NOTE

ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Organization:

CEVA, Inc. (“CEVA” or the “Company”) was incorporated in Delaware on

November 22, 1999.

The Company was formed through the combination of Parthus Technologies plc (“Parthus”) and the digital signal processor (DSP) cores licensing business and operations of DSP Group, Inc. in

November 2002.

The Company had

business or operations prior to the combination.

CEVA licenses a family of signal processing IPs, including comprehensive platforms for

baseband processing in handsets and base station RAN, highly integrated cellular IoT solutions (NB-IoT and Cat-M), DSP platforms incorporating voice input algorithms and software for voice enabled devices, DSP platforms for advanced imaging and computer vision in any camera-enabled device, and a family of self-contained AI processors that address a wide range of edge applications. For short-range wireless, we offer the industry’s most widely adopted IPs for Bluetooth (low energy and dual mode) and Wi-Fi (

4/5/6

up to

4x4

) platforms.

CEVA’s technologies are licensed to leading semiconductor and original equipment manufacturer (OEM) companies. These companies design, manufacture, market and sell application-specific integrated circuits (“ASICs”) and application-specific standard products (“ASSPs”) based on CEVA’s technology to wireless, consumer electronics and automotive companies for incorporation into a wide variety of end products.

Basis of presentation:

The consolidated financial statements have been prepared according to U.S Generally Accepted Accounting Principles (“U.S. GAAP”).

Use of estimates

The preparation of the 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 financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Financial statements in U.S. dollars

A majority of the revenues of the Company and its subsidiaries is generated in U.S. dollars (“dollars”). In addition, a portion of the Company and its subsidiaries’ costs are incurred in dollars. The Company’s management has determined that the dollar is the primary currency of the economic environment in which the Company and its subsidiaries principally operate. Thus, the functional and reporting currency of the Company and its subsidiaries is the dollar.

Accordingly, monetary accounts maintained in currencies other than the dollar are remeasured into dollars in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”)

No.

830,

“Foreign Currency Matters.” All transaction gains and losses from remeasurement of monetary balance sheet items are reflected in the consolidated statements of income as financial income or expenses, as appropriate, which is included in “financial income, net.” The foreign exchange losses arose principally on the EURO and the NIS monetary balance sheet items as a result of the currency fluctuations of the EURO and the NIS against the dollar.

Principles of consolidation

The consolidated financial statements incorporate the financial statements of the Company and all of its subsidiaries. All significant inter-company balances and transactions have been eliminated on consolidation.

Cash equivalents

Cash equivalents are short-term highly liquid investments that are readily convertible to cash with original maturities of

three

months or less from the date acquired.

Short-term bank deposits

Short-term bank deposits are deposits with maturities of more than

three

months but less than

one

year from the balance sheet date. The deposits are presented at their cost, including accrued interest. The deposits bear interest annually at an average rate of

1.76%,

1.85%

and

2.16%

during

2016,

2017

and

2018,

respectively.

Marketable securities

Marketable securities consist mainly of corporate bonds. The Company determines the appropriate classification of marketable securities at the time of purchase and re-evaluates such designation at each balance sheet date. In accordance with FASB ASC

No.

320

“Investments- Debt and Equity Securities,” the Company classifies marketable securities as available-for-sale. Available-for-sale securities are stated at fair value, with unrealized gains and losses reported in accumulated other comprehensive income (loss), a separate component of stockholders’ equity, net of taxes. Realized gains and losses on sales of marketable securities, as determined on a specific identification basis, are included in financial income, net. The amortized cost of marketable securities is adjusted for amortization of premium and accretion of discount to maturity, both of which, together with interest, are included in financial income, net. The Company has classified all marketable securities as short-term, even though the stated maturity date

may

one

year or more beyond the current balance sheet date, because it is probable that the Company will sell these securities prior to maturity to meet liquidity needs or as part of risk versus reward objectives.

The Company recognizes an impairment charge when a decline in the fair value of its investments in debt securities below the cost basis of such securities is judged to be other-than-temporary. Factors considered in making such a determination include the duration and severity of the impairment, the reason for the decline in value and the potential recovery period. For securities that are deemed other-than-temporarily impaired (“OTTI”), the amount of impairment is recognized in the statement of income and is limited to the amount related to credit losses, while impairment related to other factors is recognized in other comprehensive income (loss). The Company did

not

recognize OTTI on its marketable securities in

2016,

2017

and

2018.

