Ceva Inc: Form 10-Q for the period ended Sep 30, 2023

You should read the following discussion together with the unaudited financial statements and related notes appearing elsewhere in this quarterly report. This discussion contains forward-looking statements that involve risks and uncertainties. Any or all of our forward-looking statements in this quarterly report may turn out to be wrong. These forward-looking statements can be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. Factors which could cause actual results to differ materially include those set forth under in Part II – Item 1A – “Risk Factors,” as well as those discussed elsewhere in this quarterly report. See “Forward-Looking Statements.”

The financial information presented in this quarterly report includes the results of CEVA, Inc. and its subsidiaries.

BUSINESS OVERVIEW

Headquartered in Rockville, Maryland, CEVA is the leading licensor of wireless connectivity and smart sensing technologies. We provide Digital Signal Processors (DSPs), AI engines, wireless platforms and complementary embedded software for sensor fusion, image enhancement, computer vision, spatial audio, voice input and artificial intelligence, all of which are key enabling technologies for devices to connect, sense and infer data. Our state-of-the-art technology is included in more than 16 billion chips shipped to date for a diverse range of end markets. In 2022, more than 1.7 billion CEVA-powered devices were shipped, equivalent to more than 50 devices every second.

Our hardware IP products and solutions are licensed to customers who embed them into their System on Chip (SoC) designs to create power-efficient, intelligent, secure and connected devices. Our customers include many of the world’s leading semiconductor and original equipment manufacturer (OEM) companies targeting a wide variety of cellular and IoT end markets, including mobile, PC, consumer, automotive, smart-home, surveillance, robotics, industrial and medical. Our application software IP is licensed primarily to OEMs who embed it in their SoCs to enhance the user experience.

Our ultra-low-power hardware IP offerings are deployed in devices for wireless connectivity and smart sensing workloads. Our wireless portfolio includes 5G baseband processing platforms for mobile broadband, cellular IoT and base station RAN, and UWB, Bluetooth and Wi-Fi technologies for a range of connectivity devices. Our smart sensing portfolio includes advanced DSP and AI neural processing unit (NPU) platforms for cameras, radars, microphones, and other sensors, which enable generative AI in conjunction with computer vision, audio, voice, motion sensing and other applications. We also offer processor-agnostic sensor IP for the processing of accelerometers, gyroscopes, magnetometers and optical flow, as well as spatial audio, noise cancellation and voice recognition.

CEVA is a sustainability and environmentally conscious company. We have adopted both a Code of Business Conduct and Ethics and a Sustainability Policy, in which we emphasize and focus on environmental preservation, recycling, the welfare of our employees and privacy – which we promote on a corporate level. At CEVA, we are committed to social responsibility, values of preservation and consciousness towards these purposes.

On September 14, 2023, CEVA and its wholly owned subsidiary, Intrinsix Corp. (“Intrinsix”), a Massachusetts-based provider of design engineering solutions focused on the U.S. Aerospace & Defense industry, entered into a Share Purchase Agreement (the “Agreement”) with Cadence Design Systems, Inc. (“Cadence”), pursuant to which Cadence agreed to purchase all of the issued and outstanding capital shares of Intrinsix from CEVA for $35 million in cash, less approximately $7.5 million repaid by Intrinsix to CEVA at closing in respect of an intercompany obligation and subject to other certain purchase price adjustments as provided for in the Agreement (the “Transaction”). The closing of the Transaction occurred on October 2, 2023. At the closing, an amount of $300,000 from the consideration was deposited with a third-party escrow agent for the purposes of satisfying any additional post-closing purchase price adjustments owed by CEVA to Cadence, and a further amount of $3.5 million of the consideration was deposited with the same escrow agent for a period of 18 months as security for CEVA’s indemnification obligations to Cadence in accordance with the terms and conditions set forth in the Agreement. The Agreement includes certain representations, warranties and covenants of the parties, and CEVA has agreed to certain non-competition and non-solicitation terms, which are subject to certain exceptions.

With the sale of Intrinsix, we have taken an important step toward fully focusing on our core strengths of IP development and licensing, where we see the greatest opportunities for growth and value creation for our investors.

We believe our portfolio of wireless connectivity and smart sensing technologies address some of the most important megatrends, including 5G, generative AI, industrial automation and vehicle electrification. We continue to experience strong interest across our IP portfolio due to these trends, in both traditional and new areas. In the third quarter of 2023, all thirteen IP licensing deals concluded were for wireless communications applications.

We believe the following key elements represent significant growth drivers for the company:

