,327 for the six months ended June 30, 2020 and 2019, respectively.

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

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(UNAUDITED) (U.S. dollars in thousands)

	Three months ended March 31,						Three months ended June 30,
	2020			2019			2020			2019

Net loss:	$	(2,465	)	$	(1,066	)	$	(1,077	)	$	(521	)
Other comprehensive income (loss):
Other comprehensive loss:
Available-for-sale securities:
Changes in unrealized gains (losses)		(249	)		751
Reclassification adjustments for (gains) losses included in net loss		(7	)		47

Changes in unrealized gains								630			598
Reclassification adjustments for gains included in net loss								(4	)		(3	)
Net change		(256	)		798			626			595

Cash flow hedges:
Changes in unrealized gains		35			105			17			3
Reclassification adjustments for gains included in net loss		-			(83	)		(52	)		(23	)

Net change		35			22			(35	)		(20	)

Change in unrealized components of defined benefit plans:
Amortization of actuarial loss and prior service benefit		6			4			6			4

Net change		6			4			6			4

Foreign currency translation adjustments, net		(20	)		(25	)		(27	)		-

Other comprehensive income (loss)		(235	)		799
Other comprehensive income								570			579

Comprehensive loss	$	(2,700	)	$	(267	)
Comprehensive income (loss)							$	(507	)	$	58

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

CONDENSEDCONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(UNAUDITED)(U.S. dollars in thousands)

	Six months ended June 30,
	2020			2019

Net loss:	$	(3,543	)	$	(1,587	)
Other comprehensive loss:
Available-for-sale securities:
Changes in unrealized gains		382			1,350
Reclassification adjustments for (gains) losses included in net loss		(12	)		43
Net change		370			1,393
Cash flow hedges:
Changes in unrealized gains		52			108
Reclassification adjustments for gains included in net loss		(52	)		(105	)

Net change		-			3

Change in unrealized components of defined benefit plans:
Amortization of actuarial loss and prior service benefit		12			8

Net change		12			8

Foreign currency translation adjustments, net		(47	)		(26	)

Other comprehensive income		335			1,378

Comprehensive loss	$	(3,207	)	$	(209	)

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

DSP GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(U.S. dollars in thousands)

	Three months ended March 31,						Six months ended June 30,
	2020			2019			2020			2019
Cash flows from operating activities:

Net loss	$	(2,465	)	$	(1,066	)	$	(3,543	)	$	(1,587	)
Adjustments required to reconcile net loss to net cash provided by (used in) operating activities:
Adjustments required to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation		396			330			801			722
Equity-based compensation expenses related to employees’ stock options, SARs and RSUs		1,832			1,905			4,113			3,965
Realized losses (gains) from sale of marketable securities, net		(7	)		47			(12	)		43
Capital loss (gain) from sale and disposal of property and equipment		(43	)		10
Operating lease right-of-use asset amortization expenses		727			591
Capital (gain) loss from sale and disposal of property and equipment								(44	)		35
Amortization of intangible assets								208			208
Operating lease amortization expenses								1,228			950
Change in operating lease liability		(1,145	)		(284	)		(1,393	)		(437	)
Amortization of intangible assets		104			104
Accrued interest and amortization of premium on marketable securities and deposits		126			50			170			24
Change in operating assets and liabilities:
Deferred income tax assets and liabilities, net		(211	)		(522	)		(268	)		(1,315	)
Trade receivables, net		1,485			(2,171	)		4,812			(3,678	)
Other accounts receivable and prepaid expenses		29			(58	)		(277	)		414
Inventories		(555	)		534			(660	)		624
Long-term prepaid expenses and lease deposits		(113	)		(77	)		(142	)		80
Trade payables		532			(2,298	)		616			(1,720	)
Accrued compensation and benefits		(1,132	)		(164	)		1,434			497
Income tax accruals		328			202			378			507
Accrued expenses and other accounts payable		938			(666	)		1,243			119
Accrued severance pay, net		69			39			180			-
Accrued pensions		9			8			19			17

Net cash provided by (used in) operating activities		904			(3,486	)		8,863			(532	)

Cash flows from investing activities:

Purchase of marketable securities		(11,336	)		(9,931	)		(43,587	)		(16,543	)
Purchase of short-term deposits								(5,000	)		(3,000	)
Proceeds from maturity of marketable securities		16,684			8,545			39,439			13,555
Proceeds from sales of marketable securities		5,734			4,150			9,558			4,988
Purchase of short-term deposits		(2,000	)		-
Proceeds from redemption of short-term deposits		-			1,572			3,000			5,974
Proceeds from sale of fixed assets								44			23
Purchases of property and equipment		(290	)		(1,944	)		(577	)		(3,892	)
Decrease in restricted deposits		17			-			17			-
Proceeds from sale of fixed assets		43			9

Net cash provided by investing activities	$	8,852		$	2,401		$	2,894		$	1,105

	Three months ended March 31,						Six months ended June 30,
	2020			2019			2020			2019
Cash flows from financing activities:

Issuance of common stock and treasury stock upon exercise of stock options	$	172		$	938		$	1,477		$	1,097
Purchase of treasury stock		(3,350	)		-			(3,736	)		-

Net cash provided by (used in) financing activities		(3,178	)		938			(2,259	)		1,097

Increase (decrease) in cash and cash equivalents		6,578			(147	)
Cash and cash equivalents at the beginning of the period		28,737			12,639
Increase in cash and cash equivalents								9,498			1,670
Cash and cash equivalents at the beginning of the year								28,737			12,639
Erosion due to exchange rate differences		(30	)		(24	)		(37	)		(23	)

Cash and cash equivalents at the end of the period	$	35,285		$	12,468
Cash and cash equivalents at the end of the year							$	38,198		$	14,286

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

DSP GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(UNAUDITED)

(U.S. dollars in thousands)

Three Months Ended March 31, 2019	Number of common stock			Common stock		Additional paid-In capital		Treasury stock			Accumulated deficit			Accumulated other comprehensive income (loss)			Total stockholders’ equity
Balance at December 31, 2018		22,266		$	22	$	378,855	$	(122,325	)	$	(112,363	)	$	(2,324	)	$	141,865
Three months ended June 30, 2019																				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, 2019																					22,701		$	23	$	380,777	$	(117,968	)	$	(115,894	)	$	(1,525	)	$	145,413
Net loss		-			-		-		-			(1,066	)		-			(1,066	)		-			-		-		-			(521	)		-			(521	)
Change in accumulated other comprehensive income		-			-		-		-			-			799			799			-			-		-		-			-			579			579
Issuance of treasury stock upon purchase of common stock under employee stock purchase plan		102			*) -		-		1,023			(51	)		-			972
Purchase of treasury stock																					-			-		-		-			-			-			-

Issuance of treasury stock upon exercise of stock options, stock appreciation rights and vesting of restricted stock units by employees and directors		333			1		17		3,334			(2,414	)		-			938			102			*)		12		1,028			(882	)		-			158
Equity-based compensation		-			-		1,905		-			-			-			1,905						-		2,060		-			-			-			2,060
Balance at March 31, 2019		22,701		$	23	$	380,777	$	(117,968	)	$	(115,894	)	$	(1,525	)	$	145,413
Three Months Ended March 31, 2020
Balance at December 31, 2019		23,111		$	23	$	386,534	$	(113,862	)	$	(118,712	)	$	(889	)	$	153,094
Balance at June 30, 2019																					22,803		$	23	$	382,849	$	(116,940	)	$	(117,297	)	$	(946	)	$	147,689
Three months ended June 30, 2020
Balance at March 31, 2020																					23,205		$	23	$	388,387	$	(113,532	)	$	(123,775	)	$	(1,124	)	$	149,979
Net loss		-			-		-		-			(2,465	)		-			(2,465	)		-			-		-		-			(1,077	)		-			(1,077	)
Change in accumulated other comprehensive income																					-			-		-		-			-			570			570
Purchase of treasury stock		(282	)		*) -		-		(3,443	)		-						(3,443	)		(22	)		*)		-		(294	)		-			-			(294	)
Change in accumulated other comprehensive income		-			-		-		-			-			(235	)		(235	)
Issuance of treasury stock upon purchase of common stock under employee stock purchase plan		104			*) -		-		1,052			(28	)		-			1,024

Issuance of treasury stock upon exercise of stock options, stock appreciation rights and vesting of restricted stock units by employees and directors		272			*) -		21		2,721			(2,570	)		-			172			227			*)		66		2,294			(1,057	)		-			1,303
Equity-based compensation		-			-		1,832		-			-			-			1,832						-		2,281		-			-			-			2,281
Balance at March 31, 2020		23,205		$	23	$	388,387	$	(113,532	)	$	(123,775	)	$	(1,124	)	$	149,979
Balance at June 30, 2020																					23,410		$	23	$	390,734	$	(111,532	)	$	(125,909	)	$	(554	)	$	152,762

(*) Represents an amount lower than $1.

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

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, 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
Change in accumulated other comprehensive income		-			-		-		-			-			-			-
Purchase of treasury stock		-			-		-		-			-			-			-
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
Six months ended June 30, 2020
Balance at December 31, 2019		23,111		$	23	$	386,534	$	(113,862	)	$	(118,712	)	$	(889	)	$	153,094
Net loss		-			-		-		-			(3,543	)		-			(3,543	)
Change in accumulated other comprehensive income		-			-		-		-			-			335			335
Purchase of treasury stock		(305	)		*)		-		(3,736	)		-			-			(3,736	)
Issuance of treasury stock upon purchase of common stock under employee stock purchase plan		105			*)		-		1,052			(30	)		-			1,022
Issuance of treasury stock upon exercise of stock options, stock appreciation rights and restricted stock units by employees and directors		499			*)		87		5,014			(3,624	)		-			1,477
Equity-based compensation		-			-		4,113		-			-			-			4,113
Balance at June 30, 2020		23,410		$	23	$	390,734	$	(111,532	)	$	(125,909	)	$	(554	)	$	152,762

(*) Represents an amount lower than $1.

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

DSP GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

~~March 31, 2020~~June 30, 2020

(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~~10-Q and Article 10 of Regulation ~~S-X.~~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 ~~three~~six months ended ~~March 31,~~ June 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~~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~~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:~~below.

Recently Issued and Adopted Accounting Pronouncements

On January 1, 2020, the Company adopted Accounting Standards Update (“ASU”) No. ~~2016-13,~~2016-13, “Financial Instruments – Credit Losses on Financial ~~Instruments,”~~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~~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 ~~a material~~any impact on the Company’s consolidated financial statements.

The condensed consolidated financial statements for the three months ended March 31, 2020 are presented under the new standard, while comparative periods presented are not adjusted and continue to be reported in accordance with the Company’s historical accounting policy.

Recently Issued Accounting Pronouncements Not Yet Effective

In December 2019, the Financial Accounting Standards Board ~~(FASB)~~(“FASB”) issued ~~Accounting Standard Update No. 2019-12,~~ASU 2019-12, Income Taxes (Topic ~~740)~~740): Simplifying the Accounting for Income Taxes ~~(ASU 2019-12)~~, 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.

911

NOTE B— Operating Leases

The Company has entered into various non-cancelable operating lease agreements ~~for certain~~ 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 ~~March 31,~~June 30, 2020 was $691 and ~~2019 was $709 and $742,~~$1,400, respectively, out of which an amount of ~~$709~~$691 and ~~$742, respectively,~~$1,400 represented the total cash paid for amounts included in the measurement of operating lease liabilities during the three and six months ended ~~March 31,~~June 30, 2020, respectively.

Total operating lease cost during the threeand ~~2019.~~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.

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

	Three months ended March 31						June 30, 2020			June 30, 2019
	2020			2019
	(Unaudited)
Weighted-average remaining lease term – operating leases (years)		7.90			8.26
Weighted-average remaining lease term – operating leases (in years)								7.70			8.32
Weighted-average discount rate – operating leases		5.06	%		4.96	%		5.05	%		4.98	%

As of ~~March 31,~~June 30, 2020, and 2019 (unaudited), the Company’s operating lease liabilities were as follows:

	Operating Leases
				June 30, 2020			June 30, 2019
Gross lease liabilities	$	15,078		$	15,022		$	15,512

Less: imputed interest		(2,964	)		(2,850	)		(3,062	)

Present value of lease liabilities		12,114			12,172			12,450
Less: current portion of lease liabilities		(2,388	)		(2,404	)		(2,088	)
Total long-term lease liabilities	$	9,726		$	9,768		$	10,362

NOTE c—C—INVENTORIES

Inventories are stated at the lower of cost or ~~market~~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:

	March 31, 2020		December 31, 2019		June 30, 2020		December 31, 2019
	(Unaudited)		(Audited)		(Unaudited)		(Audited)

Work-in-process	$	4,758	$	4,512	$	4,285	$	4,512
Finished goods		3,259		2,952		3,842		2,952

	$	8,017	$	7,464	$	8,127	$	7,464

~~For the three months ended March 31, 2020, the Company did not record any inventory write-off expenses.~~

For the ~~three~~six months ended ~~March 31, 2019,~~June 30,2020, the Company recorded ~~$93~~$91 of income due to the utilization of inventory that was written off in the past.

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.

NOTE d—D—NET LOSS PER SHARE

Basic net loss per share isare 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 ~~includes~~include the effect of dilutive stock options, stock appreciation rights and restricted share units outstanding during the period, all in accordance with FASB ~~ASC~~ Accounting Standard Codification (“ASC”) No.260 “Earnings per Share.” The following table sets forth the computation of basic and diluted net loss per share:

Three months ended
March 31,

2020

2019

(Unaudited)

Net loss
$ (2,465 ) $ (1,066 )
Loss per share:

Basic and diluted
$ (0.11 ) $ (0.05 )

Weighted average number of shares of common stock outstanding during the period used to compute basic net loss per share (in thousands)
23,342 22,542
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)
23,342 22,542

	Three months ended June 30,						Six months ended June 30,
	2020			2019			2020			2019
	(Unaudited)
Net loss	$	(1,077	)	$	(521	)	$	(3,543	)	$	(1,587	)
Loss per share:
Basic and Diluted	$	(0.05	)	$	(0.02	)	$	(0.15	)	$	(0.07	)

Weighted average number of shares of common stock outstanding during the period used to compute basic net loss per share (in thousands)		23,301			22,757			23,321			22,650
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)		23,301			22,757			23,321			22,650

NOTE eE — MARKETABLE SECURITIES and time deposits

The Company accounts for investments in marketable securities in accordance with FASB ASC ~~No.320-10~~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 ~~March 31,~~June 30, 2020 and December 31,2019:

Amortized cost

Unrealized losses, net

Fair value

March 31,
2020

December 31,
2019

March 31,
2020

December 31,
2019

March 31,
2020

December 31,
2019

(Unaudited)

(Audited)

(Unaudited)

(Audited)

(Unaudited)

(Audited)

Short-term deposits
17,079 $ 15,067 - $ - $ 17,079 $ 15,067
Long-term deposits
- - - - - -
U.S. GSE securities
4,535 4,468 12 (6 ) 4,547 4,462
Corporate obligations
71,278 82,556 (335 ) (60 ) 70,943 82,496

$ 92,892 $ 102,091 $ (323 ) $ (66 ) $ 92,569 $ 102,025

	Amortized cost				Unrealized losses, net					Fair value
	June 30, 2020		December 31, 2019		June 30, 2020		December 31, 2019			June 30, 2020		December 31, 2019
	(Unaudited)		(Audited)		(Unaudited)		(Audited)			(Unaudited)		(Audited)

Short-term deposits		17,152	$	15,067	$	-	$	-			17,152	$	15,067
U.S. GSE securities		2,412		4,468		6		(6	)		2,418		4,462
Corporate obligations		78,950		82,556		296		(60	)		79,246		82,496

	$	98,514	$	102,091	$	302	$	(66	)	$	98,816	$	102,025

The amortized cost of marketable debt securities at ~~March 31,~~ June 30,2020, by contractual maturities, is shown ~~below:~~below (unaudited):

			Unrealized gains (losses)									Unrealized gains (losses)
	Amortized cost		Gains		Losses			Fair value		Amortized cost		Gains		Losses			Fair value

Due in one year or less	$	23,525	$	31	$	(40	)	$	23,516	$	33,355	$	157	$	(19	)	$	33,493
Due after one year to five years		52,288		150		(464	)		51,974		48,007		395		(231	)		48,171

	$	75,813	$	181	$	(504	)	$	75,490	$	81,362	$	552	$	(250	)	$	81,664

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

Available-for-sale debt securities with an amortized cost basis in excess of estimated fair value are assessed to determine what amount of that difference, if any, is caused by expected credit losses. Expected credit losses on available-for-sale debt securities are recognized in interest and other income (expense), net on ~~our~~the Company’s condensed consolidated statements of income, and any remaining unrealized losses, net of taxes, are included in accumulated other comprehensive loss in stockholders' equity. As of ~~March 31,~~June 30, 2020, the Company did not record an allowance for credit losses for its available-for-sale marketable debt securities. The Company has not recorded any impairment charge for unrealized losses in the periods presented. The Company determines realized gains or losses on sale of marketable securities on a specific identification method, and records such gains or losses as interest and other income (expense), net.

The total fair value of marketable securities with outstanding unrealized losses as of ~~March 31,~~June 30, 2020 amounted to ~~$44,913,~~$38,092, while the unrealized losses for these marketable securities amounted to ~~$504.~~$250. Of the ~~$504~~$250 unrealized losses outstanding as of ~~March 31,~~June 30, 2020, a portion of which in anthe amount of ~~$15 relates~~$1 related to marketable securities that were in a loss position for more than 12 months and the remaining portion in anthe amount of ~~$489 relates~~$249 was related to marketable securities that were in a loss position for less than 12 months.

Proceeds from maturity of available-for-sale marketable securities during the ~~three~~six months ended ~~March 31,~~June 30, 2020 and 2019 were ~~$16,684~~$39,439 and ~~$8,545,~~$13,555, respectively. Proceeds from sales of available-for-sale marketable securities during the ~~three~~six months ended ~~March 31,~~June 30, 2020 and 2019 were ~~$5,734~~$9,558 and ~~$4,150,~~$4,988, respectively. Net realized gains from the sale of available-for-sale securities for the ~~three~~six months ended ~~March 31,~~June 30, 2020 were $7$12 compared to net realized losses for the ~~three~~six months ended ~~March 31,~~June 30, 2019 of ~~$47.~~$43. The Company determines realized gains or losses on the sale of marketable securities based on a specific identification method.

NOTE f—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 ~~$3,248~~$3,301 and $3,170 at ~~March 31,~~ June 30,2020 (unaudited) and December 31, 2019, respectively. The Company accrues interest and penalties, relating to unrecognized tax benefits, in its provision for income taxes. At ~~March 31,~~June 30, 2020 (unaudited) and December 31, 2019, the Company had accrued interest and penalties relating to unrecognized tax benefits of ~~$216~~$251 and $188, 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—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.