Long-term bank deposits

Long-term bank deposits are deposits with maturities of more than

one

year as of the balance sheet date. The deposits presented at their cost, including accrued interest. The deposits bear interest annually at an average rate of

1.97%,

2.26%

and

2.57%

during

2016,

2017

and

2018,

respectively.

Property and equipment, net

Property and equipment are stated at cost, net of accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets, at the following annual rates:

	%
Computers, software and equipment	10	-	33
Office furniture and equipment	7	-	33
Leasehold improvements	10	-	25
	(the shorter of the expected lease term or useful economic life)

The Company’s long-lived assets are reviewed for impairment in accordance with FASB ASC

No.

360

35,

“Impairment or Disposal of Long-Lived Assets,” whenever events or changes in circumstances indicate that the carrying amount of an asset

may

not

be recoverable. Recoverability of the carrying amount of an asset to be held and used is measured by a comparison of its carrying amount to the future undiscounted cash flows expected to be generated by such asset. If such asset is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of such asset exceeds its fair value. In determining the fair value of long-lived assets for purposes of measuring impairment, the Company's assumptions include those that market participants would consider in valuations of similar assets.

An asset to be disposed is reported at the lower of its carrying amount or fair value less selling costs.

impairment was recorded in

2016,

2017

and

2018.

Goodwill

Goodwill is carried at cost and is

not

amortized but rather is tested for impairment at least annually or between annual tests in certain circumstances. The Company conducts its annual test of impairment for goodwill on

October

1st

of each year.

The Company operates in

one

operating segment and this segment comprises the only reporting unit.

There is a

two

-phase process for impairment testing of goodwill. The

first

phase screens for potential impairment, while the

second

phase (if necessary) measures impairment. Goodwill impairment is deemed to exist if the net book value of a reporting unit exceeds its estimated fair value. In such case, the

second

phase is then performed, and the Company measures impairment by comparing the carrying amount of the reporting unit’s goodwill to the implied fair value of that goodwill. An impairment loss is recognized in an amount equal to the excess. For each of the

three

years in the period ended

December 31, 2018,

impairment of goodwill has been identified.

Intangible assets, net

Acquired intangible assets with definite lives are amortized over their estimated useful lives. The Company amortizes intangible assets on a straight-line basis with definite lives over periods ranging from

one

and a half to

seven

years.

Intangible assets with definite lives are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset

may

not

be recoverable. Recoverability of these assets is measured by comparison of their carrying amounts to future undiscounted cash flows the assets are expected to generate. If such assets are considered to be impaired, the impairment to be recognized equals the amount by which the carrying value of the assets exceeds its fair market value. The Company did

not

record any impairments during the years ended

December 31, 2016,

2017

and

2018.

Investments in other company

The Company's non-marketable equity securities are investments in privately held companies without readily determinable market values.

Prior to

January 1, 2018,

the Company accounted for its non-marketable equity securities at cost less impairment. As of

December 31, 2017,

non-marketable equity securities accounted for under the cost method had a carrying value of

$1,806.

Effective

January 1, 2018,

the Company adopted Accounting Standards Update (“ASU”)

2016

01,

which changed the way it accounts for non-marketable securities on a prospective basis. Under the new ASU, equity investments that do

not

have readily determinable fair values and do

not

qualify for the net asset value practical expedient are eligible for the measurement alternative. For the Company’s equity investment in private company equity securities which do

not

have readily determinable fair values, the Company has elected the measurement alternative defined as cost, less impairment, plus or minus adjustments resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. The investment is reviewed periodically to determine if its value has been impaired and adjustments are recorded as necessary.

During the year ended

December 31, 2018,

the Company recorded a loss of

$870

related to revaluation of its investment in a private company based on observable price changes. During the years ended

December

31,

2016

and

2017,

impairment loss was identified.

Revenue recognition

Effective as of

January

2018,

the Company has followed the provisions of ASC Topic

606,

Revenue from Contracts with Customers

(“ASC

606”

). The guidance provides a unified model to determine how revenue is recognized. See Note

for further details.