• We believe our PentaG2 platform and DSPs for 5G handsets and 5G IoT endpoints is the most comprehensive baseband IP platform in the industry today and provides newcomers and incumbents with a comprehensive solution to address the need for 5G processing for smartphones, fixed wireless access, satellite communications and a range of connected devices such as robots, cars, smart cities and other devices for industrial applications. In the third quarter of 2023, we signed an agreement with a wireless semiconductor player for a wireless communication DSP targeting the high-growth satellite communications market.
• We believe our PentaG RAN platform for 5G RAN settings is the most comprehensive baseband processor IP in the industry today and provides newcomers and incumbents with a comprehensive solution to address the need for 5G and other communications in data centers and infrastructure.
• Our broad Bluetooth, Wi-Fi, Ultra Wide Band (UWB) and cellular IoT IPs allow us to address the high volume IoT industrial, consumer and smart home markets. Our addressable market size for Bluetooth, Wi-Fi, UWB and cellular IoT is expected to be more than 15 billion devices annually by 2027 based on research from ABI Research. In the third quarter of 2023, we signed three new combo customers for our Wi-Fi 7 (1 deal), Wi-Fi 6 (2 deals) and Bluetooth 5 IPs. We believe that Wi-Fi presents a significant royalty opportunity, given our dominant market position in licensing Wi-Fi 6 with more than 40 customers to date and leadership position in Wi-Fi 7 IP.
• The high volume consumer audio markets, including True Wireless Stereo (TWS) earbuds, smartwatches, AR and VR headsets, and other wearable assisted devices, offers an incremental growth segment for us for our Bluetooth, Audio DSPs and software IPs. For OEMs to better address this market, our RealSpace Spatial Audio & Head Tracking Solution, WhisPro speech recognition technology and ClearVox voice input software are available to enhance the user experience and offer premium features.
• Our second generation SensPro2 sensor hub DSP family provides highly compelling offerings for any sensor-enabled device and application such as smartphones, automotive safety (ADAS), autonomous driving (AD), drones, robotics, security and surveillance, augmented reality (AR) and virtual reality (VR), natural language processing (NLP) and voice recognition. Per research from Yole Group, camera-enabled devices incorporating computer vision and AI are expected to exceed 1 billion units, and devices incorporating voice AI are expected to reach 600 million units by 2025. This sensor hub DSP enables us to address the transformation in devices enabled by these applications, and expand our footprint and content in smartphones, drones, consumer cameras, surveillance, automotive ADAS, voice-enabled devices and industrial IoT applications.
• Transformer and classic neural networks are increasingly being deployed in a wide range of devices in order to make these devices “smarter.” Our newest generation family of AI NPUs present a highly-efficient and high performance architecture to enable generative and classic AI on any device including communication gateways, optically connected networks, cars, notebooks and tablets, AR/VR headsets, smartphones, and any other cloud or edge use case from the edge all the way to the cloud. Per research from Yole Group, 2.5 billion Edge AI devices will ship annually by 2026, illustrating the huge potential of the market.
• Our Hillcrest Labs sensor fusion business unit allows us to address an important technology piece used in personal computers, robotics, TWS earbuds, smart TVs and many other smart sensing IP products, for smart sensing, in addition to our existing portfolio for camera-based computer vision and AI processing, and microphone-based sound processing. MEMS-based inertial and environmental sensors are used in an increasing number of devices, including robotics, smartphones, laptops, tablets, TWS earbuds, spatial audio headsets, remote controls and many other consumer and industrial devices. Hillcrest Labs’ innovative and proven MotionEngine™ software supports a broad range of merchant sensor chips and is processor-agnostic in order to address the requirements of any OEM or semiconductor company that wishes to enhance their customer user experience. The MotionEngine software has already shipped in more than 300 million devices, indicative of its market traction and excellence. Along with our SensPro sensor fusion processors, our licensees can now benefit from our capabilities as a complete, one-stop-shop for processing all classes and types of sensors.

As a result of our focus on silicon and software IP solutions that enable products to connect, sense, and infer data, we believe we are well positioned for long-term growth in shipments and royalty revenues derived from these products. Royalty rates from these products are comprised of a range of ASPs, spanning from high volume Bluetooth and Wi-Fi to high value sensor fusion and base station RAN. The royalty ASP of our other products will be in between the two ranges.

Instability in the Middle East

Our operations in Israel remain largely unaffected by the war between Israel and Hamas that began on October 7, 2023, and we continue to drive our business and support our customers globally. However, a portion of our employees in Israel have been called to active reserve duty and additional employees may be called in the future, if needed. The Company has executed its business continuity plan with respect to those employees. It is possible that some of our operations in the region may be disrupted if this continues for a significant period of time or if the situation further deteriorates.

RESULTS OF OPERATIONS

Total Revenues

Total revenues were $24.1 million and $73.3 million for the third quarter and first nine months of 2023, respectively, representing a decrease of 20% and 19% as compared to the corresponding periods in 2022. The decrease in total revenues for the third quarter and first nine months of 2023 was mainly due to challenging macroeconomic conditions that have led to slower than expected licensing activities related to new chip design starts and generally weaker demand and sales for handsets and PCs that affected our royalty revenues. Licensing revenues for the quarter came in line with our expectations, primarily due to strong demand for our connectivity offerings, namely Bluetooth and WiFi. For the nine months, the strong connectivity contribution was offset by slower design starts and slower decision-making process by smaller companies. Some of them rely on venture capital and government fundings to underpin their businesses. In general, funding from venture capital investors for these companies slowed down towards the end of 2022, with additional instability during the first nine months of 2023 resulting from the Silicon Valley Bank failure. The decrease in total revenues for the first nine months of 2023 was also mainly due to the decrease in royalties from smartphone and PC that was primarily driven by a pull-in of handset baseband shipments in the fourth quarter of 2022, combined with traditional seasonality and inventory buildup.

Our five largest customers accounted for 53% and 30% of our total revenues for the third quarter and first nine months of 2023, respectively, as compared to 43% and 35% for the comparable periods in 2022. Three customers accounted for 14%, 14% and 12% of our total revenues for the third quarter of 2023, as compared to one customer that accounted for 12% of our total revenues for the third quarter of 2022. One customer accounted for 10% of our total revenues for the first nine months of 2023, as compared to one customer that accounted for 12% of our total revenues for the first nine months of 2022. Sales to UNISOC (formerly Spreadtrum Communications, Inc.) represented 10% and 12% of our total revenues for the first nine months of 2023 and 2022, respectively. Generally, the identity of our customers representing 10% or more of our total revenues varies from period to period, especially with respect to our IP licensing customers as we generate licensing revenues generally from new customers on a quarterly basis. With respect to our royalty revenues, two royalty paying customers represented 10% or more of our total royalty revenues for both the third quarter and first nine months of 2023, and collectively represented 46% and 41% of our total royalty revenues for the third quarter and first nine months of 2023, respectively. Three royalty paying customers represented 10% or more of our total royalty revenues for the third quarter of 2022, and two royalty paying customers represented 10% or more of our total royalty revenues for the first nine months of 2022, and collectively represented 58% and 46% of our total royalty revenues for the third quarter and first nine months of 2022, respectively. We expect that a significant portion of our future revenues will continue to be generated by a limited number of customers. The concentration of our customers is explainable in part by consolidation in the semiconductor industry.