The following table represents the Company’s sales, as a percentage of the Company’s total revenues, for the three ~~months~~ and six month periods ended ~~March 31,~~June 30, 2020 and 2019, of the Company’s significant customers:

Three months ended March 31,
Major customers/ distributors

2020

2019

(Unaudited)

Ascend Technology Inc. (“Ascend Technology”) ¹ ²
37% 27%
VTech Holdings Ltd. (“VTech”)
19% 21%

Nexty Electronics Corporation (“Nexty Electronics”)¹ ³
12% 10%

	Three months ended June 30,						Six months ended June 30,
	(Unaudited)
Major customers/ distributors	2020			2019			2020			2019
VTech Holdings Ltd.		22	%		23	%		21	%		22	%

Nexty Electronics ¹ ²		8	%		7	%		10	%		9	%

Ascend Technology Inc. ¹ ³		39	%		25	%		38	%		26	%

¹ Distributor.

² Nexty Electronics sells the Company’s products to a limited number of customers; none of those customers accounted for 10% or more of the Company’s total revenues for the three and six month periods ended June 30, 2020 and 2019.

³ Ascend Technology sells the Company’s products to a limited number of ~~customers. One~~customers; one of those customers Cisco Systems ~~Inc.,~~ accounted for ~~15%~~21% and 10% for the three month periods ended June 30, 2020 and 2019, and 18% and 10% of the Company’s total revenues for the ~~three months~~six month periods ended ~~March 31,~~June 30, 2020 and ~~2019, respectively.~~2019.

³ Nexty Electronics sells the Company’s products to a limited number of customers. One of those customers, Panasonic Communications Co., Ltd., accounted for 10% and 8% of the Company’s total revenues for the three months periods ended March 31, 2020 and 2019, respectively.

NOTE h—H—DERIVATIVE INSTRUMENTS

In accordance with Topic 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 ~~March~~June 30, 2020 and December 31, ~~2020,~~ 2019, the Company had no0 outstanding option ~~contracts~~ and ~~had~~ foreign exchange forward ~~contracts in the amount of $3,000. These hedging contracts do not contain any credit-risk-related contingency features. See Note L for information on the fair value of hedging~~ contracts.

The fair value of derivative assets and derivative liabilities were ~~$35~~both $0 as of June 30, 2020.

The amount recorded as income in research and ~~$0, respectively, at March 31, 2020. The Company recorded a net amount of $35 in other accounts receivable~~development expenses, sales and ~~prepaid~~marketing expenses and general and administrative expenses in the condensed consolidated ~~balance sheet at March 31, 2020.~~statements of income for the six months ended June 30, 2020 that resulted from the above referenced hedging transactions was $41, $4 and $7, respectively.

The ~~fair value~~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 ~~outstanding derivative instruments at March 31, 2020~~six months ended June 30, 2019 that resulted from the above referenced hedging transactions was $83, $8 and ~~December 31, 2019 is summarized below:~~$14, respectively.

Fair Value of Derivative Instruments

Derivative Assets (Liabilities)

Balance Sheet Location

March 31,
2020

December 31,
2019

Unaudited

Audited

Foreign exchange forward and option contracts

Other accounts receivable and prepaid expenses (other accounts payable)
$ 35 -

The effect of derivative instruments in cash flow hedging transactions on income and other comprehensive income (“OCI”) for the three and six months ended ~~March 31,~~June 30, 2020 and 2019 is summarized below:

Gains on derivatives
recognized in OCI

for the three months
ended March 31,

Unaudited

2020

2019

Foreign exchange forward and option contracts
$ 35 $ 105

	Gains on Derivatives Recognized in OCI
	for the three months ended June 30,				for the six months ended June 30,
	(Unaudited)
	2020		2019		2020		2019
Foreign exchange forward and option contracts	$	17	$	3	$	52	$	108

	Gains Reclassified from OCI into Income
		for the three months ended June 30				for the six months ended June 30,
		Unaudited
	Location	2020		2019		2020		2019
Foreign exchange forward and option contracts	Operating expenses	$	52	$	23	$	52	$	105

Gains reclassified from OCI into
income

for the three months
ended March 31,

Unaudited

Location

2020

2019

Foreign exchange forward and option contracts
Operating expenses
$ - $ 83

NOTE i—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—J—EQUITY-BASED COMPENSATION

Grants for the three months ended ~~March 31,~~June 30, 2020 and ~~March 31,~~ 2019:

The weighted average estimated fair value of employee restricted stock units (“RSUs”) granted during the three months ended ~~March 31,~~June 30, 2020 and 2019 was ~~$13.82~~$15.47 and ~~$11.61~~$12.58 per share, respectively (using the weighted average pre vest cancellation rate of ~~3.44%~~4.27% and ~~3.25%~~4.62% for the three months ended ~~March 31,~~June 30, 2020 and 2019, respectively, on an annual basis).

~~The weighted-average estimated fair value~~There were 0 grants of employee stock options and stock appreciation rights (“SARs”) ~~granted~~ during the three months ended ~~March 31, 2019 was $3.41 per stock option~~ June 30, 2020 and ~~SARs, respectively, using the binomial model with the following weighted-average assumptions (annualized percentages):~~

	~~Three months ended~~ ~~March 31,~~
	~~2019~~
	~~(Unaudited)~~
~~Volatility~~		~~32.29%~~
~~Risk-free interest rate~~		~~2.16%~~
~~Dividend yield~~		0%
~~Pre-vest cancellation rate~~		~~4.63%~~
~~Post-vest cancellation rate~~		~~2.28%~~
~~Suboptimal exercise factor~~		~~1.229~~

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 March 31, 2019 derived from the binomial model was 4.92 years. No stock options or SARs were granted for the three months ended March 31, 2020.2019.

Employee stock benefit plans

As of ~~March 31,~~June 30, 2020, the Company ~~has two~~had 2 equity incentive plans from which the Company may grant future equity awards and one expired equity incentive ~~plan~~plans from which no future equity awards may be granted but had outstanding equity awards granted prior to expiration. The Company also ~~has one~~had 1 employee stock purchase plan. As of ~~March 31,~~June 30, 2020, approximately ~~169,000~~669,000 shares of common stock remain available for grant under the Company’s employee stock purchase plan and ~~1,081,000~~approximately 1,070,000 shares of common stock remain available for grant under the Company’s equity incentive plans.

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:~~plans (unaudited):

	Number of Options/SARs/ RSUs			Weighted average exercise price		Weighted average remaining contractual term (years) (3)		Aggregate value *()**		Number of Options/SARs/RSUs			Weighted average exercise price		Weighted average remaining contractual term (years) (3)		Aggregate value ()**
	in thousands							in thousands		in thousands							in thousands
Outstanding at December 31, 2019		1,735		$	3.84
Outstanding at March 31, 2020											2,109		$	2.99
Options granted											-			-
SARs Granted											-			-
RSUs granted		678			-						20			-
Options / SARs / RSUs cancelled/forfeited/expired		(21	)	$	0.55						(5	)		-
Options / SARs exercised and RSUs vested		(283	)	$	1.23						(252	)	$	6.84
Outstanding at March 31, 2020 (1)		2,109		$	2.99		3.84	$	21,958
Exercisable at March 31, 2020 (2)		586		$	9.71		3.80	$	2,162
Outstanding at June 30, 2020 (1)											1,872		$	2.45		3.97	$	25,150
Exercisable at June 30, 2020 (2)											428		$	9.56		3.97	$	2,705

(*) Represents an amount lower than $1.

(**) Calculation of aggregate intrinsic value is based on the share price of the Company’s common stock on ~~March 31,~~June 30, 2020 ~~($13.40~~($15.88 per share).

~~(1)~~(1) Due to the ceiling imposed on the SAR grants, the outstanding amount above can be exercised for a maximum of ~~approximately 2,048 thousands~~1,831 thousand shares of the Company’s common stock as of ~~March 31,~~June 30, 2020. 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)~~(2) Due to the ceiling imposed on the SAR grants, the exercisable amount above can be exercised for a maximum of ~~approximately 547 thousands~~404 thousand shares of the Company’s common stock as of ~~March 31,~~June 30, 2020.

~~(3)~~(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 ~~March 31,~~June 30, 2020 with exercise prices above ~~$13.40~~$15.88 per share (the closing price of the Company’s common stock on ~~March 31,~~June 30, 2020) is as follows:

	Exercisable				Unexercisable				Total				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		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 $13.40		586	$	9.71		1,523	$	0.41		2,109	$	2.99
Above $13.40		-	$	-		-	$	-		-	$	-
Less than $15.88														428	$	9.56		1,444	$	0.34		1,872	$	2.45
Above $15.88														-	$	-		-	$	-		-	$	-
Total		586	$	9.71		1,523	$	0.41		2,109	$	2.99		428	$	9.56		1,444	$	0.34		1,872	$	2.45

The Company’s aggregate equity-based compensation expense for the three months ended ~~March 31,~~June 30, 2020 and 2019 totaled ~~$1,832~~$2,281 and ~~$1,905,~~$2,060, respectively.

As of ~~March 31,~~June 30, 2020, there was ~~$12,083~~$10,114 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 2020 through 2024.

NOTE k—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 ~~three~~six months ended ~~March 31,~~June 30, 2020 and 2019 (unaudited) are as follows:

	March 31,
	2020		2019		Six months ended June 30,
	Unaudited				2020		2019
Components of net periodic benefit cost:
Service cost and amortization of loss	$	7	$	5	$	14	$	10
Interest cost		3		4		5		8

Net periodic benefit cost	$	10	$	9	$	19	$	18

The net pension liability as of ~~March 31,~~June 30, 2020 amounted to ~~$951.~~$973.

NOTE l—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, 2020:

	Balance as of		Fair value measurements
	June 30, 2020		Level 1		Level 2		Level 3
	(Unaudited)
Description
Assets:
Cash equivalents:
Money market mutual funds	$	3,798	$	3,798		-		-

Short-term marketable securities:
U.S. GSE securities	$	-			$	-
Corporate debt securities	$	33,493		-	$	33,493		-

Long-term marketable securities:
U.S. GSE securities	$	2,418		-	$	2,418		-
Corporate debt securities	$	45,753		-	$	45,753		-

The following table provides information by value level for assets and liabilities that are measured at fair value on a recurring basis as of ~~March~~ December 31, ~~2020 (unaudited):~~2019.

Balance as of

Fair value measurements

March 31,
2020

Level 1

Level 2

Level 3

Description

Assets:

Cash equivalents:

Money market mutual funds
$ 21,931 $ 21,931 - -

Short-term marketable securities:

Corporate debt securities
$ 22,764 - $ 22,764 -
U.S. GSE securities
$ 752 $ 752

Long-term marketable securities:

U.S. GSE securities
$ 3,795 �� - $ 3,795 -
Corporate debt securities
$ 48,179 - $ 41,179 -

Derivative assets
$ 35 - $ 35 -

~~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, 2019.~~

	Balance as of		Fair value measurements						Balance as of		Fair value measurements
Description	December 31, 2019		Level 1		Level 2		Level 3		December 31, 2019		Level 1		Level 2		Level 3
									(Audited)
Assets

Cash equivalents
Money market mutual funds	$	11,635	$	11,635		-		-	$	11,635	$	11,635		-		-

Short-term marketable securities
U.S. GSE securities	$	752		-	$	752		-	$	752		-	$	752		-
Corporate debt securities	$	23,322		-	$	23,322		-	$	23,322		-	$	23,322		-

Long-term marketable securities
U.S. GSE securities	$	3,710		-	$	3,710		-	$	3,710		-	$	3,710		-
Corporate debt securities	$	59,174		-	$	59,174		-	$	59,174		-	$	59,174		-

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 ~~March 31,~~June 30, 2020 due to the short-term maturity of these instruments.

NOTE m—M—STOCKHOLDERS’ EQUITY

During the ~~three~~six months ended ~~March 31,~~June 30, 2020, the Company repurchased ~~282,335~~304,704 shares of common stock at an average purchase price of ~~$12.19~~$12.26 per share for an aggregate purchase price of ~~$3,443.~~$3,736. As of ~~March 31,~~ June 30,2020, ~~512,578~~ 490,209 shares of common stock remained authorized for repurchase under the Company's board-authorized share repurchase program.

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

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~~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 ~~three~~firstsix months ~~ended March 31,~~ of 2020, the Company issued approximately ~~376,000~~604,000 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.

NOTE N—SEGMENT INFORMATION

Description of segments:

The Company operates under three reportable segments.

The ~~Company’s~~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~~Company's chief operating decision-maker (“CODM”) in deciding how to allocate resources and assess performance. The ~~Company’s~~Company's CODM is its Chief Executive Officer, who evaluates the ~~Company’s~~Company's performance and allocates resources based on segment revenues and operating income.

The ~~Company’s~~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 ~~the Company’s~~its business operations, which include, but are not limited to, customer base, homogeneity of products and technology.

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 ~~36%~~35% and ~~37%~~38% of the Company’s total revenues for the first ~~three months~~ half of 2020 and 2019, respectively, and 35% and 39% of the Company’s total revenues for the second quarter of 2020 and 2019, respectively, and (ii) revenues from SmartHome products amounted to ~~14%~~15% and ~~15%~~14% of the Company’s total revenues for the first ~~three~~six months of 2020 and 2019, respectively, and 15% and 13% of the Company’s total revenues for the second quarter of 2020 and 2019, respectively.

Unified Communications - Comprehensive solution for ~~Unified Communications~~unified communications products, including office solutions that offer businesses of all sizes ~~low-cost~~ VoIP terminals with converged voice and data applications. Revenues from the Company’s ~~Unified Communications~~unified communications products represented 36% and ~~33%~~32% of its total revenues for the first ~~three months~~ half of 2020 and 2019, respectively, and 36% and 30% of the Company’s revenues for the second quarter of 2020 and 2019, respectively. No revenues derived from ~~any product~~other products in the Unified Communications segment exceeded 10% of the Company’s total consolidated revenues for ~~either~~both the first ~~three~~six months and the second quarter of 2020 or and 2019.

SmartVoice - Products for the SmartVoice market that ~~provides~~provide voice activation and recognition, voice enhancement, always-on and far-end noise elimination targeted for mobile phone, mobile headsets, hearables and other devices that incorporate the Company’s noise suppression and voice quality enhancement HDClear technology. Revenues derived from products in the ~~Company’s HDClear products~~SmartVoice segment represented 14% and ~~15%~~17% of the Company’s total revenues for the first ~~three months~~ half of 2020 and 2019, ~~respectively. No revenues derived from any product in the SmartVoice segment exceeded 10%~~ respectively, and 14% and 18% of the Company’s total revenues for ~~either~~ the second quarter of 2020 and 2019, respectively. No revenues derived from other products in the mobile segment exceeded 10% of the Company’s total consolidated revenues for both the first ~~three~~six months and the second quarter of 2020 or and 2019.

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 ~~March 31,~~ June 30,2020 and ~~2019:~~2019 (unaudited):

	Revenues				Income (loss) from operations
	Three months ended March 31,
	2020		2019		2020			2019			Three months ended June 30,
	Unaudited										Revenues				Income (loss) from operations
											2020		2019		2020			2019
Home	$	14,018	$	14,730	$	3,576		$	4,071		$	14,243	$	14,918	$	4,263		$	4,167
Unified Communications		10,238		9,409		3,709			2,855		$	10,144	$	8,797	$	3,329		$	2,696
SmartVoice		3,983		4,137		(8,294	)		(6,063	)	$	3,949	$	5,319	$	(5,956	)	$	(5,465	)

Total	$	28,239	$	28,276	$	(1,009	)	$	863		$	28,336	$	29,034	$	1,636		$	1,398

Selected operating results information for each business segment was as follows for the six months ended June 30, 2020 and 2019 (unaudited):

	Six months ended June 30,
	Revenues				Income (loss) from operations
	2020		2019		2020			2019
Home	$	28,261	$	29,648	$	7,839		$	8,237
Unified Communications	$	20,382	$	18,206	$	7,037		$	5,551
SmartVoice	$	7,932	$	9,456	$	(14,250	)	$	(11,526	)
Total	$	56,575	$	57,310	$	626		$	2,262

The reconciliation of segment operating results information to the Company’s consolidated financial information was as follows ~~(unaudited)~~for the three and six months periods ended June 30, 2020 (unaudited):

Three months ended
March 31,

2020

2019

Income (loss) from operations
$ (1,009 ) $ 863
Unallocated corporate, general and administrative expenses
(491 ) (462 )
Equity-based compensation expenses
(1,832 ) (1,905 )
Intangible assets amortization expenses
(104 ) (104 )
Financial income, net
903 313

Total consolidated loss before taxes
$ (2,533 ) $ (1,295 )

	Three months			Six months
Income from operations	$	1,636		$	626
Unallocated corporate, general and administrative expenses		(611	)		(1,102	)
Equity-based compensation expenses		(2,281	)		(4,113	)
Intangible assets amortization expenses		(104	)		(208	)
Financial income, net		289			1,192
Total consolidated loss before taxes	$	(1,071	)	$	(3,605	)

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, 2019 (unaudited):

	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	)

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 ~~March 31,~~June 30, 2020 ~~(unaudited)~~(unaudited):

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
$ (66 ) $ - $ (486 ) $ (337 ) $ (889 )
Other comprehensive income (loss) before reclassifications
(249 ) 35 - (20 ) (234 )
Losses (gains) reclassified from accumulated other comprehensive income (loss)
(7 ) - 6 - (1 )

Net current period other comprehensive income (loss)
(256 ) 35 6 (20 ) (235 )

Ending balance
$ (322 ) $ 35 $ (480 ) $ (357 ) $ (1,124 )

	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	$	(322	)	$	35		$	(480	)	$	(357	)	$	(1,124	)
Other comprehensive income (loss) before reclassifications		630			17			-			(27	)		620
Losses (gains) reclassified from accumulated other comprehensive income		(4	)		(52	)		6			-			(50	)

Net current period other comprehensive income (loss)		626			(35	)		6			(27	)		570

Ending balance	$	304		$	-		$	(474	)	$	(384	)	$	(554	)

The following table provides details about reclassifications out of accumulated other comprehensive income for the three months ended ~~March 31,~~June 30, 2020 ~~(unaudited)~~(unaudited):

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	$	(4	)	Financial income, net
		-		Provision for income taxes
		(6	)	Total, net of income taxes
Gains on cash flow hedges
		(41	)	Research and development
		(4	)	Sales and marketing
		(7	)	General and administrative
		(52	)	Total, before income taxes
		-		Provision for income taxes

		(52	)	Total, net of income taxes

Losses on components of defined benefit plans		3		Research and development
		3		Sales and marketing

		6		Total, before income taxes

		-		Provision for income taxes

		6		Total, net of income taxes

Total reclassifications for the period	$	(50	)	Total, net of income taxes

Details about accumulated other comprehensive income components

Losses (gains)
reclassified from
accumulated other
comprehensive
income (loss)

Affected line item in the
statement of income

Gains on available-for-sale marketable securities
$ (7 )
Financial income, net

-
Provision for income taxes

(7 )
Total, net of income taxes

Losses on components of defined benefit plans
3
Research and development

3
Sales and marketing

6
Total, before income taxes

-
Provision for income taxes

6
Total, net of income taxes

Total reclassifications for the period
$ (1 )
Total, net of income taxes

The following table summarizes the changes in accumulated balances of other comprehensive income (loss) for the six months ended June 30, 2020 (unaudited):

	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	$	(66	)	$	–		$	(486	)	$	(337	)	$	(889	)
Other comprehensive income (loss) before reclassifications		382			52			-			(47	)		387
Losses (gains) reclassified from accumulated other comprehensive income (loss)		(12	)		(52	)		12			-			(52	)
Net current period other comprehensive income (loss)		370			-			12			(47	)		335

Ending balance	$	304		$	-		$	(474	)		(384	)	$	(554	)

The following table provides details about reclassifications out of accumulated other comprehensive income for the six months ended June 30, 2020 (unaudited):

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	$	(12	)	Financial income, net
		-		Provision for income taxes
		(12	)	Total, net of income taxes

Gains on cash flow hedges
		(41	)	Research and development
		(4	)	Sales and marketing
		(7	)	General and administrative
		(52	)	Total, before income taxes
		-		Provision for income taxes
		(52	)	Total, net of income taxes

Losses on components of defined benefit plans		6		Research and development
		6		Sales and marketing
		12		Total, before income taxes
		-		Provision for income taxes
		12		Total, net of income taxes

Total reclassifications for the period	$	(52	)	Total, net of income taxes

NOTE P—GOVERNMENT 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”~~("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 ~~approximately $200~~$907 and ~~$400~~$633 for the three ~~months~~ month periods ended ~~March 31,~~June 30, 2020 and 2019, respectively.