The following is a description of principal activities from which the Company generates revenue. Revenues are recognized when control of the promised goods or services are transferred to the customers in an amount that reflects the consideration that the Company expects to receive in exchange for those goods or services.

The Company determines revenue recognition through the following steps:

●

identification of the contract with a customer;

●

identification of the performance obligations in the contract;

●

determination of the transaction price;

●

allocation of the transaction price to the performance obligations in the contract; and

●

recognition of revenue when, or as, the Company satisfies a performance obligation.

The Company enters into contracts that can include various combinations of products and services, as detailed below, which are generally capable of being distinct and accounted for as separate performance obligations.

The Company generates its revenues from (

) licensing intellectual properties, which in certain circumstances are modified for customer-specific requirements, (

) royalty revenues, and (

) other revenues, which include revenues from support, training and sale of development systems.

The Company accounts for its IP license revenues and related services, which provide the Company's customers with rights to use the Company's IP, in accordance with ASC

606.

A license

may

be perpetual or time limited in its application. In accordance with ASC

606,

the Company will recognize revenue from IP license at the time of delivery when the customer accepts control of the IP, as the IP is functional without professional services, updates and technical support. The Company has concluded that its IP license is distinct as the customer can benefit from the software on its own.

Most of the Company’s contracts with customers contain multiple performance obligations. For these contracts, the Company accounts for individual performance obligations separately, if they are distinct. The transaction price is allocated to the separate performance obligations on a relative standalone selling price basis. Standalone selling prices of IP license are typically estimated using the residual approach. Standalone selling prices of services are typically estimated based on observable transactions when these services are sold on a standalone basis.

When contracts involve a significant financing component, the Company adjusts the promised amount of consideration for the effects of the time value of money if the timing of payments agreed to by the parties to the contract (either explicitly or implicitly) provide the customer with a significant benefit of financing, unless the financing period is under

one

year and only after the products or services were provided, which is a practical expediency permitted under ASC

606.

Revenues from contracts that involve significant customization of the Company’s IP to customer-specific specifications are performance obligations the Company generally accounts for as performance obligations satisfied over time. The company’s performance does

not

create an asset with alternative use, and the Company has an enforceable right to payment. The Company recognizes revenue on such contracts using cost based input methods, which recognize revenue and gross profit as work is performed based on a ratio between actual costs incurred compared to the total estimated costs for the contract. Provisions for estimated losses on uncompleted contracts are made during the period in which such losses are

first

determined, in the amount of the estimated loss on the entire contract.

Revenues that are derived from the sale of a licensee’s products that incorporate the Company’s IP are classified as royalty revenues. Royalty revenues are recognized during the quarter in which the sale of the product incorporating the Company’s IP occurs. Royalties are calculated either as a percentage of the revenues received by the Company’s licensees on sales of products incorporating the Company’s IP or on a per unit basis, as specified in the agreements with the licensees. The Company receives the actual sales data from its customers after the quarter ends and accounts for it as unbilled receivables. When the Company does

not

receive actual sales data from the customer prior to the finalization of its financial statements, royalty revenues are recognized based on the Company’s estimation of the customer’s sales during the quarter.

In addition to license fees, contracts with customers generally contain an agreement to provide for training and post contract support, which consists of telephone or e-mail support, correction of errors (bug fixing) and unspecified updates and upgrades. Fees for post contract support, which takes place after delivery to the customer, are specified in the contract and are generally mandatory for the

first

year. After the mandatory period, the customer

may

extend the support agreement on similar terms on an annual basis. The Company considers the post contract support performance obligation as a distinct performance obligation that is satisfied over time, and as such, it recognizes revenue for post contract support on a straight-line basis over the period for which technical support is contractually agreed to be provided to the licensee, typically

months. Training services are considered performance obligations satisfied over-time, and revenues from training services are recognized as the training is performed.

Revenues from the sale of development systems are recognized when control of the promised goods or services are transferred to the customers.

Deferred revenues, which represent a contract liability, include unearned amounts received under license agreements, unearned technical support and amounts paid by customers

not

yet recognized as revenues.