The following table sets forth the products and services as percentages of our total revenues for each of the periods set forth below:

Licensing and Related Revenues

Licensing and related revenues were $13.9 million and $45.7 million for the third quarter and first nine months of 2023, respectively, representing a decrease of 25% and 18%, as compared to the corresponding periods in 2022. We continued to see exceptional demand and contribution from our wireless communications IP portfolio, where our leadership position is unrivalled in the industry. Recently, we reached the important milestone of passing $100 million in licensing revenues for our Bluetooth portfolio since it became a mature product. We added another nine licensing agreements for our Bluetooth IP in the third quarter of 2023 alone. Three of these customers also licensed our Wi-Fi IPs to develop wireless combo chips. One of them, licensed our new Wi-Fi 7 IP for Access Points, which carries a substantial ASP uplift over the current generation Wi-Fi 6 IP, both for licensing and royalties. The decrease in licensing and related revenues for the third quarter and first nine months of 2023 was mainly due to macroeconomics and a slowdown in funding of semiconductor smaller companies that limited our ability to conclude some customer licensing agreements.

Thirteen IP license agreements were concluded during the third quarter of 2023, targeting a wide variety of end markets and applications, including Wi-Fi 7, Wi-Fi 6 and Bluetooth 5 for connectivity chips targeting access points, the maker community, smart wearables and smart home devices, Bluetooth audio for a global leader in hearing care, and a communications DSP license targeting high-volume satellite communications. Three of the thirteen deals were with first-time customers.

Licensing and related revenues accounted for 58% and 62% of our total revenues for the third quarter and first nine months of 2023, respectively, as compared to 62% for both the comparable periods of 2022.

Royalty Revenues

Royalty revenues were $10.1 million and $27.5 million for the third quarter and first nine months of 2023, respectively, representing a decrease of 11% and 20%, as compared to the corresponding periods in 2022. Royalty revenues accounted for 42% and 38% of our total revenues for the third quarter and first nine months of 2023, respectively, as compared to 38% for both the comparable periods of 2022. The third quarter and first nine months of 2022 included revenue of $1.0 million and $1.2 million, respectively, following the resolution of royalty audits. Excluding these amounts, the third quarter of 2023 would have been down by 2% and the first nine months of 2023 would have been down 17% as compared to the comparable periods of 2022. In the third quarter of 2023 we also reported the second highest volume of CEVA-powered device shipments for any quarter in the Company’s history, as IoT end market demand picked up ahead of the holiday season. As is evident from the strength of our wireless communications licensing business in the past few years, wireless chips continue to lead the way in terms of device shipments, with Bluetooth chips in the quarter surpassing 300 million units, and cellular IoT shipments at an all-time high of more than 35 million units. The decrease in royalty revenues for the third quarter and first nine months of 2023 was mainly due to customer inventory adjustments and prolonged weak demand for smartphones and PCs.

Our customers reported sales of 501 million and 1,167 million chipsets incorporating our technologies for the third quarter and first nine months of 2023, respectively, an increase of 40% and a decrease of 12% from the corresponding periods in 2022 for actual shipments reported.

The five largest royalty-paying customers accounted for 60% and 55% of our total royalty revenues for the third quarter and first nine months of 2023, respectively, as compared to 66% and 65% for the comparable periods of 2022.

Geographic Revenue Analysis

(in millions, except percentages)

*) Less than $0.1 million

Due to the nature of our license agreements and the associated potential large individual contract amounts, the geographic split of revenues both in absolute dollars and percentage terms generally varies from quarter to quarter.

Cost of Revenues

Cost of revenues was $2.4 million and $9.4 million for the third quarter and first nine months of 2023, respectively, as compared to $5.7 million and $11.8 million for the comparable periods of 2022. Cost of revenues accounted for 10% and 13% of our total revenues for the third quarter and first nine months of 2023, respectively, as compared to 19% and 13% for the comparable periods of 2022. The decrease for the third quarter and first nine months of 2023 principally reflected impairment charges, incurred for the third quarter and first nine months of 2022 of prepaid assets with respect to (1) Immervision-related assets and services, and (2) certain non-performing assets related to NB-IoT technology. The decrease for the third quarter of 2023 also reflected lower customization work for our licensees. Included in cost of revenues for the third quarter and first nine months of 2023 was a non-cash equity-based compensation expense of $216,000 and $636,000, respectively, as compared to $187,000 and $511,000 for the comparable periods of 2022.

Gross Margin

Gross margin for the third quarter and the first nine months of 2023 was 90% and 87%, respectively, as compared to 81% and 87% for the comparable periods of 2022. The increase for the third quarter of 2023 mainly reflected lower cost of revenues as set forth above, mainly due to the impairment charges, offset by lower total revenues. These gross margins, which reflect historical periods on a re-cast basis excluding the Intrisix business as a discontinued operation, are also illustrative of our decision to return to pure IP licensing and royalty business model.