The Company recorded grants in the amount of $1,120 and $1,001 for the six month periods ended June 30, 2020 and 2019, 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.

NOTE Q—SUBSEQUENT EVENTS

On July 1, 2020, DSP Group Ltd, the Israeli subsidiary (“Israeli Sub”) of the Corporation completed the acquisition of SoundChip SA, a privately held Swiss company (“SoundChip”) pursuant to the terms of a share purchase agreement (the “SPA”) the Israeli Sub entered into with SoundChip, SoundChip’s shareholders and Mark Donaldson, Ben Skelton and Paul Darlington, as founders and shareholders’ representatives (collectively, the “Founders” and together with SoundChip’s shareholders, the “Shareholders”). Pursuant to the terms of the SPA, Israeli Sub paid an initial purchase price of approximately $14.4 million (with a portion held in escrow in accordance with the terms of the SPA) 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 by certain customer and product sales milestones during the period from July 1, 2020 to December 31, 2022. The Corporation funded the Initial Purchase Price from existing cash. The Initial Purchase Price is subject to a further post-closing working capital true up.

2125

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 belief that, while we are confident about our engagement pipeline and the potential of each of our ~~growth initiatives,~~IoAT businesses (comprised of our Unified Communications, SmartHome, and SmartVoice product lines and previously referred to as “Growth Initiatives”), we may face some near-term softness, mainly related to a shortfall in consumer spending and its implications on ~~demand for consumer electronic products, as well as the impact of the lockdowns on the ability of consumers to buy~~ consumer electronics demand and slowdown in ~~outlets beyond~~ the ~~Internet;~~Unified Communications market related to reduced spending in enterprise IT infrastructure, that will negatively impact our revenues;

●

Our expectation that revenues from our ~~growth initiatives~~IoAT businesses will ~~increase~~represent approximately two-thirds of the total revenues in ~~2020 as compared to 2019;~~2020;

●

Our ~~expectation~~belief that ~~revenues from growth initiatives will represent more than two-thirds of the total revenues~~our past research and development investments in ~~2020;~~new technologies are paying off;

●

Our belief that our ~~past research and development investments~~innovative technical solutions are well-positioned to play a significant role in ~~new technologies~~the technological trends that are ~~paying off;~~accelerating as a result of the COVID-19 pandemic;

●

Our belief that sensitivity to touching commonly-used surfaces could accelerate the adoption of voice as a user interfaces (VUIs) for a broad array of products;

●

Our belief that notwithstanding near-term slowdown, demand for Unified Communications products could increase over the long term to enhance workforce’s efficiency and productivity during and after the COVID-19 pandemic

●

Our belief that increased voice calls made from home amid the COVID-19 pandemic could drive demand for the integration of DECT/ULE in home gateways to ensure quality of service and full home coverage;

●

Our belief that our company is uniquely positioned to leverage our leadership in Unified Communications, SmartVoice and SmartHome markets with world class technologies and innovative ~~technical~~ solutions ~~are well-positioned to play a significant role in~~that address the ~~technological trends that are accelerating as a result~~increasing demands of ~~the COVID-19 pandemic;~~these markets;

●

Our anticipation that our gross margin on an annual basis will continue to increase, as compared to previous periods, as our product mix shifts in favor of new products, which generally have higher gross margins;

●

Our belief that ~~sensitivity~~new communication access methods, including mobile, wireless broadband, cable and other connectivity, the traditional cordless telephony market using fixed-line telephony will continue to ~~touching commonly-used surfaces~~ decline, which will continue to reduce our revenues derived from, and unit sales of, cordless telephony products;c~~ould accelerate the adoption of voice as a user interfaces (VUIs) for a broad array of products;~~ and

●

Our belief that ~~demand for Unified Communications products~~ ~~could~~ ~~increase to enhance workforces efficiency and productivity~~ ~~during the COVID-19 pandemic;~~

●

~~Our belief that increased voice calls made from home~~ ~~amid the COVID-19 pandemic c~~~~ould drive demand for the integration~~sales of ~~DECT/ULE in home gateways to ensure quality of service and full home coverage;~~

●

~~Our expectation that the increase in revenues from growth initiatives will be driven mainly by our Unified Communications segment;~~

●

~~Our~~ ~~expectation that the Unified Communications market will recover in 2020 as compared to 2019;~~

●

~~Our belief that new communication access methods, including mobile, wireless broadband, cable and other connectivity, the traditional~~digital cordless telephony ~~market using fixed-line telephony~~products will continue to ~~decline, which will continue to reduce~~represent a substantial percentage of our revenues ~~derived from, and unit sales~~for the remainder of ~~cordless telephony products;~~ ~~and~~2020;

●

Our belief that our available cash and cash equivalents at ~~December 31,~~June 30, 2020 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.

Moreover, thethe full impact of the COVID-19 pandemic continues to evolve as of the date of this report. As such, it is uncertain as to the full magnitude that the ~~pand~~~~emic~~pandemic will have on our financial condition, liquidity, and future results of operations. Management is actively ~~monito~~~~ring~~monitoring the impact of the global situation on the company’s financial condition, liquidity, operations, suppliers, industry, and workforce. Given the ~~daily~~continual evolution of the COVID-19 pandemic and the global responses to curb its spread, we are not able to estimate the full effect of the COVID-19 outbreak on the company’s results of operations, financial condition or liquidity for fiscal year 2020. The following discussions are subject to the future effects of the COVID-19 pandemic.

This Quarterly Report on Form 10-Q includes trademarks and registered trademarks of DSP Group. Products or service names of other companies mentioned in this Quarterly Report on Form 10-Q may be trademarks or registered trademarks of their respective owners.

DSP Group, Inc. is referred to in this Quarterly Report as “DSP Group,” “we,” “us” “our” or “company.”

Overview

The following discussion and analysis is intended to provide investors with a narrative of our financial results and an evaluation of our financial condition and results of operations. The discussion should be read in conjunction with our condensed consolidated financial statements and notes thereto.

Business Overview

DSP Group is a leading global provider of wireless chipset solutions for converged communications, delivering system solutions that combine semiconductors and software with reference designs. We provide a broad portfolio of wireless chipsets integrating DECT, Wi-Fi, PSTN and VoIP technologies with state-of-the-art application processors. We also enable converged voice, audio and data connectivity across diverse consumer products – from cordless and ~~VoIP~~Unified Communications phones to home gateways and connected multimedia screens. Our Home segment consists of cordless telephony products and SmartHome products, which are comprised of our home gateway and home automation products. Our Unified Communications segment consists of a comprehensive set of solutions for ~~Unified~~unified communications (Unified Communications ~~(VoIP~~ office products). Our SmartVoice segment consists of products targeted at mobile, IoT and wearable device markets that incorporate our noise suppression and voice quality enhancement HDClear technology, as well as other ~~third-party~~third party advanced voice processing, always on and sensor hub functionalities.

In 2013, we defined three initiatives aimed at growing market verticals, which align well with our expertise. We called such initiatives Unified Communications, SmartHome, and SmartVoice, which together we refer as “growth initiatives.” Our strategy with respect to such initiatives has proven successful. Starting in 2018, our growth initiatives accounted for a majority of our total revenues. Reflecting our success in turning growth initiatives into our core expertise, we have decided to change the terminology “growth initiatives�� to Internet of Audio Things or “IoAT businesses.”

We are seeing evidence that our past research and development investments in ~~new technologies~~our IoAT businesses are paying off. We believe our innovative technical solutions are well-positioned to play a significant role in the technological trends that are accelerating as a result of the COVID-19 pandemic. For instance, with more employees working remotely, and offices reconfiguring workspaces to cater to social distancing requirements, high-quality communication and remote collaboration tools are essential. ~~This~~Although there is near-term slowdown in the Unified Communications market due to reduced spending in enterprise IT infrastructure as a result of shelter-in restrictions and work-from-home activities, for the long term, trends emerging from COVID-19 could create an increased demand for Unified Communications products such as headsets, phones, video conferencing and conferencing systems to enhance workforce’s efficiency and productivity. Also, individuals worldwide have recently become sensitive to the health risks of touching commonly-used surfaces, which could accelerate the adoption of voice as a user interfaces (VUIs) for a broad array of products to address the increasing preference for contactless, germ-free, voice-enabled human-machine interface. Moreover, amid the COVID-19 outbreak, voice calls made from home increased significantly, which could drive demand for the integration of DECT/ULE in home gateways to ensure quality of service and full home coverage. We believe our company is uniquely positioned to leverage our leadership in Unified Communications, SmartVoice and SmartHome markets with world class technologies and innovative solutions that address the increasing demands of these markets.

In the first ~~quarter~~half of 2020, revenues from our ~~growth initiatives, namely sales from our Unified Communications, SmartHome and SmartVoice products,~~IoAT businesses were ~~$18.2~~$36.6 million and accounted for ~~64%~~65% of our total revenues, as compared to ~~63%~~62% of our total revenues for the first ~~three months~~half of 2019, and represented an increase of 3% year-over-year. Revenues from our Unified Communications products represented 36% of our total revenues for the first ~~quarter of~~half 2020, as compared to ~~33%~~32% of our total revenues for the first ~~quarter~~half of 2019. Revenues from our SmartVoice products represented 14% of our total revenues for the first ~~quarter~~half of 2020, as compared to ~~15%~~17% of our total revenues for the first ~~quarter~~half of 2019. Revenues from SmartHome products accounted for 15% and 14% of our ~~total~~ revenues for the first ~~quarter~~half of 2020 and 2019, respectively.

For the first half of 2020 as compared to ~~15% of our total revenues for~~ the first ~~quarter~~half of ~~2019. Year-over-year, the Unified Communications segment grew 9%,~~2019, revenues from the SmartVoice segment ~~decreased~~declined by 4%16%, revenues from the Unified Communications segment increased by 12%, and revenues from SmartHome products ~~decreased~~increased by 5%6%. Based on a strong pipeline of design wins, our current mix of IoAT products ~~for growth initiative~~ and anticipated commercialization schedules of customers incorporating such products, we anticipate annual revenues generated from our ~~growth initiatives to increase in 2020, as compared to 2019, and we expect such revenues~~IoAT businesses to represent ~~more than~~approximately two-thirds of our total revenues for 2020. The expected increase in revenues from growth initiatives will be driven mainly by our Unified Communications segment. Based on feedback from customers and major design wins we have secured to date, we anticipate that the Unified Communications market will recover in 2020, as compared to 2019.

Our revenues were ~~$28.2~~$56.6 million for the first ~~three months~~half of 2020, ~~essentially flat~~a 1% decrease compared to the corresponding period of 2019. ~~Revenue derived~~The decrease for the first half of 2020 was primarily as a result of a decrease in sales of our digital cordless products and SmartVoice products, partially offset by increased sales of our SmartHome and Unified Communications products. Revenues from ~~cordless telephony products represented 36%~~our IoAT businesses accounted for 65% of our total revenues for the first ~~quarter~~half of 2020, as compared to ~~37%~~62% of our total revenues for the first ~~quarter~~half of ~~2019, and declined by 5% for the first quarter of 2020, as compared to the same period in~~ 2019.

Our gross margin ~~decreased~~increased to ~~50.9%~~50.6% of our total revenues for the first ~~quarter~~half of 2020 from ~~51.1%~~50.4% for the first ~~quarter~~half of 2019, primary due to (i) ~~lower inventory provisions for the first three months~~an improvement in direct contribution and production yield of ~~2019, as compared to the same period in 2020,~~certain of our products, and (ii) ~~higher royalties expenses paid for the first three months of 2020, as compared to the first three months of 2019. The decrease was partially offset by positive effects from changes~~a change in the mix of products sold and mix of ~~customers for the first three months of 2020,~~customers. We anticipate that our gross margin on an annual basis will continue to increase, as compared to ~~the first three months~~previous periods, as our product mix shifts in favor of ~~2019.~~new products, which generally have higher gross margins.

Our operating loss was ~~$3.4~~$4.8 million for the first ~~quarter~~half of 2020, as compared to an operating loss of ~~$1.6~~$2.9 million for the first ~~quarter~~half of 2019. The increase in our operating loss is attributable mainly to an increase in our operating expenses for the first ~~three months~~half of 2020, as compared to the corresponding period of 2019.

Our operating expenses ~~amounted~~increased to ~~$17.8~~$33.4 million for the first ~~quarter~~half of 2020, ~~as compared to $16.1~~from $31.8 million for the first ~~quarter~~half of 2019. ~~The increase in our operating~~Operating expenses for the first ~~quarter~~half of 2020 increased mainly as a result of an increase in our research and development expenses and sales and marketing expenses for the first half of 2020, as compared to the first quarter of 2019, is attributable mainly to (i) an increase of $1.4 million in our research and development expenses for the first quarter of 2020, as compared to the corresponding period of 2019, and (ii) an increase of $0.5 million in our sales and marketing expenses for the first quarter of 2020, as compared to the corresponding periodhalf of 2019. ~~These increases were~~The increase was partially offset by a decrease ~~of $0.2 million~~ in our general and administrative expenses for the ~~first quarter of 2020, as compared to the corresponding period of 2019.~~comparable periods.

Notwithstanding our success in increasing our revenues from ~~growth initiatives,~~IoAT and increasing our gross margin as a percentage of our total revenues, we expect that our financial condition will continue to be challenged by the expected continued decline of the cordless telephony ~~market.~~market and the impact of COVID-19 on the world economy. A significant percentage of our revenues continues to be generated from sales of chipsets used in cordless phones that are based on fixed-line telephony.

As of ~~March 31,~~June 30, 2020, our principal source of liquidity consisted of cash and cash equivalents of ~~$35.3~~$38.2 million and marketable securities, short and ~~time~~long-term deposits of ~~$92.6~~$98.8 million, totaling ~~$127.9~~$137 million.

COVID-19

An outbreak of a new strain of coronavirus, COVID-19, occurred in China in December 2019 and has spread globally. The Center for Disease Control (“CDC”) and World Health Organization (“WHO”) have recognized this outbreak as a pandemic, which has caused shutdowns to businesses and cities worldwide while disrupting supply chains, business operations, travel, consumer confidence and business sentiment. In March, in compliance with global social distancing and lockdown regulations aimed to slow the spread of COVID-19, we moved most of our employees worldwide to a work-from-home model. ~~We are following~~Since then, we have moved to a hybrid work-from-home and return-to-work model in certain geographies as permitted by guidelines established by the CDC and WHO and orders issued by applicable governments where we operate. We have taken a number of precautionary health and safety measures to safeguard our employees while maintaining business continuity. We are monitoring and assessing orders issued by applicable governments to ensure compliance with evolving COVID-19 guidelines.

~~Initially,~~Throughout the COVID-19 outbreak, mainly affected our customers’ supply chain operations in China, as factories failed to re-open after the Chinese New Year Holiday. Those factories experienced a prolonged shutdown and gradually resumed operations only in early March. As the pandemic progressed, each of the geographies in which we operate has issued some form of order requiring the closure of non-essential business and/or requiring residents to stay at home. Throughout this time period, we have continued to supply our chipsets and serve ~~our~~ customers. While the impact from COVID-19 on our the financial results for the first quarter of 2020 was relatively insignificant as set forth in the below section discussing the results of operations for the first quarter of 2020,Nonetheless, we are currently unable to determine or predict the nature, duration or scope of the overall impact the COVID-19 pandemic will have on our business, results of operations, liquidity or capital resources for the reminder of the year. By the end of the first ~~quarter,~~half, and to a larger extent in the second ~~quarter,~~half of 2020, demand for consumer electronic products has softened due to social distancing and shelter-in-place restrictions. Also, we are experiencing some near-term slowdown in the Unified Communications market due to reduced spending in enterprise IT infrastructure as a result of shelter-in restrictions and work-from-home activities. Therefore, while we are confident about our engagement pipeline and the potential of each of our ~~growth initiatives, looking forward,~~IoAT businesses, we may face some near-term softness ~~mainly related to a shortfall in consumer spending and its implications on demand for consumer electronic products, as well as the~~that will negatively impact ~~of the lockdowns on limiting consumers’ ability to buy consumer electronics in outlets beyond the Internet.~~our revenues.

As of the date of this filing, significant uncertainty exists concerning the magnitude of the impact and duration of the COVID-19 pandemic. In light of the uncertain and rapidly evolving situation relating to the COVID-19 pandemic, we have taken a number of precautionary measures to manage our resources conservatively by reducing and/or deferring non-essential capital expenditures and operating expenses to mitigate the adverse impact of the pandemic. We will continue to assess our business during the crisis to make strategic decisions for our business that we believe are in the best ~~interest~~interests of stockholders.