The Company capitalizes sales commission as costs of obtaining a contract when they are incremental and, if they are expected to be recovered, amortized in a manner consistent with the pattern of transfer of the good or service to which the asset relates. If the expected amortization period is

one

year or less, the commission fee is expensed when incurred.

Cost of revenue

Cost of revenue includes the costs of products, services and royalty expense payments to the Israeli Innovation Authority of the Ministry of Economy and Industry in Israel (the “IIA“) (refer to Note

for further details). Cost of product revenue includes materials, subcontractors, amortization of acquired intangible assets (NB-IoT technologies) and the portion of development costs associated with product development arrangements. Cost of service revenue includes salary and related costs for personnel engaged in services, training and customer support, and travel, office expenses and other support costs.

Income taxes

The Company recognizes income taxes under the liability method. It recognizes deferred income tax assets and liabilities for the expected future consequences of temporary differences between the financial reporting and tax bases of assets and liabilities. These differences are measured using the enacted statutory tax rates that are expected to apply to taxable income for the years in which differences are expected to reverse. The effect of a change in tax rates on deferred income taxes is recognized in the statements of income during the period that includes the enactment date.

Valuation allowance is recorded to reduce the deferred tax assets to the net amount that the Company believes is more likely than

not

to be realized. The Company considers all available evidence, both positive and negative, including historical levels of income, expectations and risks associated with estimates of future taxable income and ongoing tax planning strategies, in assessing the need for a valuation allowance.

The Company accounts for uncertain tax positions in accordance with ASC

740.

ASC

740

contains a

two

-step approach to recognizing and measuring uncertain tax positions. The

first

step is to evaluate the tax position taken or expected to be taken in a tax return by determining if the weight of available evidence indicates that it is more likely than

not

that, on an evaluation of the technical merits, the tax position will be sustained on audit, including resolution of any related appeals or litigation processes. The

second

step is to measure the tax benefit as the largest amount that is more than

50%

(cumulative probability) likely to be realized upon ultimate settlement. The Company accrues interest and penalties related to unrecognized tax benefits under taxes on income.

Research and development

Research and development costs are charged to the consolidated statements of income as incurred.

Government grants and tax credits

Government grants received by the Company relating to categories of operating expenditures are credited to the consolidated statements of income during the period in which the expenditure to which they relate is charged. Royalty and non-royalty-bearing grants from the IIA for funding certain approved research and development projects are recognized at the time when the Company is entitled to such grants, on the basis of the related costs incurred, and included as a deduction from research and development expenses.

The Company recorded grants in the amounts of

$6,410,

$4,137

and

$3,352

for the years ended

December 31, 2016,

2017

and

2018,

respectively. The Company’s Israeli subsidiary is obligated to pay royalties amounting to

3.5%

of the sales of certain products the development of which received grants from the IIA in previous years. The obligation to pay these royalties is contingent on actual sales of the products. Grants received from the IIA

may

become repayable if certain criteria under the grants are

not

met.

The French Research Tax Credit, Crédit d’Impôt Recherche (“CIR”), is a French tax incentive to stimulate research and development (“R&D”) which is relevant for the Company's French subsidiaries (RivieraWaves and CEVA France). Generally, the CIR offsets the income tax to be paid and the remaining portion (if any) can be refunded. The CIR is calculated based on the claimed volume of eligible R&D expenditures by the Company. As a result, the CIR is presented as a deduction to “Research and development expenses” in the consolidated statements of income. During the years ended

December 31, 2016,

2017

and

2018,

the Company recorded CIR benefits in the amount of

$1,485,

$1,555

and

$2,065,

respectively.

Employee benefit plan

Certain of the Company’s employees are eligible to participate in a defined contribution pension plan (the “Plan”). Participants in the Plan

may

elect to defer a portion of their pre-tax earnings into the Plan, which is run by an independent party. The Company makes pension contributions at rates varying up to

10%

of the participant’s pensionable salary. Contributions to the Plan are recorded as an expense in the consolidated statements of income.

The Company’s U.S. operations maintain a retirement plan (the “U.S. Plan”) that qualifies as a deferred salary arrangement under Section

401

(k) of the Internal Revenue Code. Participants in the U.S. Plan

may

elect to defer a portion of their pre-tax earnings, up to the Internal Revenue Service annual contribution limit. The Company matches

100%

of each participant’s contributions up to a maximum of

of the participant’s base pay. Each participant

may

contribute up to

15%

of base remuneration. Contributions to the U.S. Plan are recorded during the year contributed as an expense in the consolidated statements of income.