Operating Expenses

Total operating expenses were $24.4 million and $74.5 million for the third quarter and the first nine months of 2023, respectively, as compared to $26.7 million and $75.5 million for the comparable periods of 2022. The net decrease for the third quarter of 2023 principally reflected an impairment charge of $3.6 million recorded in the third quarter of 2022 with respect to Immervision technology acquired in August 2019, as we decided to cease the development of this product line, partially offset with lower research grants received, mainly from the Israeli Innovation Authority of the Ministry of Economy and Industry in Israel (IIA). The net decrease for the first nine months of 2023 principally reflected: (1) an impairment charge of $3.6 million recorded in the third quarter of 2022 with respect to Immervision technology acquired in August 2019, as we decided to cease the development of this product line; and (2) lower salary and employee-related costs, mainly associated with lower employee-related performance costs, partially offset with lower research grants received, mainly from the IIA, and higher non-cash equity-based compensation expenses .

Research and Development Expenses, Net

Our research and development expenses, net, were $17.8 million and $54.5 million for the third quarter and the first nine months of 2023, respectively, as compared to $16.5 million and $52.3 million for the comparable periods of 2022. The increase for the third quarter of 2023 principally reflected lower research grants received, mainly from the IIA, and higher salaries and related costs, partially offset by lower contractors’ costs. The increase for the first nine months of 2023 principally reflected lower research grants received, mainly from the IIA, and higher non-cash equity-based compensation expenses, partially offset by lower salaries and employee-related costs mainly associated with lower employee-related performance costs. Included in research and development expenses for the third quarter and first nine months of 2023 were non-cash equity-based compensation expenses of $2,257,000 and $6,703,000, respectively, as compared to $2,105,000 and $5,988,000 for the comparable periods of 2022. Research and development expenses as a percentage of our total revenues were 74% for both the third quarter and the first nine months of 2023, as compared to 55% and 58% for the comparable periods of 2022. The percentage increase for both the third quarter and first nine months of 2023, as compared to the comparable periods of 2022, was mainly due to lower revenues.

The number of research and development personnel was 322 at September 30, 2023, as compared to 331 at September 30, 2022.

Sales and Marketing Expenses

Our sales and marketing expenses were $2.9 million and $8.2 million for the third quarter and the first nine of 2023, respectively, as compared to $2.9 million and $8.0 million for the comparable periods of 2022. The increase for the first nine months of 2023 principally reflected higher non-cash equity-based compensation expenses. Included in sales and marketing expenses for the third quarter and first nine months of 2023 were non-cash equity-based compensation expenses of $478,000 and $1,305,000, respectively, as compared to $380,000 and $1,030,000 for the comparable periods of 2022. Sales and marketing expenses as a percentage of our total revenues were 12% and 11% for the third quarter and first nine months of 2023, respectively, as compared to 10% and 9% for the comparable periods of 2022.

The total number of sales and marketing personnel was 34 at September 30, 2023, as compared to 35 at September 30, 2022.

General and Administrative Expenses

Our general and administrative expenses were $3.6 million and $11.3 million for the third quarter and the first nine months of 2023, respectively, as compared to $3.3 million and $9.9 million for the comparable periods of 2022. The increase for the third quarter of 2023 primarily reflected higher non-cash equity-based compensation expenses. The increase for the first nine months of 2023 primarily reflected higher professional services cost and higher non-cash equity-based compensation expenses. Included in general and administrative expenses for the third quarter and first nine months of 2023 were non-cash equity-based compensation expenses of $1,018,000 and $2,787,000, respectively, as compared to $699,000 and $2,004,000 for the comparable periods of 2022. General and administrative expenses as a percentage of our total revenues were 15% for both for the third quarter and first nine months of 2023, as compared to 11% for both the comparable periods of 2022.

The number of general and administrative personnel was 51 at September 30, 2023, as compared to 48 at September 30, 2022.

Amortization of Intangible Assets

Our amortization charges were $0.1 million and $0.4 million for the third quarter and first nine months of 2023, respectively, as compared to $0.6 million and $1.7 million for the comparable periods of 2022. The amortization charges for both the third quarter and first nine months of 2023 were incurred in connection with the amortization of intangible assets associated with the acquisitions of the Hillcrest Labs and VisiSonics business. The amortization charges for the third quarter and first nine months of 2022 were incurred in connection with the amortization of intangible assets associated with the acquisition of the Hillcrest Labs and the strategic investment in Immervision.

Impairment of Assets

During both the three and nine months ended September 30, 2022, we recorded an impairment charge of $3.6 million with respect to Immervision technology acquired in August 2019, as we decided to cease the development of this product line.

Financial Income, Net (in millions)

Financial income, net, consists of interest earned on investments, gains and losses from sale of marketable securities, accretion (amortization) of discounts (premiums) on marketable securities and foreign exchange movements.

The increase in interest income and gains and losses from marketable securities, net, during both the third quarter and first nine months of 2023 principally reflected higher yields, offset by lower combined bank deposits and marketable securities balances held.

We review our monthly expected major non-U.S. dollar denominated expenditures and look to hold equivalent non-U.S. dollar cash balances to mitigate currency fluctuations. However, our Euro cash balances increase significantly on a quarterly basis beyond our Euro liabilities, mainly from applicable French research tax credits, which are generally refunded every three years. This has resulted in a foreign exchange gain of $0.03 million and $0.39 million for the third quarter and first nine months of 2023, respectively, as compared to foreign exchange loss of $0.70 million and $0.96 million for the comparable periods of 2022.