RESULTS OF OPERATIONS

The following ~~table represents~~tables represent our total revenues and our revenues by product family for the three and six month periods ended ~~March 31,~~June 30, 2020 and 2019 (dollars in millions):

	Three months ended March 31,						Three months ended June 30,						Six months ended June 30,
	2020		2019		Change		2020		2019		Change		2020		2019		Change
Total revenues (1)	$	28.2	$	28.3		-
Total Revenues ⁽¹⁾							$	28.3	$	29.0		(2%)	$	56.6	$	57.3		(1%)
Cordless (2)	$	10.1	$	10.6		(5%)	$	9.9	$	11.3		(12%)	$	20.0	$	21.8		(8%)
Percentage of total revenues		36%		37%				35%		39%				35%		38%
SmartHome (3)	$	4.0	$	4.2		(5%)	$	4.3	$	3.6		18%	$	8.3	$	7.8		6%
Percentage of total revenues		14%		15%				15%		13%				15%		14%
Unified Communications (4)	$	10.2	$	9.4		9%	$	10.1	$	8.8		15%	$	20.4	$	18.2		12%
Percentage of total revenues		36%		33%				36%		30%				36%		32%
SmartVoice (5)	$	4.0	$	4.1		(4%)	$	3.9	$	5.3		(26%)	$	7.9	$	9.5		(16%)
Percentage of total revenues		14%		15%				14%		18%				14%		17%

	1.	The decrease in revenues for the second quarter and the first ~~quarter~~six months of 2020 as compared to the same ~~period~~periods in 2019 was primarily as a result of a decrease in sales of our cordless ~~SmartHome~~telephony and SmartVoice products, ~~partially~~ offset to some extent by increased sales of our Unified Communications and SmartHome products.
	2.	The decrease in cordless revenues for the second quarter and first ~~quarter~~six months of 2020 as compared to the same ~~period~~periods in 2019 was mainly attributable to ~~a decrease in customer~~decreased demand from our customers in all ~~cordless~~ markets.
	3.	The ~~decrease~~increase of our SmartHome product sales for the ~~comparable~~second quarter and first six months of 2020 as compared to the same periods in 2019 is attributable mainly to ~~a decrease~~an increase in customer demand ~~mostly~~ for home gateway products.
	4.	The increase in our Unified Communications product sales for the ~~comparable~~second quarter and first six months of 2020, as compared to same periods in 2019, is mainly attributable to a growth in market demand for our Unified Communications products that resulted from the growth of our market share within this market.
	5.	The decrease in our SmartVoice product sales for the ~~comparable~~second quarter and first six months of 2020, as compared to the same periods in 2019, was attributable to a decrease in ~~customer~~ demand ~~in that market.~~from our customers.

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The following table shows the breakdown of revenues for all product lines for the periods based on the geographic location of our customers (in thousands):

	Three months ended March 31,				Three months ended June 30,				Six months ended June 30,
	2020		2019		2020		2019		2020		2019
United States	$	886	$	1,329	$	623	$	1,147	$	1,509	$	2,476
Japan		3,628		3,045		2,338		2,346		5,966		5,391
Europe		1,710		2,172		1,268		2,065		2,978		4,237
Hong-Kong		7,275		7,649		8,115		8,134		15,390		15,783
China		4,204		4,410		5,376		6,596		9,580		11,006
Taiwan		8,932		6,410		9,171		6,278		18,103		12,688
South Korea		1,198		2,506		1,126		1,549		2,324		4,055
Other		406		755		319		919		725		1,674

Total revenues	$	28,239	$	28,276	$	28,336	$	29,034	$	56,575	$	57,310

Sales to our customers in ~~the~~ United States decreased for the second quarter and first ~~quarter~~six months of 2020 as compared to the same ~~period~~periods of 2019, representing a decrease of ~~33%~~46% and 39% in absolute dollars. The decrease in our sales to the United States for the comparable periods resulted mainly from a decrease in sales to one of our U.S. customers.

Sales to our customers in Japan increased for the first ~~quarter~~six months of 2020 as compared to the same period of 2019, representing an increase of ~~19%~~11% in absolute dollars. The increase in our sales to Japan for the comparable periods resulted mainly from an increase in sales ~~to one of our customers – Panasonic Communications Co., Ltd. (“Panasonic”),~~ through our distributor, – Nexty Electronics Corporation (“Nexty Electronics”)~~, representing~~. The increase in sales to Nexty Electronics resulted mainly from an increase ~~of 20% for the comparable periods.~~

in sales to Panasonic Communications Ltd. (“Panasonic”). Sales to our customers in Europe decreased for the second quarter and first ~~quarter~~six months of 2020 as compared to the same ~~period~~periods of 2019, representing a decrease of ~~21%~~39% and 30%, respectively, in absolute dollars. The decrease in our sales to Europe for the comparable periods resulted mainly from a decrease in sales to one of our German customers.

Sales to our customers in ~~Hong Kong~~China decreased for the second quarter and first ~~quarter~~half of 2020, as compared to the same ~~period~~periods of 2019, representing a decrease of 5%18% and 13%, respectively, in absolute ~~dollars, resulting~~dollars. The decrease in our sales to China for the comparable periods resulted mainly from a decrease in demand from our customers, especially sales of our SmartVoice products to ~~our customer, VTech Holdings~~OPPO Mobile Telecommunications Corp. Ltd. (“~~VTech”~~OPPO”), ~~representing an 11% decrease in sales for the comparable periods. This decrease was offset to some extent by an increase in sales to several other customers in Hong Kong.~~one of China’s top mobile OEMs.

Sales to our customers in Taiwan increased for the second quarter and first ~~quarter~~half of 2020, as compared to the same ~~period~~periods of 2019, representing an increase of ~~39%~~46% and 43%, respectively, in absolute dollars. The increase in our sales to Taiwan for the comparable periods resulted mainly from an increase in sales through our distributor, Ascend Technology Inc. (“Ascend Technology”)~~, representing a 38% increase in sales for the comparable periods.~~. The increase in sales to Ascend Technology resulted mainly from an increase in sales to Cisco Systems, Inc. (“Cisco”).

Sales to our customers in South Korea decreased for the second quarter and first ~~quarter~~six months of 2020, as compared to the same ~~period~~periods of 2019, representing a decrease of ~~52%~~27% and 43%, respectively, in absolute dollars, ~~resulting mainly from a decrease in sales to our tier one customer in the SmartVoice segment.~~

Sales to other customers decreased for the first quarter of 2020, as compared to the same period of 2019, representing a decrease of 46% in absolute dollars. The decrease in our sales to other customers for the comparable periods resulted mainly from a decrease in sales to a tier one ~~of our customers located~~customer in ~~Brazil.~~the SmartVoice segment.

As our products are generally incorporated into consumer electronics products sold by our OEM customers, our revenues are affected by seasonal buying patterns of consumer electronics products sold by our OEM customers that incorporate our products, as well as inventory correction cycles within the market.

Significant customers. The loss of any of our significant customers or distributors could have a material adverse effect on our business, financial condition and results of operations. The following table represents our total revenues, as a percentage of our total revenues, from our significant customers for the ~~three-month~~three and six months periods ended ~~March 31,~~June 30, 2020 and 2019:

Three months ended March 31,

2020

2019

VTech
19 % 21 %

Panasonic
10 % 8 %

Cisco
15 % 10 %

	Three months ended June 30,				Six months ended June 30,
	2020		2019		2020		2019
VTech Holdings Ltd. (“VTech”)		22%		23%		21%		22%
Cisco		21%		10%		18%		10%

The following table represents our total revenues, as a percentage of our total revenues, through our main distributors for the three ~~month~~and six-month periods ended ~~March 31,~~June 30, 2020 and 2019:

	Three months ended March 31,						Three months ended June 30,				Six months ended June 30,
	2020			2019			2020		2019		2020		2019
Nexty Electronics (1)		12	%		10	%		8%		7%		10%		9%

Ascend Technology (2)		37	%		27	%		39%		25%		38%		26%

(1)

Our distributor, Japan-based Nexty Electronics, sells our products to a limited number of ~~customers. One~~customers; none of those customers ~~Panasonic,~~has accounted for 10% ~~and 8%~~or more of our ~~total~~ revenues for the ~~first quarter of 2020~~three and six month periods ended June 30, 2019 ~~respectively.~~and 2018.

(2)

Ascend Technology sells our products to a limited number of customers. One of those customers – Cisco – accounted for ~~15%~~21% and 10% of our total revenues for the ~~first quarter~~three month periods ended June 30, 2020 and 2019, respectively, and 18% and 10% of our total revenues for the six month periods ended June 30, 2020 and 2019, respectively.

Significant products. Revenues from our ~~digital cordless telephony~~Unified Communications products represented 36% and ~~37%~~32% of our total revenues for the ~~three~~six months ended ~~March 31,~~June 30, 2020 and 2019, respectively. Revenues from our Unified Communications products represented 36% and 30% of our total revenues for the second quarter of 2019 and 2018, respectively.

Revenues from our SmartVoice products represented 14% and 17% of our total revenues for the six months ended June 30, 2020 and 2019, respectively. Revenues from our SmartVoice products represented 14% and 18% of our total revenues for the second quarter of 2020 and 2019, respectively.

Revenues from our SmartHome products represented 15% and 14% of our total revenues for the six months ended June 30, 2020 and 2019, respectively. Revenues from our SmartHome products represented 15% and 13% of our total revenues for the second quarter of 2020 and 2019, respectively.

Revenues from our digital cordless telephony products represented 35% and 38% of our total revenues for the six months ended June 30, 2020 and 2019, respectively. Revenues from our digital cordless telephony products represented 35% and 39% of our total revenues for the second quarter of 2020 and 2019, respectively. We believe that sales of digital cordless telephony products will continue to represent a substantial percentage of our revenues for ~~2020.~~

~~Revenues from our Unified Communications products represented 36% and 33%~~the remainder of ~~our total revenues for the three months ended March 31, 2020 and 2019, respectively.~~

~~Revenues from our SmartHome products represented 14% and 15% of our total revenues for the first three months of 2020 and 2019, respectively.~~

~~Revenues from our SmartVoice products represented 14% and 15% of our total revenues for the three months ended March 31, 2020 and 2019, respectively.~~2020.

Gross profit. Gross profit as a percentage of revenues was ~~50.9~~50.3 % for the ~~first~~second quarter of 2020 and ~~51.1%~~49.7% for the second quarter of 2019. Gross profit as a percentage of revenues was 50.6% for the first ~~quarter~~half of 2020 and 50.4% for the first half of 2019. The ~~decrease~~increase in our gross profit for the comparable periods was primarily due to (i) ~~lower inventory provisions for the first three months~~an improvement in direct contribution and production yield of ~~2019, as compared to the same period in 2020,~~certain of our products, and (ii) ~~higher royalty expenses for the first three months of 2020, as compared to the first three months of 2019, both of which were partially offset by the positive effects of changes~~a change in the mix of products sold and mix of ~~customers for~~customers. This increase was partially offset by higher royalties paid during the second quarter and first ~~three months~~half of 2020 ~~as compared~~ to IP vendors and the ~~first three months of 2019.~~

As gross profit reflects the sale of chips and chipsets that have different margins, changes in the mix of products sold have impacted and will continue to impact our gross profit in future periods. Our gross profit may decrease in the future due to a variety of factors, including the continued decline in the average selling prices of our products, changes in the mix of products sold, our failure to achieve cost reductions, roll-out of new products in any given period, our success in introducing new engineering processes to reduce manufacturing costs, increases in the cost of raw materials such as gold, oil and silicon wafers, and increases in production, assembly and testing costs. Moreover, our suppliers may pass the increase in the cost of raw materials and commodities onto us, which would further reduce the gross margins of our products. There are no guarantees that our ongoing efforts in cost reduction and yield improvements will keep pace with the anticipated continuing decline in average selling prices of our products.IIA.

Cost of goods sold consists primarily of costs of wafer manufacturing and fabrication, assembly and testing of integrated circuit devices and related overhead costs, and compensation and associated expenses related to manufacturing and testing support, inventory obsolesce and logistics personnel.

Research and development expenses, net.Our research and development expenses, net, decreased to $8.5 million for the second quarter of 2020 from $8.6 million for the second quarter of 2019. The decrease for the second quarter of 2020 was mainly due to (i) an increase in funding received from the IIA in the amount of $0.3 million, as compared to the second quarter of 2019, and (ii) a decrease in travel expenses in the amount of $0.1 million, as compared to the second quarter of 2019. The decrease in research and development expenses was partially offset by an increase of $0.3 million in salaries and related expenses as compared to the second quarter of 2019 as a result of the revaluation of the Israeli Shekel vs. the U. S. Dollar in the second quarter of 2020, as compared to the second quarter of 2019 and an increase in the number of research and development employees in the second quarter of 2020, as compared to the second quarter of 2019.

Our research and development expenses, net, increased to ~~$10.4~~$18.8 million for the first ~~quarter~~half of 2020 from ~~$8.9~~$17.5 million for the first ~~quarter~~half of 2019. The increase for the first ~~quarter~~half of 2020 was mainly due to (i) an increase in IP and ~~tape-out~~tape out expenses in anthe amount of $1.2 million, as compared to the first ~~quarter~~half of 2019, ~~related to an innovative Edge AI SoC,~~ (ii) an increase of $0.5 million in ~~payroll~~salaries and related expenses as compared to the first ~~quarter~~half of 2019 ~~due to the devaluation~~as a result of ~~the U. S. Dollar vs. the Israeli Shekel for the first quarter of 2020, (iii)~~ an increase in the number of research and development employees ~~for~~in the first ~~quarter~~half of 2020, as compared to the first ~~quarter~~half of 2019 and ~~(iv) a decrease in funding received from~~the revaluation of the Israeli ~~Innovation Authority (“IIA”)~~Shekel vs. the U. S. Dollar in the first half of 2020, as compared to the first half of 2019, and (iii) an ~~amount~~increase in equity-based compensation expenses of ~~$0.2~~$0.1 million, as compared to the first ~~quarter~~half of 2019. ~~These increases were~~The increase was partially offset by (i) a decrease ~~in labor contractors and subcontractor expenses, a decrease in travel expenses, and a decrease~~of $0.2 million in development tools expenses, ~~totaling $0.3 million for the first quarter of 2020,~~ as compared to the ~~same period~~first half of 2019, (ii) an increase in funding received from the IIA in the first half of 2020 in amount of $0.1 million, and (iii) a decrease of $0.2 million in travel expenses as compared to the first half of 2019.

Our research and development expenses, net, as a percentage of our total revenues were ~~37%~~30% and ~~32%~~29% for the three months ended ~~March 31,~~June 30, 2020, and 2019 and 33% and 31% for the six months ended June 30, 2020 and 2019, respectively. The increase in research and development expenses, net, as a percentage of our total revenues for the three months ended June 30, 2020 and 2019 was mainly due to a decrease in revenues in the comparable periods. The increase in research and development expenses, net, as a percentage of revenues for the first half of 2020, as compared to the first half of 2019, was mainly due to decrease in revenues, and an increase in research and development expenses for the comparable periods.

Research and development expenses consist mainly of payroll expenses to employees involved in research and development activities, expenses related to tape out and mask work, subcontracting, labor contractors and engineering expenses, depreciation and maintenance fees related to equipment and software tools used in research and development, and facilities expenses associated with and allocated to research and development activities.

Sales and marketing expenses. Our sales and marketing expenses amounted to $4.4 million for both the second quarter of 2020 and 2019.

Our sales and marketing expenses increased to ~~$5.0~~$9.4 million for the first ~~quarter~~half of 2020 from ~~$4.5~~$8.9 million for the first ~~quarter~~half of 2019. The increase in sales and marketing expenses for the first ~~quarter~~half of 2020, as compared to the comparable period of 2019, was mainly due to (i) an increase in salaries and payroll ~~and~~ related expenses in the amount of $0.3 million for the first ~~quarter~~half of 2020, as compared to the first ~~quarter~~half of 2019, ~~in an amount of $0.2 million,~~ mainly as a result of an increase in the number of sales and marketing employees, (ii) an increase of $0.2 million in sales commissions for the first half of 2020, and (iii) an increase of $0.3 million in equity-based compensation expenses for the first ~~quarter~~half of 2020, as compared to the ~~same period~~first half of ~~2019,~~2019. The increase in sales and ~~(iii) an increase~~marketing expenses was partially offset by a decrease of ~~$0.1~~$0.2 million in ~~sales commissions~~travel expenses for the first ~~quarter~~half of 2020, as compared to the ~~same period~~first half of 2019.

Our sales and marketing expenses, net, as a percentage of our total revenues were ~~18%~~16% and ~~16%~~15% for the three months ended ~~March 31,~~June 30, 2020 and 2019, respectively, and 17% and 15% for the first half of 2020 and 2019, respectively. The increase as a percentage of our total revenues for the three months ended ~~March 31,~~June 30, 2020 and 2019 was mainly due to a decrease in revenues for the comparable periods. The increase in sales and marketing expenses as a percentage of our revenues for the first half of 2020, as compared to 2019, was mainly due to an increase in sales and marketing expenses and a decrease in revenues for the comparable periods.

Sales and marketing expenses consist mainly of sales commissions, payroll expenses to direct sales and marketing employees, travel, trade show expenses, and facilities expenses associated with and allocated to sales and marketing activities.

General and administrative expenses. Our general and administrative expenses decreased to ~~$2.3~~$2.6 million for the ~~first~~second quarter of 2020, from ~~$2.6~~$2.7 million for the ~~first~~second quarter of 2019. The decrease in our general and administrative expenses for the second quarter of 2020 was mainly due to a decrease of $0.1 million in travel expenses, as compared to the second quarter of 2019.

Our general and administrative expenses were $5.0 million and $5.2 million for the first ~~quarter~~half of 2020 and 2019, respectively. The decrease in general and administrative expenses for the first half of 2020, as compared to the comparable period of 2019, iswas mainly ~~attributable~~due to (i) a decrease ~~of $0.2 million~~ in equity-based compensation expenses for the first ~~quarter~~half of 2020 in the amount of $0.2 million as compared to the first half of 2019, and (ii) a decrease in travel expenses in the amount of $0.1 million as compared to the first half of 2019. The decrease in general and administrative expenses was partially offset by an increase in professional expenses for the first half of 2020, as compared to the first ~~quarter~~half of 2019.

General and administrative expenses as a percentage of our total revenues were ~~8% and~~ 9% for ~~the three month periods ended March 31, 2020 and 2019, respectively. The decrease as a percentage of our total revenues for~~both the three months ended ~~March 31,~~June 30, 2020 ~~was mainly due to a decrease in general~~ and ~~administrative expenses~~2019, and 9% for both the ~~comparable periods.~~first six months of 2020 and 2019.

Our general and administrative expenses consist mainly of payroll expenses for management and administrative employees, accounting and legal fees, expenses related to investor relations as well as facilities expenses associated with general and administrative activities.

Description of segments.

~~The company operates~~We operate under three reportable segments.

Our 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 our chief operating decision-maker (“CODM”) in deciding how to allocate resources and assess performance. Our CODM is the Chief Executive Officer, who evaluates our performance and allocates resources based on segment revenues and operating income.

Our operating segments are as follows: Home, Unified Communications and SmartVoice. The classification of our business segments is based on a number of factors that ~~our~~ management uses to evaluate, view and run ~~the company’s~~our business operations, which include, but are not limited to, customer base, homogeneity of products and technology.

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, we consolidated our 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 our total revenues, and amounted to ~~36%~~35% and ~~37%~~38% of ~~the Company’s~~our total revenues for the first ~~three months~~half of 2020 and 2019, respectively, and 35% and 39% of our total revenues for the second quarter of 2020 and 2019, respectively, and (ii) revenues from SmartHome products amounted to ~~14%~~15% and ~~15%~~14% of our total revenues for the first ~~three~~six months of 2020 and 2019, respectively, and 15% and 13% of our total revenues for the second quarter of 2020 and 2019, respectively.