Total contributions for the years ended

December 31, 2016,

2017

and

2018

were

$1,020,

$988

and

$1,048,

respectively.

Accrued severance pay

The liability of CEVA’s Israeli subsidiary for severance pay for employees hired prior to

August 1, 2016

is calculated pursuant to Israeli severance pay law based on the most recent salary of each employee multiplied by the number of years of employment for that employee as of the balance sheet date. The Israeli subsidiary’s liability is fully provided for by monthly deposits with severance pay funds, insurance policies and an accrual. The deposited funds include profits and losses accumulated up to the balance sheet date. The deposited funds

may

be withdrawn only upon the fulfillment of the obligation pursuant to Israeli severance pay law or labor agreements. The value of these policies is recorded as an asset on the Company’s consolidated balance sheets.

Effective

August 1, 2016,

the Israeli subsidiary’s agreements with new employees in Israel are under Section

of the Severance Pay Law,

1963.

The Israeli subsidiary’s contributions for severance pay have extinguished its severance obligation. Upon contribution of the full amount based on the employee’s monthly salary for each year of service,

additional obligation exists regarding the matter of severance pay, and

additional payments is made by the Israeli subsidiary to the employee. Furthermore, the related obligation and amounts deposited on behalf of the employee for such obligation are

not

stated on the balance sheet, as the Israeli subsidiary is legally released from any obligation to employees once the required deposit amounts have been paid.

Severance pay expenses, net of related income, for the years ended

December 31, 2016,

2017

and

2018,

were

$1,348,

$1,413

and

$1,818,

respectively.

Equity-based compensation

The Company accounts for equity-based compensation in accordance with FASB ASC

No.

718,

“Stock Compensation” which requires the recognition of compensation expenses based on estimated fair values for all equity-based awards made to employees and non-employee directors.

March 2016,

the FASB issued ASU

2016

09,

“Compensation - Stock Compensation (Topic

718

), Improvements to Employee Share-Based Payment Accounting” (“ASU

2016

09”

). ASU

2016

simplifies several aspects of the accounting for share-based payment transaction, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. For public companies, ASU

2016

is effective for fiscal years, and interim periods within those fiscal years, beginning after

December 15, 2016.

The Company adopted ASU

2016

during the

first

quarter of

2017,

at which time it changed its accounting policy to account for forfeitures as they occur. There was

material impact of the adoption of this standard on the Company’s financial statements. In addition, historically, excess tax benefits or deficiencies from the Company’s equity awards were recorded as additional paid-in capital in its consolidated balance sheets and were classified as a financing activity in its consolidated statements of cash flows. As a result of adoption during the

first

quarter of

2017,

the Company prospectively records any excess tax benefits or deficiencies from its equity awards as part of its provision for income taxes in its consolidated statements of income during the reporting periods during which equity vesting occurs. Excess tax benefits for share-based payments are presented as an operating activity in the statements of cash flows rather than financing activity. The Company elected to apply the cash flow classification requirements related to excess tax benefits prospectively in accordance with ASU

2016

and prior periods have

not

been adjusted.

The Company estimates the fair value of options and stock appreciation right (“SAR”) awards on the date of grant using an option-pricing model. The value of the portion of an award that is ultimately expected to vest is recognized as an expense over the requisite service period in the Company’s consolidated statements of income. The Company recognizes compensation expenses for the value of its options and SARs, which have graded vesting based on the accelerated attribution method over the requisite service period of each of the awards. Prior to

January 1, 2017,

the Company recognized compensation expenses for the value of its options and SARs, net of estimated forfeitures. Estimated forfeitures were based on actual historical pre-vesting forfeitures and the rate was adjusted to reflect changes in facts and circumstances, if any.

The Company recognizes compensation expenses for the value of its restricted stock unit (“RSU”) awards, based on the straight-line method over the requisite service period of each of the awards. The fair value of each RSU is the market value as determined by the closing price of the common stock on the day of grant.