Remeasurement of Marketable Equity Securities

We recorded an income of $0.2 million and a loss of $0.1 million for the third quarter and first nine months of 2023, respectively, as compared to a loss of $0.5 million and $2.3 million for the comparable periods of 2022, related to remeasurement of marketable equity securities, which we hold at cost. Over time, other income (expense), net, may be affected by market dynamics and other factors. Equity values generally change daily for marketable equity securities and upon the occurrence of observable price changes or upon impairment of marketable equity securities. In addition, volatility in the global economic climate and financial markets, could result in a significant change in the value of our investments.

Provision for Income Taxes

Our income tax expenses was $1.1 million and $3.1 million for the third quarter and first nine months of 2023, respectively, as compared to $17.9 million and $19.8 million for the comparable periods of 2022. Our income tax expenses comprise of withholding tax expenses in our Israeli subsidiary for which we will not be able to obtain a refund from the tax authorities, as well as tax expenses on income generated in our French subsidiary (under the French IP Box regime) and taxes in the U.S., mainly because of the effect of IRC Section 174, as further described below. The decrease for both the third quarter and first nine months of 2023 primarily reflected the impact of a charge to record a valuation allowance in the third quarter and first nine months of 2022 due to a change in the estimation for taxable income for future years of our Israeli operations.

We are subject to income and other taxes in the United States and in numerous foreign jurisdictions. Our domestic and foreign tax liabilities are dependent on the jurisdictions in which profits are determined to be earned and taxed. Additionally, the amount of taxes paid is subject to our interpretation of applicable tax laws in the jurisdictions in which we operate. A number of factors influence our effective tax rate, including changes in tax laws and treaties as well as the interpretation of existing laws and rules. Federal, state, and local governments and administrative bodies within the United States, and other foreign jurisdictions have implemented, or are considering, a variety of broad tax, trade, and other regulatory reforms that may impact us. For example, the Tax Cuts and Jobs Act (the “U.S. Tax Reform”) enacted on December 22, 2017 resulted in changes in our corporate tax rate, our deferred income taxes, and the taxation of foreign earnings. It is not currently possible to accurately determine the potential comprehensive impact of these or future changes, but these changes could have a material impact on our business and financial condition.

We have significant operations in Israel and operations in France and the Republic of Ireland. A substantial portion of our taxable income is generated in Israel and France, as well as in the U.S. due to global intangible low-taxed income (GILTI) and the requirement to capitalize R&D expenditures under IRC Section 174 over five years if sourced from the U.S. and over 15 years if sourced internationally. Although our Israeli and Irish subsidiaries, and, from 2022 onward, our French subsidiary, are taxed at rates substantially lower than U.S. tax rates, the tax rates in these jurisdictions could nevertheless result in a substantial increase as a result of withholding tax expenses with respect to which we are unable to obtain a refund from the relevant tax authorities.

Our French subsidiary is entitled to a tax benefit of 10% applied to specific revenues under the French IP Box regime. The French IP Box regime applies to net income derived from the licensing, sublicensing or sale of several IP rights such as patents and copyrighted software, including royalty revenues. This elective regime requires a direct link between the income benefiting from the preferential treatment and the R&D expenditures incurred and contributing to that income. Qualifying income may be taxed at a favorable 10% CIT rate (plus social surtax, hence 10.3% in total).

Our Irish subsidiary qualified for a 12.5% tax rate on its trade. Interest income generated by our Irish subsidiary is taxed at a rate of 25%.

Our Israeli subsidiary is entitled to various tax benefits as a technological enterprise. In December 2016, the Economic Efficiency Law (Legislative Amendments for Applying the Economic Policy for the 2017 and 2018 Budget Years), 2016, which includes the Amendment to the Law for the Encouragement of Capital Investments, 1959 (Amendment 73) (the “Amendment”), was published. The Amendment, among other things, prescribes special tax tracks for technological enterprises, which are subject to rules that were issued by the Minister of Finance in April 2017.

The new tax track under the Amendment, which is applicable to our Israeli subsidiary, is the “Technological Preferred Enterprise”. Technological Preferred Enterprise is an enterprise for which total consolidated revenues of its parent company and all subsidiaries are less than 10 billion New Israeli Shekel (NIS). A Technological Preferred Enterprise, as defined in the Amendment, that is located in the center of Israel (where our Israeli subsidiary is currently located), is taxed at a rate of 12% on profits deriving from intellectual property. Any dividends distributed to “foreign companies”, as defined in the Amendment, deriving from income from technological enterprises will be taxed at a rate of 4%. We are applying the Technological Preferred Enterprise tax track for our Israeli subsidiary from tax year 2020 and onwards.

Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates.

We believe that the assumptions and estimates associated with revenue recognition, fair value of financial instruments, equity-based compensation and income taxes have the greatest potential impact on our consolidated financial statements. Therefore, we consider these to be our critical accounting policies and estimates.

See our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on March 1, 2023, for a discussion of additional critical accounting policies and estimates. There have been no changes in our critical accounting policies as compared to what was previously disclosed in the Annual Report on Form 10-K for the year ended December 31, 2022.

LIQUIDITY AND CAPITAL RESOURCES

As of September 30, 2023, we had approximately $17.1 million in cash and cash equivalents, $10.4 million in bank deposits, and $104.2 million in marketable securities, totaling $131.7 million, as compared to $146.5 million at December 31, 2022. The decrease for the first nine months of 2023 principally reflected cash used in operating activities, as well as $3.6 million cash used for the acquisition of the VisiSonics business.

Out of total cash, cash equivalents, bank deposits and marketable securities of $131.7 million, $127.4 million was held by our foreign subsidiaries. Our intent is to permanently reinvest earnings of our foreign subsidiaries 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 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.