Unified Communications - Comprehensive solution for ~~Unified Communications~~unified communications products, including office solutions that offer businesses of all sizes ~~low-cost~~ VoIP terminals with converged voice and data applications. Revenues from our ~~Unified Communications~~unified communications products represented 36% and ~~33%~~32% of our total revenues for the first ~~three months~~half of 2020 and 2019, respectively, and 36% and 30% of our revenues for the second quarter of 2020 and 2019, respectively. No revenues derived from ~~any~~other products in the Unified Communications segment exceeded 10% of our total consolidated revenues for ~~either~~both the first ~~three~~six months and the second quarter of 2020 orand 2019.

SmartVoice - Products for the SmartVoice market that ~~provides~~provide voice activation and recognition, voice enhancement, always-on and far-end noise elimination targeted for mobile phone, mobile headsets, hearables and other devices that incorporate ~~our~~the Company’s noise suppression and voice quality enhancement HDClear technology. Revenues derived from ~~our HDClear~~ products in the SmartVoice segment represented 14% and ~~15%~~17% of our total revenues for the first ~~three months~~half of 2020 and 2019, respectively, and 14% and 18% of our total revenues for the second quarter of 2020 and 2019, respectively. No revenues derived from ~~any~~other products in the SmartVoice segment exceeded 10% of ~~the Company’s~~our total consolidated revenues for ~~either~~both the first ~~three~~six months and the second quarter of 2020 orand 2019.

Segment data:

~~Segment data.~~ We derive the results of our business segments directly from our internal management reporting system and by using certain allocation methods. The accounting policies we use to derive business segment results are substantially the same as those we use for consolidation of our financial statements. ~~Management~~The CODM measures the performance of each business segment based on several metrics, including earnings from operations. ~~Management~~The CODM uses these results, in part, to evaluate the performance of, and to assign resources to, each of the business segments. We do not allocate to our business segments certain operating expenses, which ~~we manage~~are managed separately at the corporate level. These unallocated costs include primarily amortization of purchased intangible assets, equity-based compensation expenses, and certain corporate governance costs.

~~We do not allocate any assets to segments and, therefore, no amount of assets is reported to our management or disclosed in the financial information for segments.~~

Selected operating results information for each business segment was as follows for the three months ended ~~March 31,~~June 30, 2020 and ~~2019:~~2019 (unaudited):

	Revenues				Income (loss) from operations
	Three months ended March 31,										Three months ended June 30,
	2020		2019		2020			2019			Revenues				Income (loss) from operations
											2020		2019		2020			2019
Home	$	14,018	$	14,730	$	3,576		$	4,071		$	14,243	$	14,918	$	4,263		$	4,167
Unified Communications		10,238		9,409		3,709			2,855		$	10,144	$	8,797	$	3,329		$	2,696
SmartVoice		3,983		4,137		(8,294	)		(6,063	)	$	3,949	$	5,319	$	(5,956	)	$	(5,465	)

Total	$	28,239	$	28,276	$	(1,009	)	$	863		$	28,336	$	29,034	$	1,636		$	1,398

Selected operating results information for each business segment was as follows for the six months ended June 30, 2020 and 2019 (unaudited):

Six months ended June 30,

Revenues

Income (loss) from operations

2020

2019

2020

2019

Home
$ 28,261 $ 29,648 $ 7,839 $ 8,237
Unified Communications
$ 20,382 $ 18,206 $ 7,037 $ 5,551
SmartVoice
$ 7,932 $ 9,456 $ (14,250 ) $ (11,526 )
Total
$ 56,575 $ 57,310 $ 626 $ 2,262

Sales to our customers in the ~~home~~Home segment decreased for the second quarter and the first ~~three months~~half of 2020, as compared to the second quarter and first ~~three~~six months of 2019, representing a decrease of 5% in absolute ~~dollars.~~dollars for both comparable periods. The decrease in sales in the ~~Home~~home segment for the comparable periods was mainly attributable to decreased demands for cordless ~~phones over the comparable periods.~~phones.

Sales to our customers in the Unified Communications segment increased for the second quarter and first ~~three months~~half of 2020, as compared to the second quarter and first ~~three months~~half of 2019, representing an increase of 9%15% and 12%, respectively, in absolute dollars. The increase in sales in the Unified Communications segment for ~~the~~both comparable periods was mainly due to ~~increased~~an increase in demand from our ~~customers for, and an increase in our market share of, VoIP products.~~customers.

Sales to our customers in the SmartVoice segment decreased for the second quarter and the first ~~three~~six months of 2020, as compared to the second quarter and first ~~three~~six months of 2019, representing a decrease of 4%26% and 16%, respectively, in absolute dollars. The decrease in sales to our customers in the SmartVoice segment for the ~~first three months of 2020, as compared to the first three months of 2019,~~comparable periods was mainly due to a decrease in sales to ~~one of our~~a tier one ~~customers~~customer and sales of our SmartVoice products to ~~OPPO Mobile Telecommunications Corp. Ltd, one of China’s top mobile OEMs.~~OPPO.

The reconciliation of segment operating results information to our consolidated financial information is included in Note N to our condensed consolidated financial statements.

Amortization of intangible assets. For the ~~first three months~~second quarter of 2020 and 2019, we recorded an expense of $0.1 million relating to the amortization of intangible assets associated with previous acquisitions. During the first half of 2020 and 2019, we recorded an expense of $0.2 million relating to the amortization of intangible assets associated with previous acquisitions.
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Financial income, net. Financial income, net, amounted to ~~$0.9 million~~$0.3 and ~~$0.3~~$0.4 million for the three month periods ended ~~March 31,~~June 30, 2020 and 2019, respectively. ~~The increase in financial~~Financial income, net, ~~resulted mainly from income related~~amounted to ~~exchange rate differences due to the lease accounting standard (ASC 2016-02) in an amount of $0.4~~$1.2 million and $0.7 million for the first six months of 2020 and 2019, respectively.
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Financial income, net, for the second quarter of 2020 ~~as compared to exchange rate difference expenses due to ASC 2016-02~~decreased in anthe amount of ~~$0.3~~$0.1 million ~~for the first quarter~~as a result of ~~2019. The increase is offset to some extent by~~ a decrease ~~of $0.1 million~~ in marketable securities and deposits interest for the ~~three months period ended March 31,~~second quarter of 2020, as compared to the ~~three months period ended March 31,~~second quarter of 2019, due to a decrease in interest rates.

Financial income, net, for the first half of 2020 increased in the amount of $0.7 million as a result of a decrease in non-cash expenses from exchange rate differences resulting from lease accounting standard (ASC 2016-02) included in the first half of 2019.
Provision for income taxes. We had no income tax benefit for the second quarter of 2020, as compared to income tax benefit of $0.4 million for the second quarter of 2019. We had $0.1 ~~and $0.2~~ million of income tax benefit for the first ~~quarters~~six months of 2020, ~~and 2019, respectively.~~as compared to $0.6 million of income tax benefit for the first half of 2019.

The income tax benefit for the first quarter of 2020 was mainly attributable to income in an amount of $0.1 million that resulted from changes in deferred taxes related to intangible assets acquired in previous acquisitions and equity-based compensation expenses. The income tax benefit for the firstsecond quarter of 2019 was attributable to (i) income in the amount of $0.3 million from changes in other deferred taxes, mainly related to Israeli research and development expenses that were capitalized for tax purposes to be utilized in the future at higher tax rates less current tax expenses, and (ii) income in the amount of $0.1 million that resulted from changes in deferred taxes related to intangible assets acquired in previous acquisitions and equity-based compensation ~~expenses, and (ii)~~expenses.
The income tax benefit for the first half of 2020 was attributable to income in the amount of $0.1 million from changes in other deferred taxes, mainly related to losses incurred by our Israeli subsidiary for tax purposes, less current tax expenses. The income tax benefit for the first half of 2019 was attributable to (i) income in the amount of $0.4 million from changes in other deferred taxes, mainly related to Israeli research and development expenses that were capitalized for tax purposes and will be utilized in the future ~~periods~~ at higher tax rates less current tax expenses, and (ii) income in the amount of $0.2 million that resulted from changes in deferred taxes related to intangible assets acquired in previous acquisitions and equity-based compensation expenses.

LIQUIDITY AND CAPITAL RESOURCES

Operating activities. During the first ~~three~~six months of 2020, we generated ~~$0.9~~$8.9 million of cash and cash equivalents ~~for~~from our operating activities, as compared to ~~$3.5~~$0.5 million of cash used infor our operating activities for the first ~~quarter~~half of 2019. The increase in net cash ~~generated~~provided from operating activities for the first ~~three months~~half of 2020, as compared to the first ~~three months~~half of 2019, was mainly as a result of changes in working capital ~~including: (i)~~items for the first half of 2020, as compared to the first half of 2019 (mainly a decrease in accounts receivable in anthe amount of ~~$1.5~~$4.8 million ~~during~~for the first half of 2020, as compared to an increase ~~of $2.2 million in 2019, (ii) an increase~~ in accounts ~~payable~~receivable in the amount of ~~$0.5~~$3.7 million ~~in 2020 as compared to a decrease~~for the first half of ~~$2.3 million in 2019, and (iii) an increase in accrued expenses of $0.9 million in 2020, as compared to a decrease of $0.7 million in 2019. These increases were partially~~2019), offset by (a) an increase in inventories in an amount of $0.6 million in 2020, as compared to a decrease of $0.5 million in 2019, (b) a decrease in accrued compensation and benefits in an amount of $1.1 million in 2020, as compared to a decrease of $0.2 million in 2019. In addition to the working capital changes, there wassome extent by an increase in net loss for the first ~~three months~~half of 2020, as compared to the ~~same period~~first half of 2019.

Investing activities. We invest excess cash in marketable securities of varying maturity, depending on our projected cash needs for operations, capital expenditures and other business purposes. During the first ~~quarter~~half of 2020, we purchased ~~$13.3~~$48.6 million of marketable securities and short-term deposits, as compared to ~~$9.9~~$19.5 million ~~of marketable securities~~purchased during the first ~~quarter~~half of 2019. During the first ~~quarter~~half of 2020, ~~$16.7~~$42.4 million of marketable securities and short-term deposits matured and were called by the issuers, as compared to ~~$8.5~~$19.5 million during the first ~~quarter~~half of 2019. During the first ~~quarter~~half of 2020 and 2019, ~~$5.7~~$9.6 million and ~~$4.2~~$5.0 million, respectively, of marketable securities were sold. ~~During the first quarter of 2020, no short-term deposits matured whereas $1.6 million of short-term deposits matured during the same period in 2019.~~ As of ~~March 31,~~June 30, 2020, the amortized cost of our marketable securities and deposits was ~~$92.9~~$98.5 million and their stated market value was ~~$92.6,~~$98.8, representing $0.3 million of unrealized ~~losses.~~gains.

Our capital equipment purchases, consisting primarily of research and development software tools, computers, peripheral, engineering test and lab equipment, leasehold improvements, furniture and fixtures, totaled ~~$0.3~~$0.6 and ~~$1.9~~$3.9 million, for the first ~~three~~six months of 2020 and 2019, respectively. For the first ~~quarter~~six months of 2019, ~~the~~ capital investments were related mostly to leasehold improvements for our new Israeli facilities.

Financing activities. During the first ~~three~~six months of 2020, we paid an aggregate purchase price of ~~$3.4~~$3.7 million to repurchase approximately ~~275,000~~305,000 shares of common stock at an average purchase price of ~~$12.17~~$12.26 per share. No shares of common stock were repurchased during the first ~~three~~six months of 2019.

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In addition, during the first ~~quarter~~half of 2020, we received ~~$0.2~~$1.5 million upon the exercise of employee and director stock options. During the first ~~quarter~~half of 2019, we received ~~$0.9~~$1.1 million upon the exercise of employee and director stock options. We cannot predict cash flows from exercises of stock options for future periods.

Our board of directors has previously approved a number of share repurchase programs, including those in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934, for the repurchase of our common stock. In February 2019, our board authorized an increase of the existing share repurchase program to an aggregate of $10.0 million, inclusive of previously authorized amounts under the repurchase program. At ~~March 31,~~June 30, 2020, approximately 0.5 million shares of our common stock were available for repurchase under our board authorized share repurchase program.

As of ~~March 31,~~June 30, 2020, we had cash and cash equivalents totaling approximately ~~$35.3~~$38.2 million and marketable securities and time deposits of approximately ~~$93.1~~$98.8 million. Out of total cash, cash equivalents and marketable securities of ~~$128.4~~$137.0 million, ~~$116.4~~$125.0 million was held by foreign entities. Our intent is to permanently reinvest earnings of our foreign operations and our current operating plans do not demonstrate a need to repatriate foreign earnings to fund our U.S. operations. However, if these funds were needed for our operations in the United States, we 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. On July 1, 2020, we used approximately $14.5 million of our cash for the acquisition of SoundChip (see “Subsequent Events” section below).

Our working capital at ~~March 31,~~June 30, 2020 was approximately ~~$77~~$84.1 million, compared to ~~$50.8 million~~$51.1 as of ~~March 31,~~June 30, 2019. The increase in working capital was mainly due to (i) replacement of ~~long term~~long-term marketable securities with short term marketable securities and deposits, and (ii) net cash generated from operating activities from ~~March 31,~~June 30, 2019 through ~~March 31,~~June 30, 2020. The ~~above mentioned~~above-mentioned increases were partially offset by ~~(a) purchase of capital equipment in an amount of $4.0 million from March 31, 2019 to March 31, 2020, and (b)~~(i) the repurchase of our common stock in the amount of ~~$3.4~~$3.7 million from ~~March 31,~~June 30, 2019 through ~~March 31,~~June 30, 2020, and (ii) capital equipment purchases in the amount of $2.3 million from June 30, 2019 through June 30, 2020. We believe that our current cash, cash equivalents, cash deposits and market securities will be ~~sufficient~~enough to meet our cash requirements for both the short and long term. We believe the company has the financial resources to weather the expected short-term impacts of COVID-19. However, we have limited insight into the extent to which our business may be impacted by COVID-19, and there are many uncertainties, including the length and severity of the pandemic. An extended and severe pandemic may materially and adversely affect our future operations, financial position and liquidity.

In addition, as part of our business strategy, we may evaluate potential acquisitions of businesses, products and technologies. Accordingly, a portion of our available cash may be used at any time for the acquisition of complementary products or businesses. Such potential transactions may require substantial capital resources, which may require us to seek additional debt or equity financing. We cannot assure you that we will be able to successfully identify suitable acquisition candidates, complete acquisitions, integrate acquired businesses into our current operations, or expand into new markets. Furthermore, we cannot assure you that additional financing will be available to us in any required time frame and on commercially reasonable terms, if at all. See the section of the risk factors entitled ~~“We~~"We may engage in future acquisitions that could dilute our stockholders’ equity and harm our business, results of operations and financial condition.”" for more detailed information.
Subsequent Events
On July 1, 2020, DSP Group Ltd, our Israeli subsidiary (“Israeli Sub”) completed the acquisition of SoundChip SA, a privately held Swiss company (“SoundChip”) pursuant to the terms of a share purchase agreement (the “SPA”) the Israeli Sub entered into with SoundChip, SoundChip’s shareholders and Mark Donaldson, Ben Skelton and Paul Darlington, as founders and shareholders’ representatives (collectively, the “Founders” and together with SoundChip’s shareholders, the “Shareholders”). Pursuant to the terms of the SPA, Israeli Sub paid an initial purchase price of approximately $14.4 million (with a portion held in escrow in accordance with the terms of the SPA) 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 by certain customer and product sales milestones during the period from July 1, 2020 to December 31, 2022. We funded the Initial Purchase Price from existing cash. The Initial Purchase Price is subject to a further post-closing working capital true up.
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Off-Balance sheet arrangements

We do not have any off-balance sheet arrangements, as such term is defined in recently enacted rules by the Securities and Exchange Commission, that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.
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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest rate risk. It is our policy not to enter into interest rate derivative financial instruments, except for hedging of foreign currency exposures discussed below. We do not currently have any significant interest rate risk since we do not have any financial obligations.

The majority of our 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 short term deposits may be redeemed and therefore minimal credit risk exists with respect to them. Nonetheless, cash deposits with these banks exceed the Federal Deposit Insurance Corporation (“FDIC”) insurance limits in the U.S. or similar limits in foreign jurisdictions to the extent such deposits are even insured in such foreign jurisdictions. While we monitor on a systematic basis the cash balances and adjust the balances as appropriate, these balances could be impacted if one or more of the financial institutions with which we deposit our funds fails or is subject to other adverse conditions in the financial or credit markets. To date we have experienced no loss of principal or lack of access to our cash; however, we can provide no assurances that access to our cash will not be affected if the financial institutions that we hold our cash fail or if there is significant instability in the financial and credit markets.

We hold an investment portfolio of marketable securities consisting principally of debentures of U.S. and European corporations, and state and political subdivisions of the U.S. government. We intend, and have the ability, to hold investments in marketable securities even with a decline in fair value until recovery of any temporary declines in their market value. ~~We typically do not attempt to reduce or eliminate our market exposures on our investment securities because a majority of our investments are short term.~~ However, we can provide no assurance that we will recover any present declines in the market value of our investments.

Interest rate fluctuations relating to our cash and cash equivalents and within our investment portfolio have not had, and we do not currently anticipate such fluctuations will have, a material effect on our financial position on an annual or quarterly basis.

Foreign currency exchange rate risk. A significant part of our sales and expenses are denominated in U.S. dollars. Part of our expenses in Israel is paid in NIS, which subjects us to the risks of foreign currency fluctuations between the U.S. dollar and the NIS. Our primary expenses paid in NIS are employee salaries and lease payments on our Israeli facilities. Furthermore, a portion of our expenses for our European operations are paid in Euro, which subjects us to the risks of foreign currency fluctuations between the U.S. dollar and the Euro. Our primary expenses paid in Euro are employee salaries, lease and operational payments on our European facilities. To partially protect the company against an increase in value of forecasted foreign currency cash flows resulting from salary and lease payments denominated in NIS during 2020, we instituted a foreign currency cash flow hedging program. The option and forward contracts used are designated as cash flow hedges, as defined by FASB ASC No. 815,” Derivatives and Hedging,” and are all effective as hedges of these expenses. For more information about our hedging activity, see Note H to our condensed consolidated financial statements for the period ended ~~March 31,~~June 30, 2020. An increase in the value of the NIS and the Euro in comparison to the U.S. dollar could increase the cost of our research and development expenses and general and administrative expenses, all of which could harm our operating profit. Although we currently are using a hedging program to minimize the effects of currency fluctuations relating to the NIS, our hedging position is partial, may not exist at all in the future and may not succeed in minimizing our foreign currency fluctuation risks.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSUREs ABOUT MARKET RISK

See ~~“Management’s~~"Management’s discussion and analysis of financial condition and results of operations—quantitative and qualitative disclosures about market risk.”"
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ITEM 4. CONTROLS AND PROCEDURES

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of ~~March 31,~~June 30, 2020.
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There has been no change in our internal control over financial reporting that occurred during our most recent fiscal quarter that has materially affected or is reasonably likely to materially affect our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

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

ITEM 1A. RISK FACTORS.