The Company uses the Monte-Carlo simulation model for options and SARs granted. The Monte-Carlo simulation model uses the assumptions noted below. Expected volatility was calculated based upon actual historical stock price movements over the most recent periods ending on the grant date, equal to the expected option and SAR term. The Company has historically

not

paid dividends and has

foreseeable plans to pay dividends. The risk-free interest rate is based on the yield from U.S. Treasury

zero

-coupon bonds with an equivalent term. The Monte-Carlo model also considers the suboptimal exercise multiple which is based on the average exercise behavior of the Company's employees over the past years, the contractual term of the options and SARs, and the probability of termination or retirement of the holder of the options and SARs in computing the value of the options and SARs.

The fair value for the Company’s stock options and SARs (other than share issuances in connection with the employee stock purchase plan, as detailed below) granted to employees and non-employees directors was estimated using the following assumptions (neither options nor SARs were granted during

2017

and

2018

	2016 (*

Expected dividend yield		0%
Expected volatility	38%	-	49%
Risk-free interest rate	0.5%	-	2.4%
Expected forfeiture (employees)		—
Expected forfeiture (executives)		5%
Contractual term of up to (years)		10
Suboptimal exercise multiple (employees)		—
Suboptimal exercise multiple (executives)		2.4

(* During

2016,

the Company granted stock options only to its non-employee directors.

The fair value for rights to purchase shares of common stock under the Company’s employee stock purchase plan was estimated on the date of grant using the following assumptions:

	2016			2017			2018

Expected dividend yield		0%			0%			0%
Expected volatility	29%	-	57%	28%	-	46%	35%	-	42%
Risk-free interest rate	0.3%	-	0.5%	0.5%	-	1.1%	0.7%	-	2.2%
Expected forfeiture		0%			0%			0%
Contractual term of up to (months)		24			24			24

During the years ended

December 31, 2016,

2017

and

2018,

the Company recognized equity-based compensation expense related to stock options, SARs, RSUs and employee stock purchase plan as follows:

	Year ended December 31,
	201 6		201 7		201 8

Cost of revenue	$	246	$	459	$	588
Research and development, net		2,860		3,839		5,141
Sales and marketing		922		1,428		1,587
General and administrative		2,208		2,967		3,051
Total equity-based compensation expense	$	6,236	$	8,693	$	10,367

As of

December 31, 2018,

there was

$217

of unrecognized compensation expense related to unvested stock options, SARs and employee stock purchase plan . This amount is expected to be recognized over a weighted-average period of

1.1

years. As of

December 31, 2018,

there was

$11,432

of unrecognized compensation expense related to unvested RSUs. This amount is expected to be recognized over a weighted-average period of

1.5

years.

Fair value of financial instruments

The carrying amount of cash, cash equivalents, short term bank deposits, trade receivables, other accounts receivable, trade payables and other accounts payable approximates fair value due to the short-term maturities of these instruments. Marketable securities and derivative instruments are carried at fair value. See Note

for more information.

Comprehensive income (loss)

The Company accounts for comprehensive income (loss) in accordance with FASB ASC

No.

220,

“Comprehensive Income.” This statement establishes standards for the reporting and display of comprehensive income (loss) and its components in a full set of general purpose financial statements. Comprehensive income (loss) generally represents all changes in stockholders’ equity during the period except those resulting from investments by, or distributions to, stockholders. The Company determined that its items of other comprehensive income (loss) relate to unrealized gains and losses, net of tax, on hedging derivative instruments and marketable securities.

Concentration of credit risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash, cash equivalents, bank deposits, marketable securities, foreign exchange contracts and trade receivables. The Company invests its surplus cash in cash deposits and marketable securities in financial institutions and has established guidelines relating to diversification and maturities to maintain safety and liquidity of the investments.