During the first nine months of 2023, we invested $12.5 million of cash in bank deposits and marketable securities with maturities up to 36 months from the balance sheet date. In addition, during the same period, bank deposits and marketable securities were sold or redeemed for cash amounting to $25.5 million. All of our marketable securities are classified as available-for-sale. The purchase and sale or redemption of available-for-sale marketable securities are considered part of investing cash flow. Available-for-sale marketable 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 investments, as determined on a specific identification basis, are included in the interim condensed consolidated statements of loss. The amount of credit losses recorded for the first nine months of 2023 was immaterial. For more information about our marketable securities, see Note 7 to the interim condensed consolidated financial statements for the three and nine months ended September 30, 2023.

Bank deposits are classified as short-term bank deposits and long-term bank deposits. Short-term bank deposits are deposits with maturities of more than three months but no longer than one year from the balance sheet date, whereas long-term bank deposits are deposits with maturities of more than one year as of the balance sheet date. Bank deposits are presented at their cost, including accrued interest, and purchases and sales are considered part of cash flows from investing activities.

As previously discussed, on September 14, 2023, CEVA and Intrinsix entered into an agreement with Cadence to sell all the issued and outstanding capital shares of Intrinsix to Cadence for $35 million in cash, less approximately $7.5 million that was repaid by Intrinsix to CEVA at closing in respect of an intercompany obligation and subject to other certain purchase price adjustments as provided for in the Agreement. Upon the consummation of the Transaction on October 2, 2023, an amount of $300,000 from the consideration was deposited with a third-party escrow agent for the purposes of satisfying any additional post-closing purchase price adjustments owed by CEVA to Cadence, and a further amount of $3.5 million of the consideration was deposited with the same escrow agent for a period of 18 months as security for CEVA’s indemnification obligations to Cadence in accordance with the terms and conditions set forth in the Agreement, such that CEVA received a total of $31.1 million at closing.

Operating Activities

Cash used in operating activities for the first nine months of 2023 was $11.1 million and consisted of net loss of $15.6 million, adjustments for non-cash items of $16.1 million, and changes in operating assets and liabilities of $11.6 million. Adjustments for non-cash items primarily consisted of $3.9 million of depreciation and amortization of intangible assets (including $1.1 million from discontinued operations), and $12.3 million of equity-based compensation expenses. The decrease in operating assets and liabilities primarily consisted of an increase in trade receivables of $0.8 million, an increase in prepaid expenses and other assets of $2.0 million (mainly as a result of an increase in applicable French research tax credits), a decrease in deferred taxes, net of $1.5 million, a decrease in trade payables of $0.8 million, a decrease in accrued payroll and related benefits of $6.2 million (mainly as a result of a yearly bonus payments), and a decrease of income tax payable of $1.4 million, partially offset by an increase in deferred revenues of $1.0 million.

Cash provided by operating activities for the first nine months of 2022 was $3.5 million and consisted of net loss of $25.1 million, adjustments for non-cash items of $23.1 million, and changes in operating assets and liabilities of $5.5 million. Adjustments for non-cash items primarily consisted of $5.8 million of depreciation and amortization of intangible assets (including $1.7 million from discontinued operations), $10.4 million of equity-based compensation expenses, $2.3 million of remeasurement of marketable equity securities, $3.6 million of impairment of intangible assets with respect to Immervision technology acquired in August 2019, as we decided to cease the development of this product line, and $0.7 million of unrealized foreign exchange loss. The increase in operating assets and liabilities primarily consisted of a decrease in deferred taxes, net of $11.8 million (primarily reflect the impact of a charge to record a valuation allowance in the first nine months of 2022), a decrease in trade receivables of $0.7 million, and an increase in accrued expenses and other payables, including income taxes payable, of $1.5 million, partially offset by a decrease in deferred revenues of $5.1 million, a decrease in accrued payroll and related benefits of $2.8 million and an increase in prepaid expenses and other assets of $1.3 million.

Cash flows from operating activities may vary significantly from quarter to quarter depending on the timing of our receipts and payments. Our ongoing cash outflows from operating activities principally relate to payroll-related costs and obligations under our property leases and design tool licenses. Our primary sources of cash inflows are receipts from our accounts receivable, to some extent, funding from research and development government grants and French research tax credits, and interest earned from our cash, deposits and marketable securities. The timing of receipts of accounts receivable from customers is based upon the completion of agreed milestones or agreed dates as set out in the contracts.

Investing Activities

Net cash provided by investing activities for the first nine months of 2023 was $7.2 million, compared to $3.3 million of net cash used in investing activities for the comparable period of 2022. We had a cash outflow of $10.5 million and a cash inflow of $19.5 million with respect to investments in marketable securities during the nine months of 2023, as compared to a cash outflow of $27.3 million and a cash inflow of $10.0 million with respect to investments in marketable securities during the first nine months of 2022. For the first nine months of 2023, we had net proceeds of $4.0 million from bank deposits, as compared to net proceeds of $16.9 million from bank deposits for the comparable period of 2022. We had a cash outflow of $2.1 million and $2.9 million during the first nine months of 2023 and 2022, respectively, from purchase of property and equipment. For the first nine months of 2023, we had a cash outflow of $3.6 million for the acquisition of the VisiSonics business.

Financing Activities

Net cash provided by financing activities for the first nine months of 2023 was $0.4 million, as compared to $3.3 million of net cash used in financing activities for the comparable period of 2022.