There are no material changes to the Risk Factors described under the title “Factors That May Affect Future Performance” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 other than (1) changes to the Risk Factor below entitled “We generate a significant amount of our total revenues from the sale of digital cordless telephony products and our business and operating results may be materially adversely affected if we do not continue to succeed in this highly competitive market or if sales within the overall cordless digital market decreases;” (2) changes to the Risk Factor below entitled “We rely significantly on revenue derived from a limited number of customers;” (3) changes to the Risk Factor below entitled “Because we have significant international operations, we may be subject to political, economic and other conditions relating to our international operations that could increase our operating expenses and disrupt our business;” (4) changes to the Risk Factor below entitled “Because we have significant operations in Israel, we may be subject to political, economic and other conditions affecting Israel that could increase our operating expenses and disrupt our business;” (5) changes to the Risk Factor below entitled “The tax benefits available to us under Israeli law requires us to meet several conditions, and may be terminated or reduced in the future, which would increase our taxes;” (6) changes to the Risk Factor below entitled “Our research and development expenses may increase if the grants we currently receive from the Israeli government are reduced or withheld;” (7) changes to the Risk Factor below entitled “We are exposed to fluctuations in currency exchange rates;” and ~~(7)~~(8) changes to the Risk Factor below entitled “The COVID-19 pandemic, or other outbreak of disease or similar public health threat, could materially and adversely affect our business, financial condition and results of operations.”

The COVID-19 pandemic, or other outbreak of disease or similar public health threat, could materially and adversely affect our business, financial condition and results of operations.

The COVID-19 pandemic has resulted in government authorities implementing numerous measures to try to contain the virus, such as travel bans ~~travel~~and restrictions, quarantines, shelter in place orders, ~~restrictions accessing facilities,~~ and shutdowns. These measures have impacted and may further impact our workforce and operations, ~~and~~ the operations of our customers, and those of our respective vendors and suppliers, as well as consumer confidence and demand. There is considerable uncertainty regarding the impact, and expected duration, of such measures and potential future ~~measures. Continued~~measures, and restrictions ~~may have~~on our access to our facilities or on our support operations or workforce, or similar limitations for our customers, vendors and suppliers. As a ~~material adverse effect on~~result, the continued spread of COVID-19 could cause further disruption in our supply chain and customer demand, and could adversely affect the ability of our customers to perform, including in making timely payments to us, which could further adversely impact our business, financial condition and results of operations.
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The outbreak has significantly increased economic and demand uncertainty. The COVID-19 pandemic has caused an economic slowdown that is likely to continue and could cause a global recession.

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We have seen that demand for consumer electronic products ~~soften~~has softened due to social distancing and shelter-in-place restrictions. Also, we have noticed a slowdown in spending on enterprise IT infrastructure which negatively affects revenues from our Unified Communications business segment. Therefore, we ~~may~~ face ~~some~~decreased near-term softness, ~~mainly~~ related to a shortfall in consumer spending and ~~its implications on~~ demand for consumer electronic products, as well as ~~the impact of the lockdowns on limiting consumers’ ability to buy consumer electronics~~near-term decrease in ~~outlets beyond the Internet.~~revenues from our Unified Communications business segment.

The spread of ~~COVID-19~~coronavirus also has caused us to modify our business practices (including employee travel, employee work locations, and cancellation of physical participation in meetings, events and conferences), and we may take further actions as may be required by government authorities or that we determine are in the best interests of our employees, customers, and communities. Such actions may result in further disruptions to our supply chain, operations and facilities, and workforce. We cannot assure you that such measures will be sufficient to mitigate the risks posed by COVID-19, and our ability to perform critical functions could be harmed.
In recent weeks, the spread of COVID-19 has led to disruption and volatility in the global capital markets, which may adversely affect our, our customers’, and our suppliers’ liquidity, cost of capital and ability to access the capital markets. The continued spread of COVID-19 could cause further disruption in our supply chain and customer demand and could adversely affect the ability of our customers to perform. As a result, our customers may be unable to make timely payments to us, which could further adversely impact our business, financial condition and results of operations.

We cannot at this time quantify or forecast the business impact of COVID-19. The degree to which COVID-19 impacts our business, financial condition, and results of operations will depend on future developments, which are highly uncertain, and we cannot assure you as to the duration and spread of the outbreak, its severity, the actions to contain the virus or treat its impact, or how quickly and to what extent normal economic and operating conditions can resume.

In order to sustain the future growth of our business, we must penetrate new markets and our new products must achieve widespread market acceptance but such additional revenue opportunities may not be implemented and may not be achieved.

In order to expand our business and increase our revenues, we must penetrate new markets and introduce new products, especially our ~~Unified Communications, SmartVoice and SmartHome product families.~~products from IoAT (Internet of Audio Things) businesses. To sustain the future growth of our business, we need to introduce new products as sales of our cordless products continue to decline as expected. We have invested significant resources in pursuing potential opportunities for revenue growth in ~~new product initiatives.~~the IoAT businesses. We also are exploring opportunities to expand sales of our products in new geographies, including China, South Korea and South America. However, there are no assurances that we will be successful in the development, sales and marketing of our products in these competitive markets. Moreover, there are no assurances that we will recoup our investments made pursuing additional revenue opportunities. Our inability to penetrate such markets and increase our market share in those markets or lack of customer acceptance of those products may harm our business and potential growth.

Because the markets in which we compete are subject to rapid changes, our products may become obsolete or unmarketable.

The markets for our products and services are characterized by rapidly changing technology, short product life cycles, evolving industry standards, changes in customer needs, geo-political influences, demand for higher levels of integration, growing competition and new product introductions. Our future growth is dependent not only on the continued success of our existing products but also successful introduction of new products. Our ability to adapt to changing technology and anticipate future standards, and the rate of adoption and acceptance of those standards, will be a significant factor in maintaining or improving our competitive position and prospects for growth. If new industry standards emerge, our products or our customers’ products could become unmarketable or obsolete, and we could lose market share. We may also have to incur substantial unanticipated costs to comply with these new standards. If our product development and improvements take longer than planned, the availability of our products would be delayed. Any such delay may render our products obsolete or unmarketable, which would have a negative impact on our ability to sell our products and our results of operations. Moreover, if any of our competitors implement new technologies before us, those competitors may be able to provide products that are more effective or with more user-friendly features than ours, possibly at lower prices, which could adversely impact our sales and impact our market share. Our failure to develop and introduce competitive new products that are compatible with industry standards and that satisfy customer requirements, and the failure of our products to achieve broad market acceptance, could have a negative impact on our ability to sell our products and our results of operations.

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Because our quarterly operating results may fluctuate significantly, the price of our common stock may decline.

Our quarterly results of operations may vary significantly in the future for a variety of reasons, many of which are outside our control, including the following:

●
fluctuations in volume and timing of product orders;
●
timing, rescheduling or cancellation of significant customer orders and our ability, as well as the ability of our customers, to manage inventory;
●
changes in demand for our products due to seasonal consumer buying patterns and other factors;
●
timing of new product introductions by us and by our customers or competitors;
●
changes in the mix of products sold by us or our competitors;

●
fluctuations in ~~volume~~the level of sales by our OEM customers and ~~timing~~other vendors of ~~product orders;~~end products incorporating our products;

●
timing ~~rescheduling or cancellation~~and size of ~~significant customer orders~~expenses, including expenses to develop new products and ~~our ability, as well as the ability of our customers, to manage inventory;~~product improvements, and expenses resulting from restructuring activities;

●
~~changes in demand for our products due to seasonal consumer buying patterns and other factors;~~
●
~~timing of new product introductions by us and by our customers or competitors;~~
●
~~changes in the mix of products sold by us or our competitors;~~
●
~~fluctuations in the level of sales by our OEM customers and other vendors of end products incorporating our products;~~
●
~~timing and size of expenses, including expenses to develop new products and product improvements, and expenses resulting from restructuring activities;~~

●
the timing and amount of funding from, as well as royalties payable to, Israeli Innovation Authority (“IIA”);

●
entry into new geographies, including China, South Korea and South America;

●
~~entry into~~our ability to scale our operations in response to changes in demand for our existing products and services or demand for new ~~geographies, including China, South Korea and South America;~~products requested by our customers;

●
Geo-political policies outside of our ~~ability to scale our operations in response to changes in demand for our existing products and services or demand for new products requested by our customers;~~control;

●
~~Geo-political policies outside of~~mergers and acquisitions by us, our ~~control;~~competitors and our existing and potential customers; and

●
~~mergers and acquisitions by us, our competitors and our existing and potential customers; and~~
●
general economic conditions, including current economic conditions in the United States and worldwide, and the adverse effects on the semiconductor and consumer electronics industries.

3641

Each of the above factors is difficult to forecast and could harm our business, financial condition and results of operations. Also, we sell our products to OEM customers that operate in consumer markets. As a result, our revenues are affected by seasonal buying patterns of consumer products sold by our OEM customers that incorporate our products and the market acceptance of such products supplied by our OEM customers.

Our future success is dependent on market acceptance of products in our ~~SmartVoice, SmartHome and Unified Communications product families,~~IoAT businesses, which are intensively competitive markets with dominant and established players.

Our ability to increase our revenues and offset declining revenues from our cordless product family are substantially dependent on our ability to gain market share for products in our ~~SmartVoice, SmartHome and Unified Communications product families.~~IoAT businesses. Moreover, we are targeting a new market with our SmartVoice and hearables product ~~family, a market~~families, markets with dominant and established players selling to OEM customers with whom they have established relationships. In order to gain market share, we will need to earn the business of such customers, with whom we do not have established relationships. If we are unable to generate significant revenues from our SmartVoice and hearables product ~~family~~families and gain significant and sustainable market share in ~~the mobile device market,~~such markets, our operating results would be adversely affected. Furthermore, our future growth is also dependent on the market acceptance of our Unified Communications products, a market where we also compete with existing and potential competitors, many of whom have significantly greater financial, technical, manufacturing, marketing, sales and distribution resources and management expertise than we do. In addition, our continued success and growth in the new markets in which we have recently gained market share, which markets are highly competitive, is highly dependent on our ability to be designed into future flagship products of top tier OEMs.

The market for mobile device components is highly competitive and we expect competition to intensify in the future.

The market for mobile device components is highly competitive and characterized by the presence of large companies with significantly greater resources than we have. Our SmartVoice product family relates only to the voice and audio subsystem of a mobile device and there are only a limited number of OEMs that address this market. Our main competitors include Knowles Corporation, Synaptics and Cirrus Logic. We also face competition from other companies and could face competition from new market entrants. We also compete against solutions internally developed by OEMs, as well as combined third-party software and hardware systems. Notwithstanding prior design wins with any OEM customer, our SmartVoice products may be designed out as a result of internal solutions or replacement with software systems in future products of such OEM customer. If we are unable to compete effectively, we may not succeed in achieving additional design wins and may have to lower our pricing in an attempt to gain design wins, both of which would adversely impact our operating results.

Our future business growth depends on the growth in demand for mobile devices with improved sound quality and always-on capability.

Our SmartVoice product family is designed to enhance the sound quality and minimize background noise for mobile device users and to enable always-on capabilities in mobile and other wearable devices. OEMs and ODMs may decide that the costs of improving sound quality outweigh the benefits or that always-on voice technology is not a required feature, both of which could limit demand for our SmartVoice product family. Moreover, users may also be satisfied with existing sound quality or blame poor quality on phone carriers. The market that we are targeting is evolving rapidly and is technologically challenging. New mobile devices with different components or software may be introduced that provide the same functionality as SmartVoice product family. Our future business growth will depend on the growth of this market and our ability to adapt to technological changes, user preferences and OEM demands. Our business could be materially adversely affected if we fail to do so.

3742

We generate a significant amount of our total revenues from the sale of digital cordless telephony products and our business and operating results may be materially adversely affected if we do not continue to succeed in this ~~highly~~ competitive market or if sales within the overall cordless digital market ~~decrease~~.continue to decrease.

Sales of our digital cordless telephony products comprised ~~36%~~35% of our total revenues for the first ~~quarter~~half of 2020 and ~~37%~~38% for the same period of 2019. Although we historically generated a majority of our revenue from cordless telephony products, the traditional cordless telephony market using fixed-line telephony is declining and will continue to decline, potentially steeper than prior years, which reduces our revenues derived from, and unit sales of, cordless telephony products.

We rely significantly on revenue derived from a limited number of customers.

The following table represents our sales from our ~~main~~10% and above customers as a percentage of our total revenues for the ~~three~~six months ended ~~March 31,~~June 30, 2020 and 2019:

Three months ended March 31, Six months ended June 30,
Major Customers

2020

2019

10% Customers

2020

2019

VTech
19 % 21 % 21 % 22 %

Cisco
15 % 10 % 18 % 10 %

Panasonic
10 % 8 %

Typically, our sales are made on a purchase order basis, and most of our customers have not entered into a long-term agreement requiring it to purchase our products. Moreover, we do not typically require our customers to purchase a minimum quantity of our products, and our customers can generally reschedule the delivery date of their orders on short notice without significant penalties. A significant amount of our revenues will continue to be derived from a limited number of large customers. Furthermore, the primary customers for our products are original equipment manufacturers (OEMs) and original design manufacturers (ODMs). This industry is highly cyclical and has been subject to significant economic downturns at various times. These downturns are characterized by production overcapacity and reduced revenues, which at times may affect the financial stability of our customers. Therefore, the loss of one of our major customers, or reduced demand for products from, or the reduction in purchasing capability of, one of our major customers, could have a material adverse effect on our business, financial condition and results of operations.

Because our products are components of end products, if OEMs do not incorporate our products into their end products or if the end products of our OEM customers do not achieve market acceptance, we may not be able to generate adequate sales of our products.

Our products are not sold directly to the end-user; rather, we deliver hardware and software components to OEMs and ODMs who incorporate them into their products. As a result, we rely upon OEMs and ODMs to incorporate our products into their end products at the design stage. Once an OEM designs a competitor’s product into its end product, it becomes significantly more difficult for us to sell our products to that customer because changing suppliers involves significant cost, time, effort and risk for the customer. As a result, we may incur significant expenditures on the development of a new product without any assurance that an OEM will select our product for design into its own product and without this “design win” it becomes significantly difficult to sell our products. This is especially the case for our SmartVoice product family. Moreover, even after an OEM agrees to design our products into its end products, the design cycle is long and may be delayed or discontinued due to factors beyond our control which may result in the end product incorporating our products not to reach the market until long after the initial “design win” with the OEM or not at all. From initial product design-in to volume production, many factors could impact the timing and/or amount of sales actually realized from the design-in. These factors include, but are not limited to, changes in the competitive position of our technology, our customers’ financial stability, and our ability to ship products according to our customers’ schedule and specifications. Moreover, the continued uncertainty about the sustainability of the global economic recovery and outlook may further prolong an OEM customer’s decision-making process and design cycle.

3843

Furthermore, we rely on the end products of our OEM customers that incorporate our products to achieve market acceptance. Many of our OEM customers face intense competition in their markets. If end products that incorporate our products are not accepted in the marketplace, we may not achieve adequate sales volume of our products, which would have a negative effect on our results of operations.

Our revenues, gross margins and profitability may be materially adversely affected by the continued decline in average selling prices of our products and other factors, including increases in assembly and testing expenses, and raw material and commodity costs.

We have experienced and will continue to experience a decrease in the average selling prices of our products. Decreasing average selling prices could result in decreased revenues even if the volume of products sold increases. Decreasing average selling prices may also require us to sell our products at much lower gross margin than in the past and reduce profitability. Although we have to date been able to partially offset on an annual basis the declining average selling prices of our products through general operational efficiencies and manufacturing cost reductions by achieving a higher level of product integration and improving our yield percentages, there is no guarantee that our ongoing efforts will be successful or that they will keep pace with the anticipated, continued decline in average selling prices of our products.

In addition to the continued decline in the average selling prices of our products, our gross profit may decrease in the future due to other factors, including the roll-out of new products in any given period and the penetration of new markets which may require us to sell products at a lower margin, our failure to introduce new engineering processes and mix of products sold.

Our gross margins also are affected by the product mix. For example, mature products typically have lower average gross margins than newer products. Therefore, increased sales of certain mature products would lower our gross margins. The pressures in the supply chain make it very difficult for us to increase or even maintain our product pricing, which further adversely affects our gross margins.

Furthermore, increases in the price of silicon wafers, testing costs and commodities such as gold and oil, which may result in increased production costs, mainly assembly and packaging costs, may result in a decrease in our gross margins. Moreover, our suppliers may pass the increase in raw materials and commodity costs onto us, which would further reduce the gross margin of our products. In addition, as we are a fabless company, global market trends such as “under-capacity” problems so that there is a shortage of capacity to fulfill our fabrication needs also may increase our raw material costs and thus decrease our gross margin.

We are dependent on a small number of OEM customers, and our business could be harmed by the loss of any of these customers or reductions in their purchasing volumes.

We sell our products to a limited number of OEM customers directly or through a network of distributors. Moreover, many North American, European and Japanese OEMs are moving their manufacturing sites to Southeast Asia and China, as a result of the cyclical nature of manufacturing capacity issues and cost of silicon integrated circuits, the continued decline of average selling prices of chipsets and other industry-wide factors. In addition, OEMs located in Southeast Asia and China are growing and gaining competitive strength. As a result, the mix of our OEM customers may change in the future. However, we may not succeed in attracting new customers as these potential customers may have pre-existing relationships with our current or potential competitors. This trend also may promote the consolidation of OEMs located in North America, Europe and Japan with OEMs located in Southeast Asia, which may reduce the number of our potential customers and reduce the volume of chipsets the combined OEM customer may purchase from us. However, as is common in our industry, we typically do not enter into ~~long-term~~long term contracts with our customers in which they commit to purchase products from us. The loss of any of our OEM customers may have a material adverse effect on our results of operations. To attract new customers, we may be faced with intense price competition, which may affect our revenues and gross margins.

3944

Because we have significant international operations, we may be subject to political, economic and other conditions relating to our international operations that could increase our operating expenses and disrupt our business.

Although the majority of end users of the consumer products that incorporate our products are located in the U.S., we are dependent on sales to OEM customers, located outside of the U.S., that manufacture these consumer and Unified Communications products. Also, we depend on a network of distributors to sell our products that also are primarily located outside of the U.S. Export sales shipped to manufacturers in Europe and Asia, including Japan and Asia Pacific, represented ~~97%~~98% and ~~95%~~97% of our total revenues for the ~~first~~second quarter of 2020 and 2019, respectively. Furthermore, we have material operations in Germany, Hong Kong and India and employ a number of individuals within those foreign operations. As a result, the occurrence of any negative international political, economic or geographic events, as well as our failure to mitigate the challenges in managing an organization operating in various countries, could result in significant revenue shortfalls and disrupt our workforce within our foreign operations. These shortfalls and disruptions could cause our business, financial condition and results of operations to be harmed. Some of the risks of doing business internationally include:

●
unexpected changes in foreign government regulatory requirements;

●
~~unexpected changes~~fluctuations in ~~foreign government regulatory requirements;~~the exchange rate for the U.S. dollar;

●
~~fluctuations in the exchange rate for the U.S. dollar;~~import and export license requirements;

●
~~import and export license requirements;~~

●
imposition of tariffs and other barriers and ~~restrictions;~~restrictions, as well as trade tensions such as U.S. and China trade tensions;

●
burdens of complying with a variety of foreign laws, treaties and technical standards;

●
~~burdens~~uncertainty of ~~complying with a variety~~laws and enforcement in certain countries relating to the protection of ~~foreign laws, treaties and technical standards;~~intellectual property;

●
~~uncertainty of laws~~difficulty in collecting accounts receivable and ~~enforcement in certain countries relating to the protection of intellectual property;~~longer payment cycles for international customers than existing customers;

●
difficulty in ~~collecting accounts receivable~~staffing and ~~longer payment cycles for international customers than existing customers;~~managing foreign operations and maintaining the morale and productivity of employees within foreign operations;

●
~~difficulty in staffing~~multiple and ~~managing foreign operations~~possibly overlapping tax structures and ~~maintaining the morale and productivity of employees within foreign operations;~~potentially adverse tax consequences;

●
~~multiple~~political and ~~possibly overlapping tax structures~~economic instability, including protectionist policies; and ~~potentially adverse tax consequences;~~

●
~~political and economic instability, including protectionist policies; and~~

●
changes in diplomatic and trade relationships.