The majority of the Company’s 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 bank deposits

may

be redeemed on demand and therefore minimal credit risk exists with respect to them. Nonetheless, deposits with these banks exceed the Federal Deposit Insurance Corporation (“FDIC”) insurance limits or similar limits in foreign jurisdictions, to the extent such deposits are even insured in such foreign jurisdictions. While the Company monitors on a systematic basis the cash and cash equivalent balances in the operating accounts and adjust the balances as appropriate, these balances could be impacted if

one

or more of the financial institutions with which the Company deposit its funds fails or is subject to other adverse conditions in the financial or credit markets. To date the Company has experienced

loss of principal or lack of access to its invested cash or cash equivalents; however, the Company can provide

assurance that access to its invested cash and cash equivalents will

not

be affected if the financial institutions in which the Company holds its cash and cash equivalents fail. Furthermore, the Company holds an investment portfolio consisting principally of corporate bonds. The Company has the ability to hold such investments until recovery of temporary declines in market value or maturity; accordingly, as of

December

31,

2018,

the Company believes the losses associated with its investments are temporary and

impairment loss was recognized during

2018.

However, the Company can provide

assurance that it will recover declines in the market value of its investments.

The Company is exposed primarily to fluctuations in the level of U.S. interest rates. To the extent that interest rates rise, fixed interest investments

may

be adversely impacted, whereas a decline in interest rates

may

decrease the anticipated interest income for variable rate investments.

The Company is exposed to financial market risks, including changes in interest rates. The Company typically does

not

attempt to reduce or eliminate its market exposures on its investment securities because the majority of its investments are short-term.

The Company’s trade receivables are geographically diverse, mainly in the Asia Pacific, and also in the United States and Europe. Concentration of credit risk with respect to trade receivables is limited by credit limits, ongoing credit evaluation and account monitoring procedures. The Company performs ongoing credit evaluations of its customers and to date has

not

experienced any material losses. The Company makes judgments on its ability to collect outstanding receivables and provides allowances for the portion of receivables for which collection becomes doubtful. Provisions are made based upon a specific review of all significant outstanding receivables. In determining the provision, the Company considers the expected collectability of receivables.

The Company has

off-balance-sheet concentration of credit risk.

Derivative and hedging activities

The Company follows the requirements of FASB ASC

No.

815,”

Derivatives and Hedging” which requires companies to recognize all of their derivative instruments as either assets or liabilities in the statement of financial position at fair value. The accounting for changes in fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging transaction and further, on the type of hedging transaction. For those derivative instruments that are designated and qualify as hedging instruments, a company must designate the hedging instrument, based upon the exposure being hedged, as a fair value hedge, cash flow hedge, or a hedge of a net investment in a foreign operation. Due to the Company’s global operations, it is exposed to foreign currency exchange rate fluctuations in the normal course of its business. The Company’s treasury policy allows it to offset the risks associated with the effects of certain foreign currency exposures through the purchase of foreign exchange forward or option contracts (“Hedging Contracts”). The policy, however, prohibits the Company from speculating on such Hedging Contracts for profit. To protect against the increase in value of forecasted foreign currency cash flow resulting from salaries paid in currencies other than the U.S. dollar during the year, the Company instituted a foreign currency cash flow hedging program. The Company hedges portions of the anticipated payroll of its non-U.S. employees denominated in the currencies other than the U.S. dollar for a period of

one

twelve

months with Hedging Contracts. Accordingly, when the dollar strengthens against the foreign currencies, the decline in present value of future foreign currency expenses is offset by losses in the fair value of the Hedging Contracts. Conversely, when the dollar weakens, the increase in the present value of future foreign currency expenses is offset by gains in the fair value of the Hedging Contracts. These Hedging Contracts are designated as cash flow hedges.

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 (loss) 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

December

31,

2017

and

2018,

the notional principal amount of the Hedging Contracts to sell U.S. dollars held by the Company was

and

$9,100,

respectively.

Advertising expenses

Advertising expenses are charged to consolidated statements of income as incurred. Advertising expenses for the years ended

December 31, 2016,

2017

and

2018

were

$1,033,

$1,118

and

$1,080,

respectively.

Treasury stock

The Company repurchases its common stock from time to time pursuant to a board-authorized share repurchase program through open market purchases and repurchase plans.

The repurchases of common stock are accounted for as treasury stock, and result in a reduction of stockholders’ equity. When treasury shares are reissued, the Company accounts for the reissuance in accordance with FASB ASC

No.

505

30,

“Treasury Stock” and charges the excess of the repurchase cost over issuance price using the weighted average method to retained earnings. The purchase cost is calculated based on the specific identified method. In the case where the repurchase cost over issuance price using the weighted average method is lower than the issuance price, the Company credits the difference to additional paid-in capital.