In August 2008, we announced that our board of directors approved a share repurchase program for up to one million shares of common stock which was further extended collectively by an additional 6,400,000 shares in 2010, 2013, 2014, 2018 and 2020. During the first nine months ended September 30, 2023, we repurchased 135,078 shares of common stock at an average purchase price of $22.23 per share for an aggregate purchase price of $3,003. During the first nine months of 2022, we repurchased 218,809 shares of common stock pursuant to our share repurchase program at an average purchase price of $31.01 per share, for an aggregate purchase price of $6.8 million. As of September 30, 2023, we had 143,721 shares available for repurchase. On November 7, 2023, our Board of Directors authorized the repurchase of an additional 700,000 shares of our common stock pursuant to Rule 10b-18 of the Exchange Act.

During the first nine months of 2023, we received $3.4 million from the exercise of stock-based awards, as compared to $3.5 million received for the comparable period of 2022.

We believe that our cash and cash equivalents, short-term bank deposits and marketable securities, along with cash from operations, will provide sufficient capital to fund our operations for at least the next 12 months. We cannot provide assurances, however, that the underlying assumed levels of revenues and expenses will prove to be accurate.

In addition, as part of our business strategy, we occasionally evaluate potential acquisitions of businesses, products and technologies and minority equity investments. Accordingly, a portion of our available cash may be used at any time for the acquisition of complementary products or businesses or minority equity investments. 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 or investment candidates, complete acquisitions or investments, integrate acquired businesses into our current operations, or expand into new markets. Furthermore, we cannot provide assurances that additional financing will be available to us in any required time frame and on commercially reasonable terms, if at all.

A majority of our revenues and a portion of our expenses are transacted in U.S. dollars and our assets and liabilities together with our cash holdings are predominately denominated in U.S. dollars. However, the majority of our expenses are denominated in currencies other than the U.S. dollar, principally the NIS and the Euro. Increases in volatility of the exchange rates of currencies other than the U.S. dollar versus the U.S. dollar could have an adverse effect on the expenses and liabilities that we incur when remeasured into U.S. dollars. We review our monthly expected non-U.S. dollar denominated expenditures and look to hold equivalent non-U.S. dollar cash balances to mitigate currency fluctuations. However, our Euro cash balances increase significantly on a quarterly basis beyond our Euro liabilities, mainly from French research tax benefits applicable to the CIR, which is generally refunded every three years. This has resulted in a foreign exchange gain of $34,000 and $390,000 for the third quarter and first nine months of 2023, respectively, and a foreign exchange loss of $696,000 and $956,000 for the comparable periods of 2022.

As a result of currency fluctuations and the remeasurement of non-U.S. dollar denominated expenditures to U.S. dollars for financial reporting purposes, we may experience fluctuations in our operating results on an annual and quarterly basis. 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, we follow a foreign currency cash flow hedging program. We hedge portions of the anticipated payroll for our non-U.S. employees denominated in currencies other than the U.S. dollar for a period of one to twelve months with forward and option contracts. During the third quarter and first nine months of 2023, we recorded accumulated other comprehensive loss of $77,000 and $132,000, respectively, from our forward and option contracts, net of taxes, with respect to anticipated payroll expenses for our non-U.S. employees. During the third quarter and first nine months of 2022, we recorded accumulated other comprehensive gain of $111,000 and accumulated other comprehensive loss of $462,000, respectively, from our forward and option contracts, net of taxes, with respect to anticipated payroll expenses for our non-U.S. employees. As of September 30, 2023, the amount of other comprehensive loss from our forward and option contracts, net of taxes, was $239,000, which will be recorded in the consolidated statements of income (loss) during the following five months. We recognized a net loss of $299,000 and $873,000 for the third quarter and first nine months of 2023, respectively, and a net loss of $398,000 and $1,140,000 for the comparable periods of 2022, related to forward and options contracts. We note that hedging transactions may not successfully mitigate losses caused by currency fluctuations. We expect to continue to experience the effect of exchange rate and currency fluctuations on an annual and quarterly basis.

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 bank deposits may be redeemed 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 we monitor 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 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 invested cash or cash equivalents; however, we can provide no assurance that access to our invested cash and cash equivalents will not be affected if the financial institutions that we hold our cash and cash equivalents fail.

We hold an investment portfolio consisting principally of corporate bonds. We have the ability to hold such investments until recovery of temporary declines in market value or maturity. As of September 30, 2023, the unrealized losses associated with our investments were approximately $5.8 million due to the dramatic changes in the interest rate environment that took place in 2022. As we tend to hold such bonds with unrealized losses to recovery, the allowance for credit losses was not material during the third quarter and first nine months of 2023. However, we can provide no assurance that we will recover present declines in the market value of our investments. See “Risk Factors— We have broad discretion with respect to the application of our cash, cash equivalents and financial investments, which may not yield returns for a variety of reasons, many of which may be outside of our control.” for more detailed information.

Interest income and gains and losses from marketable securities, net, were $0.89 million and $3.11 million for the third quarter and first nine months of 2023, respectively, as compared to $0.81 million and $1.76 million for the comparable periods of 2022. The increase in interest income, and gains and losses from marketable securities, net, during both the third quarter and first nine months of 2023, principally reflected higher yields, offset by lower combined bank deposits and marketable securities balances held.

We are 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. We typically do not attempt to reduce or eliminate our market exposures on our investment securities because the majority of our investments are short-term. We currently do not have any derivative instruments but may put them in place in the future. Fluctuations in interest rates 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.

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 September 30, 2023.

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.

Other than as described below, we have not identified any material changes to the Risk Factors previously disclosed in Part I—Item IA—“Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, any one or more of which could, directly or indirectly, cause our actual financial condition and operating results to vary materially from past, or from anticipated future, financial condition and operating results. Any of those factors, in whole or in part, could materially and adversely affect our business, financial condition, operating results and stock price. You should carefully consider the risks and uncertainties described in our Annual Report filed on Form 10-K for the fiscal year ended December 31, 2022, together with all of the other information in this Quarterly Report on Form 10-Q, including in “Part I—Item 2—”Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the condensed consolidated financial statements and related notes.