One or more of these factors may have a material adverse effect on our future operations and consequently, on our business, financial conditions and operating results.

Because the markets in which we compete are highly competitive, and many of our competitors may have greater resources than we do, we cannot be certain that our products will be accepted in the marketplace or capture market share.

The markets in which we operate are extremely competitive and characterized by rapid technological change, evolving standards, short product life cycles and price erosion. We expect competition to intensify as current competitors expand their product offerings and new competitors enter the market. Given the highly competitive environment in which we operate, we cannot be sure that any competitive advantages enjoyed by our current products would be sufficient to establish and sustain our new products in the market. Any increase in materials price or competition could result in the erosion of our market share, to the extent we have obtained market share, and would have a negative impact on our financial condition and results of operations.

4045

In each of our business activities, we face current and potential competition from competitors that may have significantly greater financial, technical, manufacturing, marketing, sales and distribution resources and management expertise than we do. These competitors may also have pre-existing relationships with our customers or potential customers. Further, in the event of a manufacturing capacity shortage, these competitors may be able to manufacture products when we are unable to do so. Our principal competitor in the cordless market is Dialog Semiconductors. Our principal competitors in the ~~VoIP~~Unified Communications market include Broadcom, Dialog Semiconductors, Intel, Texas Instruments and Taiwanese IC vendors. Our principal competitors in the ~~smart audio and noise reduction~~SmartVoice market include Knowles Corporation, Cirrus Logic, Synaptics, Microchip and developers of noise cancellation software running on mobile phones such as ~~ForteMedia, NXP and~~ Qualcomm.

As discussed above, various new technological developments require us to enter into new markets with competitors that have more established presence, and significantly greater financial, technical, manufacturing, marketing, sales and distribution resources and management expertise than we do. The expenditure of greater resources to expand our current product lines may increase our operating expenses and reduce our gross profit. There are no assurances that we will succeed in developing and introducing new products that are responsive to market demands.

Our research and development expenses may increase if the grants we currently receive from the Israeli government are reduced or withheld.

We currently receive research grants from programs of the IIA. To be eligible for these grants, we must meet certain development conditions and comply with periodic reporting obligations. Although we have met such conditions in the past, should we fail to meet such conditions in the future our research grants may be repayable, reduced or withheld. Such reduction can also take place due to different allocation and methodology that IIA is implementing. The reduction of such research grants may increase our research and development expenses, which in turn may reduce our operating income. ~~As an example, in 2019, the amount of grants approved by the IIA was lower than prior years due to different allocation and methodology that IIA has implemented.~~ Our research and development expenses may increase if the grants from the IIA are reduced which may negatively affect our financial results. In addition, we are required to pay royalties to the IIA on products incorporating intellectual property, the development of which utilized funding from the IIA. The royalties are subject to periodic audit by the IIA and should the IIA challenge the amount of royalties paid or payable by us and succeed in such a challenge, our gross margins for products incorporating such intellectual property, and our gross margins generally, may be negatively affect.

Because we depend on independent foundries and other third party suppliers to manufacture and test all of our integrated circuit products, we are subject to additional risks that may materially disrupt our business.

All of our integrated circuit products are manufactured and tested by independent foundries and other third party suppliers. While these foundries and other third party suppliers have been able to adequately meet the demands of our increasing business, we are and will continue to be dependent upon these foundries and third party suppliers to achieve acceptable manufacturing yields, quality levels and costs, and to allocate to us a sufficient portion of their foundry, assembly and test capacity to meet our needs in a timely manner.

While we currently believe we have access to adequate capacity to support our current sales levels pursuant to our arrangement with our foundries and other third party suppliers, we may encounter capacity shortage issues in the future. In the event of a worldwide shortage in foundry, assembly and/or test capacity, we may not be able to obtain a sufficient allocation of such capacity to meet our product needs or we may incur additional costs to ensure specified quantities of products and services. Under-capacity at the current foundries and other third party suppliers we use, or future foundries or other third party suppliers we may use, to manufacture and test our integrated circuit products may lead to increased operating costs and lower gross margins. In addition, such a shortage could lengthen our products’ manufacturing and testing cycle and cause a delay in the shipment of our products to our customers. This could ultimately lead to a loss of sales of our products, harm our reputation and competitive position, and our revenues could be materially reduced. Our business could also be harmed if our current foundries or other third party suppliers terminate their relationship with us and we are unable to obtain satisfactory replacements to fulfill customer orders on a timely basis and in a cost-effective manner. Moreover, we do not have ~~long-term~~long term capacity guarantee agreements with our foundries and with other third party suppliers.

4146

In addition, as TSMC produces a significant portion of our integrated circuit products and ASE tests and assembles a significant portion of our products, earthquakes, aftershocks or other natural disasters in Asia, or adverse changes in the political situation in Taiwan, could preclude us from obtaining an adequate supply of wafers to fill customer orders. Such events could harm our reputation, business, financial condition, and results of operations.

Our operating results are affected by general economic conditions and the highly cyclical nature of the semiconductor industry.

The general worldwide economic conditions remain uncertain which continues to make it difficult for our customers, the end-product customers, our vendors and us to accurately forecast and plan future business activities. Moreover, we operate within the semiconductor industry, which experiences significant fluctuations in sales ~~availability and~~ profitability. Downturns in the semiconductor industry are characterized by diminished product demand, excess customer inventories, accelerated erosion of prices and excess production capacity. These factors could cause substantial fluctuations in our revenues and in our results of operations. If global economic and market conditions remain uncertain or deteriorate, we could experience a material adverse impact on our business and results of operations.

Because the manufacture of our products is complex, the foundries on which we depend may not achieve the necessary yields or product reliability that our business requires.

The manufacture of our products is a highly complex and precise process, requiring production in a highly controlled environment. Changes in manufacturing processes or the inadvertent use of defective or contaminated materials by a foundry could adversely affect the foundry’s ability to achieve acceptable manufacturing yields and product reliability. If the foundries we currently use do not achieve the necessary yields or product reliability, our ability to fulfill our customers’ needs could suffer. This could ultimately lead to a loss of sales of our products and have a negative effect on our gross margins and results of operations.

Furthermore, there are other significant risks associated with relying on these third-party foundries, including:

●
risks due to the fact that we have reduced control over production cost, delivery schedules and product quality;

●
~~risks due~~less recourse if problems occur as the warranties on wafers or products supplied to ~~the fact that we have reduced control over production cost, delivery schedules~~us are limited; and ~~product quality;~~

●
~~less recourse if problems occur as the warranties on wafers or products supplied to us are limited; and~~

●
increased exposure to potential misappropriation of our intellectual property.

As we depend on independent subcontractors, located in Asia, to assemble and test our semiconductor products, we are subject to additional risks that may materially disrupt our business.

Independent subcontractors, located in Asia, assemble and test our semiconductor products. Because we rely on independent subcontractors to perform these services, we cannot directly control our product delivery schedules or quality levels. We are dependent on these subcontractors to allocate to us a sufficient portion of their capacity to meet our needs in a timely manner. Our future success also depends on the financial viability of our independent subcontractors. If the capital structures of our independent subcontractors weaken, we may experience product shortages, production delays, quality assurance problems, increased manufacturing costs, and/or supply chain disruption. All of this could ultimately lead to a loss of sales of our products, harm our reputation and competitive position, and our revenues could be materially harmed.

Moreover, the economic, market, social, and political situations in countries where some of our independent subcontractors are located are unpredictable, can be volatile, and can have a significant impact on our business because we may not be able to obtain product in a timely manner. Market and political conditions, including currency fluctuation, terrorism, political strife, war, labor disruption, and other factors, including natural or man-made disasters, adverse changes in tax laws, tariff, import or export quotas, power and water shortages, or interruption in air transportation, in areas where our independent subcontractors are located also could have a severe negative impact on our operating capabilities.

4247

We are subject to order and shipment uncertainties and if we are unable to accurately predict customer demand, our business may be harmed.

We typically sell products pursuant to shorter term purchase orders rather than long-term purchase commitments. Customers can generally change or defer purchase orders on short notice without incurring a significant penalty. Given current market conditions, we have less ability to accurately predict what or how many products our customers will need in the future. In addition, we have little visibility into and no control of the demand by our customer’s customers – generally consumer electronics retailers and businesses. Furthermore, based on discussions with our customers, we understand that our customers also have less visibility into their product demands. A decrease in the consumer electronics retailers’ or businesses’ demand or a build-up of their inventory, both of which are out of the control of our customers and us, may cause a cancellation, change or deferral of purchase orders on short notice by our customers. Anticipating demand is difficult because our customers and their customers face volatile pricing and unpredictable demand for their own products, and are increasingly focused on cash preservation and tighter inventory management. Based on these trends, our customers are reluctant to place orders with normal lead times, and we are seeing a shift to shorter lead-times and rush orders. However, we place orders with our suppliers based on forecasts of our customers’ demand and, in some instances, may establish buffer inventories to accommodate anticipated demand. Our forecasts are based on multiple assumptions, each of which may introduce error into our estimates. If we overestimate our customers’ demand or our customers overestimate their demand, we may allocate resources to manufacturing products that we may not be able to sell when we expect to, if at all. As a result, we could hold excess or obsolete inventory, which would reduce our profit margins and adversely affect our financial results. Conversely, if we underestimate our customers’ demand or our customers underestimate their demand and insufficient manufacturing capacity is available, we could forego revenue opportunities and potentially lose market share and damage our customer relationships.

Furthermore, we maintain inventory, or hubbing, arrangements with certain of our customers. Pursuant to these arrangements, we deliver products to a customer or a designated third party warehouse based upon the customer’s projected needs, but do not recognize product revenue unless and until the customer reports that it has removed our product from the warehouse to incorporate into its end products. Since we own inventory that is physically located in a third party’s warehouse, our ability to effectively manage inventory levels may be impaired, causing our total inventory turns to decrease, which could increase expenses associated with excess and obsolete product and negatively impact our cash flow.

The possible emerging trend of our OEM customers outsourcing their production may cause our revenue to decline.

We believe there may be an emerging trend of our OEM customers outsourcing their production to third parties. We have invested substantial resources to build relationships with our OEM customers. However, the outsourcing companies whom our OEM customers may choose to outsource production may not have prior business relationship with us or may instead have prior or ongoing relationships with our competitors. The emergence of this trend may require us to expend substantial additional resources to build relationships with these outsourcing companies, which would increase our operating expenses. Even if we do expend such resources, there are no assurances that these outsourcing companies will choose to incorporate our chipsets rather than chipsets of our competitors. Our inability to retain an OEM customer once such customer chooses to outsource production would have a material adverse effect on our future revenue.

4348

Third party claims of infringement or other claims against us could adversely affect our ability to market our products, require us to redesign our products or seek licenses from third parties, and seriously harm our operating results and disrupt our business.

As is typical in the semiconductor industry, we and our customers have been and may from time to time be notified of claims that we may be infringing patents or intellectual property rights owned by third parties. In addition, patent infringement claims are increasingly being asserted by patent holding companies (so-called patent “trolls”), which do not use technology and whose sole business is to enforce patents against companies, such as us, for monetary gain. Because such patent holding companies do not provide services or use technology, the assertion of our own patents by way of counter-claim may be ineffective. We have received claims that our products infringe upon the proprietary rights of such patent holding companies. In addition, third parties have asserted and may in the future assert intellectual property infringement claims against our customers, which we have agreed in certain circumstances to indemnify and defend against such claims. If litigation becomes necessary to determine the validity of any third party claims, it could result in significant expense to us and could divert the efforts of our technical and management personnel, whether or not the claim has merit and notwithstanding that the litigation is determined in our favor.

If it appears necessary or desirable, we may try to obtain licenses for those patents or intellectual property rights that we are allegedly infringing. Although holders of these types of intellectual property rights commonly offer these licenses, we cannot assure you that licenses will be offered or that the terms of any offered licenses will be acceptable to us. Our failure to obtain a license for key intellectual property rights from a third party for technology used by us could cause us to incur substantial liabilities, suspend the manufacturing of products utilizing the technology or damage the relationship with our customers. Alternatively, we could be required to expend significant resources to develop non-infringing technology. We cannot assure you that we would be successful in developing non-infringing technology. The occurrence of any of these events could harm our business, financial condition or results of operations.

Because we have significant operations in Israel, we may be subject to political, economic and other conditions affecting Israel that could increase our operating expenses and disrupt our business.

Our principal research and development facilities are located in the State of Israel and, as a result, at ~~March 31,~~June 30, 2020, ~~200~~201 of our ~~337~~340 employees were located in Israel, including ~~132~~133 out of 202 of our research and development personnel. In addition, although we are incorporated in Delaware, a majority of our executive officers are residents of Israel. Although substantially all of our sales currently are being made to customers outside of Israel, we are nonetheless directly influenced by the political, economic and military conditions affecting Israel. Any major hostilities involving Israel, or the interruption or curtailment of trade between Israel and its present trading partners, could significantly harm our business, operating results and financial condition.

Israel’s economy has been subject to numerous destabilizing factors, including a period of rampant inflation in the early to mid-1980s, low foreign exchange reserves, fluctuations in world commodity prices, military conflicts and civil unrest. In addition, Israel and companies doing business with Israel have been the subject of an economic boycott by the Arab countries since Israel’s establishment. Although they have not done so to date, these restrictive laws and policies may have an adverse impact on our operating results, financial condition or expansion of our business.

Since the establishment of the State of Israel in 1948, a state of hostility has existed, varying in degree and intensity, between Israel and the Arab countries. Although Israel has entered into various agreements with certain Arab countries and the Palestinian Authority, and various declarations have been signed in connection with efforts to resolve some of the economic and political problems in the Middle East, hostilities between Israel and some of its Arab neighbors have recently escalated and intensified. We cannot predict whether or in what manner these conflicts will be resolved. Our results of operations may be negatively affected by the obligation of key personnel to perform military service. In addition, certain of our officers and employees are currently obligated to perform annual reserve duty in the Israel Defense Forces and are subject to being called for active military duty at any time. Although we have operated effectively under these requirements since our inception, we cannot predict the effect of these obligations on the company in the future. Our operations could be disrupted by the absence, for a significant period, of one or more of our officers or key employees due to military service.

4449

The tax benefits available to us under Israeli law require us to meet several conditions, and may be terminated or reduced in the future, which would increase our taxes.

Our facilities in Israel have been granted Approved Enterprise and Beneficiary Enterprise status under the Law for the Encouragement of Capital Investments, 1959, commonly referred to as the “Investment Law,” as amended. The Investment Law provides that capital investments in a production facility (or other eligible assets) designated as an Approved Enterprise or Beneficiary Enterprise receive certain tax benefits in Israel. Our investment programs that generate taxable income are currently subject to an average tax rate of up to approximately 10% based on a variety of factors, including percentage of foreign ownership and approvals for the erosion of the tax basis of our investment programs. To be eligible for tax benefits, we must meet certain conditions, relating principally to adherence to the investment program filed with the Investment Center of the Israeli Ministry of Economy and periodic reporting obligations. Although we believe we have met such conditions in the past, should we fail to meet such conditions in the future, we would be subject to corporate tax in Israel at the standard corporate tax rate (23% for 2020) and could be required to refund tax benefits (including with interest and adjustments for inflation based on the Israeli consumer price index) already received. Our average tax rate for our investment programs also may change in the future due to circumstances outside of our control, including changes to legislation. For example, in July 2013, the Investment Law was amended whereby the reduction of corporate tax rate for preferred enterprises was eliminated such that such enterprises, which are subject to the new law, would be subject to a 16% tax rate. Therefore, we cannot provide any assurances that our average tax rate for our investment programs will continue in the future at their current levels, if at all. The termination or reduction of certain programs and tax benefits or a requirement to refund tax benefits (including with interest and adjustments for inflation based on the Israeli consumer price index) already received may have a material adverse effect on our business, operating results and financial condition.

We may engage in future acquisitions that could dilute our stockholders’ equity and harm our business, results of operations and financial condition.

We have pursued, and will continue to pursue, growth opportunities through internal development and acquisition of complementary businesses, products and technologies. We are unable to predict whether or when any other prospective acquisition will be completed. The process of integrating an acquired business may be prolonged due to unforeseen difficulties and may require a disproportionate amount of our resources and management’s attention. There are no assurances that we will be able to successfully identify suitable acquisition candidates, complete acquisitions, integrate acquired businesses into our operations, or expand into new markets. Further, once integrated, acquisitions may not achieve comparable levels of revenues, profitability or productivity as our existing business or otherwise perform as expected. The occurrence of any of these events could harm our business, financial condition or results of operations. Future acquisitions may require substantial capital resources, which may require us to seek additional debt or equity financing. Future acquisitions by us could result in the following, any of which could seriously harm our results of operations or the price of our stock:

●
issuance of equity securities that would dilute our current stockholders’ percentages of ownership;
●
~~issuance of equity securities that would dilute our current stockholders’ percentages of ownership;~~large one-time write-offs;

●
~~large one-time write-offs;~~the incurrence of debt and contingent liabilities;

●
difficulties in the ~~incurrence~~assimilation and integration of ~~debt~~operations, personnel, technologies, products and ~~contingent liabilities;~~information systems of the acquired companies;

●
~~difficulties in the assimilation and integration~~diversion of ~~operations, personnel, technologies, products and information systems of the acquired companies;~~management’s attention from other business concerns;

●
~~diversion of management’s attention from other business concerns;~~
●
contractual disputes;

4550

●
risks of entering geographic and business markets in which we have no or only limited prior experience; and

●
potential loss of key employees of acquired organizations.

We may not be able to adequately protect or enforce our intellectual property rights, which could harm our competitive position.

Our success and ability to compete is in part dependent upon our internally-developed technology and other proprietary rights, which we protect through a combination of copyright, trademark and trade secret laws, as well as through confidentiality agreements and licensing arrangements with our customers, suppliers, employees and consultants. In addition, we have filed a number of patents in the United States and in other foreign countries with respect to new or improved technology that we have developed. However, the status of any patent involves complex legal and factual questions, and the breadth of claims allowed is uncertain. Accordingly, we cannot assure you that any patent application filed by us will result in a patent being issued, or that the patents issued to us will not be infringed by others. Also, our competitors and potential competitors may develop products with similar technology or functionality as our products, or they may attempt to copy or reverse engineer aspects of our product line or to obtain and use information that we regard as proprietary. Moreover, the laws of certain countries in which our products are or may be developed, manufactured or sold, including Hong Kong, Japan, Korea, China and Taiwan, may not protect our products and intellectual property rights to the same extent as the laws of the United States. Policing the unauthorized use of our products is difficult and may result in significant expense to us and could divert the efforts of our technical and management personnel. Even if we spend significant resources and efforts to protect our intellectual property, we cannot assure you that we will be able to prevent misappropriation of our technology. Use by others of our proprietary rights could materially harm our business and expensive litigation may be necessary in the future to enforce our intellectual property rights.

Because our products are complex, the detection of errors in our products may be delayed, and if we deliver products with material defects, our credibility will be harmed, the sales and market acceptance of our products may decrease and product liability claims may be made against us.

Our products are complex and may contain errors, defects and bugs when introduced. If we deliver products with material errors, defects or bugs, our credibility and the market acceptance and sales of our products could be significantly harmed. Furthermore, the nature of our products may also delay the detection of any such error or defect. If our products contain material errors, defects and bugs, then we may be required to expend significant capital and resources to alleviate these problems. This could result in the diversion of technical and other resources from our other development efforts. Any actual or perceived problems or delays may also adversely affect our ability to attract or retain customers. Furthermore, the existence of any defects, errors or failures in our products could lead to product liability claims or lawsuits against us or against our customers. We generally provide our customers with a standard warranty for our products, generally lasting one year from the date of purchase. Although we attempt to limit our liability for product defects to product replacements, we may not be successful, and customers may sue us or claim liability for the defective products. A successful product liability claim could result in substantial cost and divert management’s attention and resources, which would have a negative impact on our financial condition and results of operations.

We are exposed to the credit risk of our customers and to credit exposures in weakened markets, which could result in material losses.

Most of our sales are on an open credit basis. Because of current conditions in the global economy, our exposure to credit risks relating to sales on an open credit basis has increased. We expect demand for enhanced open credit terms, for example, longer payment terms, to continue and believe that such arrangements are a competitive factor in obtaining business. Although we monitor and attempt to mitigate credit risks, including through insurance coverage from time to time, there can be no assurance that our efforts will be effective. Moreover, even if we attempt to mitigate credit risks through insurance coverage, such coverage may not be sufficient to cover all of our losses and we would be subject to a deductible under any insurance coverage. As a result, our future credit risk exposure may increase. Although any losses to date relating to credit exposure of our customers have not been material, future losses, if incurred, could harm our business and have a material adverse effect on our operating results and financial condition. Moreover, the loss of a customer due to its financial default also could harm our future business and potential growth.

4651

Our executive officers and key personnel are critical to our business, and because there is significant competition for personnel in our industry, we may not be able to attract and retain such qualified personnel.

Our success depends to a significant degree upon the continued contributions of our executive management team, and our technical, marketing, sales customer support and product development personnel. The loss of significant numbers of such personnel could significantly harm our business, financial condition and results of operations. We do not have any life insurance or other insurance covering the loss of any of our key employees. Because our products are specialized and complex, our success depends upon our ability to attract, train and retain qualified personnel, including qualified technical, marketing and sales personnel. However, the competition for personnel is intense and we may have difficulty attracting and retaining such personnel.

We may have exposure to additional tax liabilities as a result of our foreign operations.

We are subject to income taxes in the United States and various foreign jurisdictions. In addition to our significant operations in Israel, we have operations in Germany, the United Kingdom, Hong Kong, China, Japan, South Korea and India. Significant judgment is required in determining our worldwide provision for income taxes and other tax liabilities. In the ordinary course of a global business, there are many intercompany transactions and calculations where the ultimate tax determination is uncertain. We are regularly under audit by tax authorities and as an example, we are now under audit for one of our subsidiaries, the outcome of which could have material adverse impact on our financial condition. Our intercompany transfer pricing may be reviewed by the U.S. Internal Revenue Service and by foreign tax jurisdictions. Although we believe that our tax estimates are reasonable, due to the complexity of our corporate structure, the multiple intercompany transactions and the various tax regimes, we cannot assure you that a tax audit or tax dispute to which we may be subject will result in a favorable outcome for us. If taxing authorities do not accept our tax positions and impose higher tax rates on our foreign operations, our overall tax expenses could increase.

We are exposed to fluctuations in currency exchange rates.

A significant portion of our business is conducted outside the United States. Export sales to manufacturers in Europe and Asia, including Japan and Asia Pacific, represented 97% and ~~95%~~96% of our total revenues for the first ~~quarter~~half of 2020 and 2019, respectively. Although most of our revenue and expenses are transacted in U.S. dollars, we may be exposed to currency exchange fluctuations in the future as business practices evolve and we are forced to transact business in local currencies. Moreover, part of our expenses in Israel are paid in Israeli currency, which subjects us to the risks of foreign currency fluctuations between the U.S. dollar and the New Israeli Shekel (NIS) and to economic pressures resulting from Israel’s general rate of inflation. Our primary expenses paid in NIS are employee salaries and lease payments on our Israeli facilities. Furthermore, a portion of our expenses for our European operations are paid in the Euro, which subjects us to the risks of foreign currency fluctuations between the U.S. dollar and the Euro. Our primary expenses paid in the Euro are employee salaries, lease and operational payments on our European facilities. As a result, an increase in the value of the NIS and Euro in comparison to the U.S. dollar could increase the cost of our technology development, research and development expenses and general and administrative expenses, all of which could harm our operating profit. From time to time, we use derivative instruments in order to minimize the effects of currency fluctuations, but our hedging positions may be partial, may not exist at all in the future or may not succeed in minimizing our foreign currency fluctuation risks. Our financial results may be harmed if the trend relating to the devaluation of the U.S. dollars continues for an extended period.

4752

An unfavorable government review of our federal income tax returns or changes in our effective tax rates could adversely affect our operating results.

Our future effective tax rates could be adversely affected by earnings being lower than anticipated in countries where we have lower statutory rates and higher than anticipated in countries where we have higher statutory rates, by changes in the valuation of our deferred tax assets and liabilities, or by changes in tax laws, regulations, accounting principles or interpretations thereof. In addition, we are subject to the periodic examination of our income tax returns by the IRS and other tax authorities. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes, as an example, we are now under audit for one of our subsidiaries. The outcome from this examination may have an adverse effect on our operating results and financial condition.

Our business operations would be disrupted if the information technology systems we rely on fail to function properly.

We rely on complex information technology systems to manage our business, which operates in many geographical locations. For example, to achieve short delivery lead times and superior levels of customer service while maintaining low levels of inventory, we frequently adjust our production schedules with manufacturers and subcontractors. We develop and adjust these schedules based on end customer demand as communicated by our customers and distributors and based on our inventory levels, manufacturing cycle times, component lead times, and projected production yields. We combine and distribute all of this information electronically over a complex global communications network. Our ability to estimate demand and to adjust our production schedules is highly dependent on this network. Any delay in the implementation of, or disruption in the transition to, new or enhanced processes, systems or controls, could adversely affect our ability to manage customer orders and manufacturing schedules, as well as generate accurate financial and management information in a timely manner. These systems are also susceptible to power and telecommunication disruptions and other system failures. Failure of our IT systems or difficulties in managing them could result in business disruption. Our business could be significantly disrupted and we could be subject to third party claims associated with such disruptions.

A breach of our information technology systems could subject us to liability, reputational damage or interrupt the operation of our business.

We rely upon our information technology systems and infrastructure for our business. We could experience theft of confidential information or reputational damage from industrial espionage attacks, malware or other cyber attacks, which may compromise our system infrastructure or lead to data leakage, either internally or at our third-party providers. Similarly, data privacy breaches by those who access our systems may pose a risk that sensitive data, including intellectual property, trade secrets or personal information belonging to us, our patients, employees, customers or other business partners, may be exposed to unauthorized persons or to the public. Cyber-attacks are increasing in their frequency, sophistication and intensity, and have become increasingly difficult to detect. There can be no assurance that our efforts to protect our data and information technology systems will prevent breaches in our systems (or that of our third-party providers) that could adversely affect our business and result in financial and reputational harm to us, theft of trade secrets and other proprietary information, legal claims or proceedings, liability under laws that protect the privacy of personal information, and regulatory penalties.

New tariffs and other trade measures could adversely affect our consolidated results of operations, financial position and cash flows.

General trade tensions between the U.S. and China have been escalating since ~~2018 and are not fully resolved yet.~~2018. While tariffs and other retaliatory trade measures imposed by other countries on U.S. goods have not yet had a significant impact on our business or results of operations, we cannot predict further developments, and such existing or future tariffs could have a material adverse effect on our consolidated results of operations, financial position and cash flows. Furthermore, changes in U.S. trade policy could trigger retaliatory actions by affected countries, which could impose restrictions on our ability to do business in or with affected countries or prohibit, reduce or discourage purchases of our products by foreign customers, leading to increased costs of components contained in our products, increased costs of manufacturing our products, and higher prices for our products in foreign markets. For example, there are risks that the Chinese government may, among other things, require the use of local suppliers, compel companies that do business in China to partner with local companies to conduct business and provide incentives to government-backed local customers to buy from local suppliers. Changes in, and responses to, U.S. trade and tariff policy could reduce the competitiveness of our products and cause our ~~sales and~~ revenues to drop, which could materially and adversely impact our business and results of operations.

4853

If we determine that our goodwill and intangible assets have become impaired, we may incur impairment charges, which would negatively impact our operating results.

Goodwill represents the excess of cost over the fair value of net assets acquired in business combinations. Under accounting principles generally accepted in the United States of America, we assess potential impairment of our goodwill and intangible assets at least annually, as well as on an interim basis to the extent that factors or indicators become apparent that could reduce the fair value of any of our businesses below book value. Impairment may result from significant changes in the manner of use of the acquired asset, negative industry or economic trends and significant underperformance relative to historic or projected operating results.

We may experience difficulties in transitioning to smaller geometry process technologies or in achieving higher levels of design integration, which may result in reduced manufacturing yields, delays in product deliveries and increased expenses.

A growing trend in our industry is the integration of greater semiconductor content into a single chip to achieve higher levels of functionality. In order to remain competitive, we must achieve higher levels of design integration and deliver new integrated products on a timely basis. This will require us to expend greater research and development resources, and may require us to modify the manufacturing processes for some of our products, to achieve greater integration. We periodically evaluate the benefits, on a product-by-product basis, of migrating to smaller geometry process technologies to reduce our costs. Although this migration to smaller geometry process technologies has helped us to offset the declining average selling prices of our products, this effort may not continue to be successful. Also, because we are a fabless semiconductor company, we depend on our foundries to transition to smaller geometry processes successfully. We cannot assure you that our foundries will be able to effectively manage the transition. In case our foundries or we experience significant delays in this transition or fail to efficiently implement this transition, our business, financial condition and results of operations could be materially and adversely affected.

The anti-takeover provisions in our certificate of incorporation and bylaws could prevent or discourage a third party from acquiring us.

Our certificate of incorporation and bylaws contain provisions that may prevent or discourage a third party from acquiring us, even if the acquisition would be beneficial to our stockholders. Our board of directors also has the authority to fix the rights and preferences of shares of our preferred stock and to issue such shares without a stockholder vote. Our bylaws also place limitations on the authority to call a special meeting of stockholders. Our stockholders may take action only at a meeting of stockholders and not by written consent. We have advance notice procedures for stockholders desiring to nominate candidates for election as directors or to bring matters before an annual meeting of stockholders. In addition, these factors may also adversely affect the market price of our common stock, and the voting and other rights of the holders of our common stock.

Our stock price may be volatile so stockholders may not be able to resell shares of our common stock at or above the price they paid for them.

Announcements of developments related to our business, announcements by competitors, quarterly fluctuations in our financial results, changes in the general conditions of the highly dynamic industry in which we compete or the national economies in which we do business, and other factors could cause the price of our common stock to fluctuate, perhaps substantially. In addition, in recent years, the stock market has experienced extreme price fluctuations, which have often been unrelated to the operating performance of affected companies. These factors and fluctuations could have a material adverse effect on the market price of our common stock.

4954

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds.

~~During the first quarter of 2020, we repurchased 282,335 shares of common stock at an average purchase price of $12.19 per share for approximately $3.4 million.~~ The table below sets forth ~~the~~ information with respect to repurchases of our common stock during the ~~first~~second quarter ended ~~March 31,~~June 30, 2020.

Period

(a) Total
number of
shares
purchased

(b) average
price paid per
share

(c) Total
number of
shares
purchased as
part of publicly
announced plans
or programs

(d) Maximum
number of shares
that may yet be
purchased under
the plans or
programs) (1)

Month #1 (January 1, 2020 to January 31, 2020)
- - - 794,913
Month #2 (February 1, 2020 to February 29, 2020)
4,730 14.01 4,730 790,183
Month #3 (March 1, 2020 to March 31, 2020)
277,605 12.16 277,605 512,578 (1)
Period

(a) Total
number of
shares
purchased

(b) average
price paid per
share

(c) Total
number of
shares
purchased as
part of publicly
announced plans
or programs

(d) Maximum
number of shares
that may yet be
purchased under
the plans or
programs) (1)

Month #1 (April 1, 2020 to April 30, 2020)
22,369 13.10 22,369 490,209
Month #2 (May 1, 2020 to May 31, 2020)
- - - 490,209
Month #3 (June 1, 2020 to June 30, 2020)
- - - 490,209 (1)

~~(1)~~
~~The number represents the number of shares of our common stock that remained available for repurchase as of March 31,~~
(1) The number represents the number of shares of our common stock that remained available for repurchase as of June 30, 2020 under previously authorized share repurchase programs.

Our board of directors has previously approved a number of share repurchase programs, including those in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934, for the repurchase of our common stock. In August 2018, our board authorized a $10 million dollar buyback program, inclusive of the shares that remained available for repurchase from previously authorized share repurchase programs. In February 2019, our board authorized an increase of the existing share repurchase program to an aggregate of $10.0 million, inclusive of previously authorized amounts under the share repurchase program.

At ~~March 31,~~June 30, 2020, ~~approximately 512,578~~490,209 shares of our common stock are available for repurchase under our board-authorized share repurchase ~~program.~~programs. The repurchase program is being affected from time to time, depending on market conditions and other factors, through Rule 10b5-1 plans, open market purchases and privately negotiated transactions. The repurchase program has no set expiration or termination date.

ITEM 3. ~~defaults upon senior securities.~~DEFAULTS UPON SENIOR SECURITIES.

Not applicable.

ITEM 4. mine safety disclosure.

Not applicable.

ITEM 5. other information.

Not applicable.

ITEM 6. EXHIBITS.

Exhibit 10.1
~~Performance-Based Restricted Stock Unit~~Share Purchase Agreement, ~~for Ofer Elyakim, Chief Executive officer (portions~~by and among SoundChip SA (“SoundChip”), the Shareholders of SoundChip, DSP Group Ltd., and Mark Donaldson, Ben Skelton and Paul Darlington, as Founders and Shareholders’ Representatives [portions of this exhibit ~~is redacted) (filed as Exhibit 10.1 to Registrant’s Current Report on Form 8-K filed on March 13, 2020 and incorporated herein by reference)~~have been redacted].
Exhibit 31.1
Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

5055

~~10.2~~
Performance-Based Restricted Stock Unit Agreement for Ofer Elyakim, Chief Executive officer (portions of this exhibit is redacted) (filed as Exhibit 10.2 to Registrant’s Current Report on Form 8-K filed on March 13, 2020 and incorporated herein by reference).
~~Exhibit 31.1~~
~~Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.~~
Exhibit 31.2
Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 32.1
Certification of the Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Exhibit 32.2
Certification of the Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS
~~Certification of~~Inline XBRL Instance Document (the Instance Document does not appear in the ~~Chief Financial Officer Pursuant to Section 906 of~~Interactive Data File because its XBRL tags are embedded within the ~~Sarbanes-Oxley Act of 2002.~~Inline XBRL document)
~~Exhibit 101.INS XBRL Instance Document~~
~~Exhibit 101.SCH XBRL Taxonomy Schema Linkbase Document~~
~~Exhibit 101.CAL XBRL Taxonomy Calculation Linkbase Document~~
~~Exhibit 101.DEF XBRL Taxonomy Definition Linkbase Document~~
~~Exhibit 101.LAB XBRL Taxonomy Labels Linkbase Document~~
~~Exhibit 101.PRE~~
101.SCH
Inline XBRL Taxonomy Extension Schema Document
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document
104
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

5156

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

DSP GROUP, INC.
(Registrant)

Date: ~~May 11,~~August 10, 2020
By:
/s/ Dror Levy

Dror Levy, Chief Financial Officer and Secretary
(Principal Financial Officer and Principal Accounting Officer)

5257

	Three months ended March 31,
	2020			2019
	(Unaudited)

Net loss	$	(2,465	)	$	(1,066	)
Loss per share:
Basic and diluted	$	(0.11	)	$	(0.05	)

Weighted average number of shares of common stock outstanding during the period used to compute basic net loss per share (in thousands)		23,342			22,542
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)		23,342			22,542

	Three months ended March 31,
Major customers/ distributors	2020	2019
	(Unaudited)
Ascend Technology Inc. (“Ascend Technology”) ¹ ²	37%	27%
VTech Holdings Ltd. (“VTech”)	19%	21%

Nexty Electronics Corporation (“Nexty Electronics”)¹ ³	12%	10%

		Fair Value of Derivative Instruments
Derivative Assets (Liabilities)	Balance Sheet Location	March 31, 2020		December 31, 2019
		Unaudited		Audited

Foreign exchange forward and option contracts	Other accounts receivable and prepaid expenses (other accounts payable)	$	35		-

	Gains on derivatives recognized in OCI
	for the three months ended March 31,
	Unaudited
	2020		2019

Foreign exchange forward and option contracts	$	35	$	105

	Gains reclassified from OCI into income
		for the three months ended March 31,
		Unaudited
	Location	2020		2019

Foreign exchange forward and option contracts	Operating expenses	$	-	$	83

	Three months ended March 31,						Six months ended June 30,
Major Customers	2020			2019
10% Customers							2020			2019
VTech		19	%		21	%		21	%		22	%

Cisco		15	%		10	%		18	%		10	%

Panasonic		10	%		8	%

Period	(a) Total number of shares purchased		(b) average price paid per share		(c) Total number of shares purchased as part of publicly announced plans or programs		(d) Maximum number of shares that may yet be purchased under the plans or programs) (1)
Month #1 (January 1, 2020 to January 31, 2020)		-		-		-		794,913
Month #2 (February 1, 2020 to February 29, 2020)		4,730		14.01		4,730		790,183
Month #3 (March 1, 2020 to March 31, 2020)		277,605		12.16		277,605		512,578	(1)