Net income per share of common stock

Basic net income per share is computed based on the weighted average number of shares of common stock outstanding during each year. Diluted net income per share is computed based on the weighted average number of shares of common stock outstanding during each year, plus dilutive potential shares of common stock considered outstanding during the year, in accordance with FASB ASC

No.

260,

“Earnings Per Share.”

	Year ended December 31,
	2016		2017		2018
Numerator :
Net income	$	13,100	$	17,028	$	574
Denominator (in thousands) :
Basic weighted-average common stock outstanding		20,850		21,771		22,034
Effect of stock-based awards		715		790		469
Diluted weighted-average common stock outstanding		21,565		22,561		22,503

Basic net income per share	$	0.63	$	0.78	$	0.03
Diluted net income per share	$	0.61	$	0.75	$	0.03

The weighted-average number of shares related to outstanding options, SARs and RSUs excluded from the calculation of diluted net income per share, since their effect was anti-dilutive, were

282,696,

29,892

and

161,362

shares for the years ended

December

31,

2016

2017

and

2018,

respectively.

Recently Issued Accounting Pronouncement

(a)

Leases

February 2016,

the FASB issued ASU

2016

02,

“Leases (Topic

842

),” which will replace the existing guidance in ASC

840,

“Leases.” The updated standard aims to increase transparency and comparability among organizations by requiring lessees to recognize lease assets and lease liabilities on the balance sheet and requiring disclosure of key information about leasing arrangements. This ASU is effective for annual periods beginning after

December 15, 2018,

and interim periods within those annual periods. The provisions of ASU

2016

are to be applied using a modified retrospective approach. In

July 2018,

the FASB issued ASU

No.

2018

11,

"Targeted Improvements - Leases (Topic

842

)." This update provides an optional transition method that allows entities to elect to apply the standard on the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Consequently, the prior comparative period’s financials will remain the same as those previously presented. The Company has elected to apply the guidance at the beginning of the period of adoption and

not

restate comparative periods and elected the available practical expedients on adoption.

The Company currently estimates recording lease assets and liabilities in excess of

$9,498

on its consolidated balance sheets, with

material impact on its statement of income.

(b)

Other accounting standards

January 2016,

the FASB issued ASU

2016

13,

“Financial Instruments – Credit Losses on Financial Instruments,” 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

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. The new standard will be effective for interim and annual periods beginning after

January 1, 2020,

and early adoption is permitted. The Company is currently evaluating whether to early adopt this standard and the potential effect of such adoption on its consolidated financial statements.

January 2017,

the FASB issued ASU

No.

2017

04,

Intangibles: Goodwill and Other: Simplifying the Test for Goodwill Impairment. To simplify the subsequent measurement of goodwill, the amendments eliminate Step

from the goodwill impairment test. The annual, or interim, goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should

not

exceed the total amount of goodwill allocated to that reporting unit. In addition, the income tax effects of tax deductible goodwill on the carrying amount of the reporting unit should be considered when measuring the goodwill impairment loss, if applicable. The amendments also eliminate the requirements for any reporting unit with a

zero

or negative carrying amount to perform Step

of the goodwill impairment test. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the qualitative impairment test is necessary. The amendments should be applied on a prospective basis. The nature of and reason for the change in accounting principle should be disclosed upon transition. The amendments in this update should be adopted for annual or any interim goodwill impairment tests in fiscal years beginning after

December

15,

2019.

Early adoption is permitted on testing dates after

January

2017.

The Company is currently evaluating the impact of adopting this new guidance on its consolidated financial statements, but the adoption is

not

expected to have a material impact.

August 2017,

the FASB issued ASU

2017

12,

Derivatives and Hedging (Topic

815

) - Targeted Improvements to Accounting for Hedging Activities (“ASU

2017

12”

), which improves the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities on its financial statements and makes certain targeted improvements to simplify the qualification and application of the hedge accounting compared to current GAAP. This update is effective for fiscal years beginning after

December 15, 2018,

with early adoption permitted. The Company is currently evaluating the impact of the adoption of ASU

2017

on its consolidated financial statements.