Our operations in Israel may be adversely affected by instability in the Middle East region.

One of our principal research and development facilities is located in Israel, and most of our executive officers and one of our directors are residents of Israel. Although substantially all of our sales currently are made to customers outside Israel, we are nonetheless directly influenced by the political, economic and military conditions affecting Israel, including Israel’s war with Hamas that began October 7, 2023. For example, international travel to and from Israel has been significantly reduced in recent weeks, which in the long term could impact organizational cohesion and sales. In addition, certain of our employees are currently obligated to perform annual reserve duty in the Israel Defense Forces and are subject to being called to active military duty at any time. Currently, a portion of our employees have been called to active reserve duty and additional employees may be called in the future, if needed. It is possible that our operations could be disrupted if this situation continues for a significant period of time or further deteriorates, including if hostilities expand from other fronts, which could harm our business.

Our insurance does not cover losses that may occur as a result of an event associated with the security situation in the Middle East or for any resulting disruption in our operations. Although the Israeli government has in the past covered the reinstatement value of direct damages that were caused by terrorist attacks or acts of war, we cannot be assured that this government coverage will be maintained or, if maintained, will be sufficient to compensate us fully for damages incurred and the government may cease providing such coverage or the coverage might not suffice to cover potential damages. Any losses or damages incurred by us could have a material adverse effect on our business.

We have broad discretion with respect to the application of our cash, cash equivalents and financial investments, which may not yield returns for a variety of reasons, many of which may be outside of our control.

We have broad discretion in the application of our cash, cash equivalents and financial investments, and we may spend or invest these funds without the approval of stockholders in ways that do not improve our results of operations or enhance the value of our common stock. We have established a corporate investment policy governing the investment and management of our cash balances in excess of operational needs. Pursuant to this investment policy, we hold an investment portfolio of marketable securities consisting principally of corporate bonds in the amount of $112.1 million as of December 31, 2022, and $104.2 million as of September 30, 2023, out of total cash and cash equivalents, short-term bank deposits and marketable securities of $138.3 million and $131.7 million as of December 31, 2022, and September 30, 2023, respectively. These positions are reviewed by the audit committee of our board of directors on a quarterly basis.

Given the concentration of our investments in corporate bonds, we are significantly exposed 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. As of September 30, 2023, the unrealized losses associated with our investments in available-for-sale marketable securities were approximately $5.8 million due to the dramatic changes in the U.S. interest rate environment. As we tend to hold such bonds with unrealized losses to recovery, the allowance for credit losses was not material during either 2022 or the third quarter and first nine months of 2023, however, we can provide no assurance that we will recover present declines in the market value of our investments.

Furthermore, we are also exposed to risks related to the solvency of the banks in which we make our financial investments. While the majority of our cash and cash equivalents are invested in high grade certificates of deposits with major U.S., European and Israeli banks, 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. We monitor on a systematic basis the cash and cash equivalent balances in our operating accounts and adjust the balances as appropriate, but these balances, as well as the value of our corporate bonds, could be impacted if one or more of the financial institutions with which we deposit our funds or with respect to which we hold bonds fails or is subject to other adverse conditions in the financial or credit markets. While our risk related to certain of our corporate bonds has increased recently due to the recent liquidity crisis at Credit Suisse, we have not experienced any material adverse impact to our liquidity or to our current and projected business operations, financial condition or results of operations from matters relating to the banking failures and other adverse developments affecting certain financial institutions in recent months. However, we can provide no assurance that access to our invested cash and cash equivalents or the value of our corporate bonds will not be affected if the relevant financial institutions fail.

Our cash position and investment returns may also be impacted by other factors outside of our control, including but not limited to rising levels of inflation globally, volatility in the financial markets, and market and economic conditions in general. A loss on our investments may also negatively impact our liquidity, which in turn may hurt our ability to invest in our business.

Our operating results are affected by the highly cyclical nature of and general economic conditions in the semiconductor industry, including significant supply chain disruptions and funding trends for semiconductor startups.

We operate within the semiconductor industry, which experiences significant fluctuations in sales, profitability and financing. Downturns in the semiconductor industry are characterized by diminished product demand, excess customer inventories, accelerated erosion of prices and excess production capacity. Various market data suggests that the semiconductor industry may be facing such a negative cycle presently, especially in the global handset market. The semiconductor industry has also faced significant global supply chain issues as a result of the impact of the COVID-19 pandemic (both on demand for devices to enable wireless connectivity and remote environments and on supply from the related imposition of government restrictions on staffing and facility operations) as well as other trends such as the increasing demand for semiconductors in automobiles, which together have resulted in the inability of fabrication plants to produce sufficient quantities of chips to meet demand, supply chain shortages and other disruptions. In addition, semiconductor startups, a customer base that is an important contributor to any IP licensing business, rely on venture capital funding to underpin their businesses, but due to recent factors affecting the macroeconomic environment, funding from venture capital investors for these companies slowed down towards the end of 2022, with additional instability during the first nine months of 2023 resulting from the Silicon Valley Bank failure. The high interest rate environment and macroeconomic concerns related to an industry slowdown, inventory buildout and decline in semiconductor startup funding we experienced in the second half of 2022 has continued throughout the first nine months of 2023, and adversely affect our revenues, and may continue to impact our business. Other factors, such as further trade tensions between the U.S. and China, may prolong or deepen these challenges faced by the industry. Volatility or declines in the semiconductor industry could cause substantial fluctuations or declines in our revenues and results of operations.