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)

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)

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)

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

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)LOSS

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

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

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)LOSS

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

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)

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)

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)

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

DSP GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JuneSeptember 30, 2021

(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 and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the sixnine months ended JuneSeptember 30, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021. For further information, reference is made to the consolidated financial statements and footnotes thereto included in the Annual Report on Form 10-K of DSP Group, Inc. (the “Company”) for the year ended December 31, 2020.

The significant accounting policies applied in the annual consolidated financial statements of the Company as of December 31, 2020, contained in the Company’s Annual Report on Form 10‑K filed with the Securities and Exchange Commission on March 15, 2021, have been applied consistently in these unaudited interim condensed consolidated financial statements, except as noted below:

Recently Issued and Adopted Accounting Pronouncements 

In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which simplifies the accounting for income taxes. ASU 2019-12 is effective for annual reporting periods, and interim periods within those years, beginning after December 15, 2020. The adoption of ASU 2019-12 did not have a material impact on the Company’s condensed consolidated financial statements.

In August 2018, the FASB issued ASU 2018-14—Compensation—Retirement Benefits—Defined Benefit Plans—General (Topic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans (“ASU 2018-14”) which improves disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. This standard is effective for fiscal years ending after December 15, 2020, for public business entities. Early adoption is permitted for all entities. Entities are to apply the amendments in this update on a retrospective basis for all periods presented. The adoption of ASU 2018-14 did not have a material impact on the Company’s condensed consolidated financial statements.

Use of Estimates

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

Acquisition of SoundChip

In July 2020, the Company completed the acquisition of SoundChip SA, a privately-held Swiss company (“SoundChip”) for an initial purchase price of approximately $15 million (with a portion held in escrow in accordance with the agreement terms), subject to working capital adjustments (the “Initial Purchase Price”) and agreed to pay future contingent cash milestone payments of up to $6 million upon the achievement of certain customer and product sales milestones during the period from July 1, 2020 to December 31, 2022.

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

The preliminary purchase price allocation ("PPA") was based on information available at the time of closing of the SoundChip acquisition. During 2021, the Company finalized the PPA for SoundChip as a result of finalizing the working capital adjustments as stated above.

The following table summarizes adjustments since the preliminary PPA was disclosed as of December 31, 2020:

Proposed Acquisition by Synaptics Incorporated (“Synaptics”)

On August 30, 2021, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Synaptics, and Osprey Merger Sub, Inc., a Delaware corporation and a wholly owned subsidiary of Synaptics (the “Merger Sub”). The Merger Agreement provides, subject to its terms and conditions, for the acquisition of the Company by Synaptics at a price of $22.00 per share of the Company’s common stock, $0.001 par value per share (each, a “Share”), in cash, without interest and subject to deduction for any required withholding tax (the “Merger Consideration”), through the merger of the Merger Sub with and into the Company (the “Merger”), with the Company surviving the Merger as a wholly owned subsidiary of Synaptics. The Company’s Board of Directors (the “Board”) has unanimously approved the Merger and the Merger Agreement and recommended that stockholders adopt the Merger Agreement, and the Company will hold a stockholders’ meeting on November 29, 2021 to submit the Merger Agreement to its stockholders for their consideration.

Pursuant to the Merger Agreement, at the effective time of the Merger (the “Effective Time”):

Pursuant to the Merger Agreement, the Company will take actions necessary with respect to the Company’s Amended and Restated 1993 Employee Stock Purchase Plan (the “ESPP”) to provide that, among other things, (i) any ongoing offering period under the ESPP will be terminated prior to the Effective Time, (ii) no new offering period under the ESPP will commence during the period between the date of the Merger Agreement and the Effective Time and (iii) the ESPP will terminate on the date immediately prior to the Effective Time.

The Merger Agreement contains customary representations and warranties from both the Company, on the one hand, and Synaptics and the Merger Sub, on the other hand. It also contains customary covenants, including covenants providing for each of the Company and Synaptics to use its reasonable best efforts to cause the Merger to be consummated, and covenants requiring the Company, among other things, (i) to use commercially reasonable efforts to conduct its business in the ordinary course in all material respects, substantially consistent with past practice, during the interim period between the execution of the Merger Agreement and the Effective Time, (ii) not to engage in specified types of transactions during such period and (iii) not to solicit proposals or engage in discussions relating to alternative acquisition proposals or change the recommendation of the Board to the Company’s stockholders regarding the Merger Agreement, in each case except as otherwise permitted by the Merger Agreement, including in connection with the compliance by the Board with its fiduciary duties under applicable law.

Completion of the Merger is subject to customary closing conditions, including (i) adoption of the Merger Agreement by the Company’s stockholders, and (ii) the absence of governmental injunctions or other legal restraints prohibiting the Merger. In addition, the obligation of each party to consummate the Merger is conditioned upon, among other things, the accuracy of the representations and warranties of the other party (subject to certain materiality exceptions), and material compliance by the other party with its covenants under the Merger Agreement. Synaptics’s obligation to consummate the Merger is also conditioned on the absence of a “Company Material Adverse Effect,” as defined in the Merger Agreement. Synaptics’s obligations under the Merger Agreement are not subject to any financing condition.

The Merger Agreement may be terminated, subject to the terms and conditions of the Merger Agreement: (i) by mutual written agreement of Synaptics and the Company, (ii) by either Synaptics or the Company, if a governmental injunction or other legal restraint in certain jurisdictions prevents the consummation of the Merger, (iii) by either Synaptics or the Company, if the requisite vote of the Company’s stockholders has not been obtained or (iv) by either Synaptics or the Company upon the other party’s uncured material breach of any representation, warranty, covenant or agreement under the Merger Agreement. The Merger Agreement may also be terminated by the Company to enter into an agreement with respect to a superior proposal, subject to specified conditions, and by Synaptics, if the Board changes its recommendation regarding the Merger, the Board’s recommendation is not included in the Company’s proxy statement for the Merger, or the Board fails to reaffirm its recommendation in response to an alternative acquisition proposal. In addition to the foregoing termination rights, and subject to certain limitations, either party may terminate the Merger Agreement if the Merger is not consummated by January 30, 2022.

If the Merger Agreement is terminated under certain circumstances specified in the Merger Agreement, the Company will be required to pay Synaptics a termination fee of $19,774,000 (including under specified circumstances in connection with the Company’s entry into an agreement with respect to a superior proposal).

NOTE B— OPERATING LEASES

The Company has entered into various non-cancelable operating lease agreements of its offices and car leases. The Company's leases have original lease periods expiring between 2021 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 sixnine months ended JuneSeptember 30, 2021 was $799$843 and $1,630,$2,472, respectively, out of which an amount of $799$828 and $1,630$2,457 represented the total cash paid for amounts included in the measurement of operating lease liabilities during the three and sixnine months ended JuneSeptember 30, 2021, respectively.

Total operating lease cost during the three and sixnine months ended JuneSeptember 30, 2020 was $691$767 and $1,400,$2,166, respectively, out of which an amount of $691$767 and $1,400$2,166 represented the total cash paid for amounts included in the measurement of operating lease liabilities during the three and sixnine months ended JuneSeptember 30, 2020, respectively.

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

As of JuneSeptember 30, 2021, and 2020 (unaudited), the Company’s operating lease liabilities were as follows:

NOTE C—INVENTORIES

Inventories are stated at the lower of cost or 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:

Inventory write-off amounted to $29$17 for the sixnine months ended JuneSeptember 30, 2021 due to aging of certain inventory items that are not expected to be sold.

For the sixnine months ended JuneSeptember 30, 2020, the Company recorded $91$9 of income due to the utilization of inventory that was previously written off in the past.off.

NOTE D—NET LOSS PER SHARE

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

NOTE E — MARKETABLE SECURITIES AND TIME DEPOSITS

The Company accounts for investments in marketable securities in accordance with FASB ASC 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 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 JuneSeptember 30, 2021 and December 31, 2020:

The amortized cost of marketable debt securities at JuneSeptember 30, 2021, by contractual maturities, is shown below (unaudited):

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

The total fair value of marketable securities with outstanding unrealized losses as of JuneSeptember 30, 2021 amounted to $48,883,$51,324, and the unrealized losses for these marketable securities amounted to $294.$350.

Management believes that as of JuneSeptember 30, 2021, the unrealized losses in the Company’s investments in all types of marketable securities were temporary and 0 credit loss was realized in the Company’s consolidated interim statements of operations.

The Company assessed available-for-sale debt securities with an amortized cost basis in excess of estimated fair value to determine what amount of the difference, if any, is caused by expected credit losses in accordance with ASC 326 “Financial Instruments – Credits Losses.” Allowance for credit losses on available-for-sale debt securities are recognized as a charge in the condensed consolidated statement of operation, and any remaining unrealized losses, net of taxes, are included in accumulated other comprehensive income (loss) in stockholders' equity. The unrealized losses related to the Company’s marketable securities were primarily due to changes in interest rates. Because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be at maturity and because the unrealized losses are not as a result of a credit loss, the Company does not consider the losses to be a credit loss at JuneSeptember 30, 2021.

Proceeds from maturity of available-for-sale marketable securities during the first halfnine months of 2021 and 2020 were $15,423$19,818 and $39,439,$46,924, respectively. Proceeds from sales of available-for-sale marketable securities during the first halfnine months of 2021 and 2020 were $4,692$6,972 and $9,558,$24,553, respectively. Net realized lossgain from the sale of available-for-sale securities for the sixnine months ended JuneSeptember 30, 2021 were $8was $22 compared to net realized gain for the threenine months ended JuneSeptember 30, 2020 of $12.$39. The Company determines realized gains or losses on the sale of available-for-sale marketable securities based on a specific identification method.

NOTE 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 $3,268$3,385 and $3,449 at JuneSeptember 30, 2021 (unaudited) and December 31, 2020, respectively. The Company accrues interest and penalties, relating to unrecognized tax benefits, in its provision for income taxes. At JuneSeptember 30, 2021 (unaudited) and December 31, 2020, the Company had accrued interest and penalties relating to unrecognized tax benefits of $302$330 and $329, 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—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 and sixnine month periods ended JuneSeptember 30, 2021 and 2020, of the Company’s significant customers: