# CEVA INC (CEVA) FY 2021 MD&A Verbatim Item 7 Management's Discussion and Analysis from CEVA INC's 10-K for fiscal year 2021. SEC filing source: https://www.sec.gov/Archives/edgar/data/1173489/000143774922004905/ceva20211231_10k.htm Accession: 0001437749-22-004905 Filing date: 2022-03-01 Report date: 2021-12-31 Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Confidence: high Company profile: /company/CEVA/ All MD&A years: /company/CEVA/mda/ Next year: /company/CEVA/mda/fy2022/ (FY 2022) ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS You should read the following discussion together with the consolidated financial statements and related notes appearing elsewhere in this annual report. This discussion contains forward-looking statements that involve risks and uncertainties. Actual results may differ materially from those included in such forward-looking statements. Factors that could cause actual results to differ materially include those set forth under “Risk Factors,” as well as those otherwise discussed in this section and elsewhere in this annual report. See “Forward-Looking Statements and Industry Data.” BUSINESS OVERVIEW The following discussion and analysis is intended to provide an investor with a narrative of our financial results and an evaluation of our financial condition and results of operations. The discussion should be read in conjunction with our consolidated financial statements and notes thereto for the year ended December 31, 2021, both appearing elsewhere in this annual report. Headquartered in Rockville, Maryland, CEVA is the leading licensor of wireless connectivity and smart sensing technologies and integrated IP solutions for a smarter, more secure and more connected world. We offer Digital Signal Processors, AI processors, wireless platforms and complementary software for sensor fusion, image enhancement, computer vision, voice input and artificial intelligence. During 2021, we acquired Intrinsix Corp. (Intrinsix), which provides chip design expertise and a range of additional IP in the areas of mixed signal, RF, security and heterogeneous System-on-Chip (SoC) interfaces. Our IP products and solutions are licensed to customers who embed them into their SoC and microcontroller 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, robotics, industrial, aerospace and defense and medical. Our ultra-low-power IP offerings are deployed in devices for smart sensing and connectivity workloads. Our smart sensing portfolio includes advanced technologies for cameras, microphones, sensor hubs and inertial measurement units (IMU). Our camera platforms incorporate AI processors, digital signal processor (DSP) cores, accelerators and software technologies for AI, computer vision and imaging. Our microphone technologies incorporate DSP cores and software technologies for noise cancellation, echo cancellation and voice recognition. Our sensor hub DSPs serve as a hub for AI and DSP processing workloads associated with a wide range of sensors including camera, Radar, LiDAR, Time-of-Flight, microphones and inertial measurement units (IMUs). Our IMU technologies include processor agnostic software supporting sensor processing of accelerometers, gyroscopes, magnetometers and optical flow, as well as environmental sensors in devices. Our wireless portfolio includes LTE and 5G mobile broadband platforms for handsets and base station RAN, NB-IoT for low bit rate cellular, UWB for high-precision localization, and Bluetooth and Wi-Fi technologies for wireless IoT. We believe the acquisition of Intrinsix will allow us to further support our customers with integrated IP solutions that will combine CEVA and Intrinsix IP along with Intrinsix’s design capabilities toward the creation of highly optimized IP. We believe this will in turn strengthen our relationships with customers, generate recurrent royalties and more. Furthermore, Intrinsix’s experience and customer base in the growing chip development programs with the U.S. Department of Defense and the Defense Advanced Research Projects Agency (DARPA) together with its IP offerings for processor security and chiplets will extend CEVA’s serviceable market and revenue base. 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. We believe that our IP licensing business and chip design expertise are solid with a diverse customer base and myriad target markets. Our state-of-the-art technology has shipped in more than 14 billion chips to date for a wide range of end markets. Every second, more than fifty devices sold worldwide are powered by CEVA. 31 We believe the adoption of our wireless connectivity and smart sensing IP products beyond our incumbency in the handset baseband market continues to progress. In particular, we are currently experiencing exceptional interest for our wireless connectivity platforms, in both traditional and new areas. Reflecting this trend, ten of the twenty IP licensing and non-recurring engineering (NRE) deals concluded in the fourth quarter of 2021 were for Bluetooth and Wi-Fi wireless connectivity. Notably, we signed an agreement with a lead OEM customer for the next generation Wi-Fi 7 technology which we are developing today. We believe the following key elements represent significant growth drivers for the company: [[GREPCENT_TABLE]] [["","\u25cf","CEVA is a player in mobile handsets, the largest space of the semiconductor industry. Our customers use our technologies for baseband and voice processing. Our key customer currently has a strong foothold in low-tier LTE smartphones and feature phones markets which continue to experience strong momentum."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u25cf","The royalty we derive from premium-tier smartphones is higher on average than that of mid and low-tier smartphones due to more DSP content that bears a higher royalty average selling price (ASP). Looking ahead, we believe our PentaG platform for 5G handsets and 5G Broadband IoT endpoints 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 processing for smartphones, fixed wireless access and a range of connected devices such as robots, cars, smart cities and other devices for industrial applications. In the fourth quarter, we signed a comprehensive agreement for our PentaG platform with a Japanese OEM for the nationwide deployment of 5G fixed wireless access in Japan."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u25cf","Our specialization and technological edge in signal processing platforms for 5G base station RAN, including Remote Radio Units (RRU), Active Antenna Units (AAU), Base Band Units (BBU) and Distributed Units (DU) put us in a strong position to capitalize on the growing 5G RAN across its new form factors such as V-RAN, C-RAN and O-RAN, as well as small cells and private networks."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u25cf","Our broad Bluetooth, Wi-Fi, Ultra Wide Band (UWB) and NB-IoT IPs allow us to expand further into the high volume IoT applications and substantially increase our value-add. Our addressable market size for Bluetooth, Wi-Fi, UWB and NB-IoT is expected to be more than 14 billion devices annually by 2026 based on ABI Research. In 2021, we reported all-time record high shipments of devices enabled by our Bluetooth, Wi-Fi and cellular IoT IPs of 1.1 billion units, up 79% year-over-year."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u25cf","The growing market for True Wireless Stereo (TWS) earbuds, smartwatches, AR and VR headsets, and other wearable assisted devices, offers an incremental growth segment for us. To better address this market, our WhisPro speech recognition technology and ClearVox voice input software are offered in conjunction with our audio/voice DSPs."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u25cf","Our unique capability to combine our Bluetooth IP, audio DSP IP and software for contextual aware user experience puts us in a strong position to capitalize on the fast-growing True Wireless Stereo (TWS) markets of earbuds, smartwatches, hearing aids, device speakers, PCs and more. Our recently announced BlueBud platform integrates all of these technologies, lowering the entry barriers for semiconductors and OEMs to develop differentiated, high-performance solution for TWS devices. During the fourth quarter, we concluded our fourth BlueBud license agreement."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u25cf","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 D\u00e9veloppement, 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 new DSP architecture 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. In the fourth quarter we signed 2 deals for SensPro, targeting AI in automotive and next-generation computing."]] [[/GREPCENT_TABLE]] 32 [[GREPCENT_TABLE]] [["","\u25cf","Neural networks are increasingly being deployed in a wide range of camera-based devices in order to make these devices \u201csmarter.\u201d To address this significant and lucrative opportunity, our NeuPro-S\u2122 a second-generation family of AI processors for deep learning at the edge, brings the power of deep learning to the device, without relying on connectivity to the cloud. We believe this market opportunity for Edge AI at the edge represents new IP licensing and royalty drivers for the company in the coming years."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u25cf","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, headsets, remote controls and many other consumer and industrial devices. Hillcrest Labs\u2019 innovative and proven MotionEngine\u2122 software supports a broad range of merchant sensor chips and is licensed to OEMs and semiconductor companies that can run the software on CEVA DSPs or a variety of RISC CPUs. The MotionEngine software expands and complements CEVA\u2019s smart sensing technology. Hillcrest Labs\u2019 technology has already shipped in more than 200 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."]] [[/GREPCENT_TABLE]] As a result of our diversification strategy beyond baseband for handsets, and our progress in addressing those new markets under the base station and IoT umbrella, we continue to experience significant growth in shipments and royalty revenues derived from base station and IoT product category (formerly referred to as non-handset products). Unit shipments for this category were up 25% year-over-year in the fourth quarter of 2021 to 333 million units and up 69% for the full year ended December 31, 2021, to more than 1.3 billion units. We expect royalty growth to continue in this product category for the next few years. These devices are comprised of a range of different products at different royalty ASPs, spanning from high volume Bluetooth to high value sensor fusion and base station RAN. The royalty ASP of our other products will be in between the two ranges. CURRENT TRENDS We believe that as the continuing digital transformation drives industries to become connected and intelligent, our ubiquitous technology and collaborative business model present a significant and secular growth prospect. We intend to continue to capitalize on the semiconductor momentum with our AI, connectivity and other product lines, and our customer pipeline at the end of the year is historically high. We believe our key customers are keenly receptive to our products road map and priorities and willing to expand the scope of engagements with us, and anticipate that an increasing share of new customers and revenues will be derived from China and the remainder of the APAC region. Our licensing, NRE and related revenues business is expected to continue to expand as we benefit from multiple growth vectors where we excel, in particular 5G, Wi-Fi 6 & 7, Edge AI and wearables and hearables. In addition, our new integrated IP solution offerings and expanded access to the lucrative aerospace and defense markets as a result of our acquisition of Intrinsix present further compelling opportunities. In royalties, we expect our base station & IoT product category to have a noticeable contribution to royalties in 2022, with royalties from base station RAN, Bluetooth, Wi-Fi and sensor fusion being the main drivers and outgrow their respective markets. Overall, we forecast another growth year in royalty revenues, where the strength of our base station & IoT royalty drivers more than offsetting the anticipated declines in royalty revenues from Intel following the sale of its 5G smartphone modem business and in handset baseband royalties as the remaining 4G smartphones from a Tier 1 OEM are phased out over the course of the year. 33 The ongoing COVID-19 pandemic and related public health measures has also materially affected how we and our customers are operating our businesses, and have materially affected our operating results, though we are encouraged by the persistent design activities of our customers and interests in our products and by recent indicators relating to our base station and IoT product category. During 2020, the world encountered new trends and different seasonality than what we have experienced in prior years. Some consumer electronics products sold well, and some new technologies were widely adopted due to social distancing and other restrictions. Nonetheless, prolonged measures to contain the spread of coronavirus pose uncertainty for economic activities. In particular, in emerging markets where our primary exposure is in low tier handsets, COVID-19 has had a negative impact. While the impact from COVID-19 on our financial results for the years ended December 31, 2021 and 2020 was not material, we are currently unable to determine or predict the nature, duration or scope of the overall impact the pandemic will have on our business, results of operations, liquidity or capital resources for the year 2022. For example, as of the date of this filing, while we see positive activity in our IP licensing and pipeline of deals, customers in the semiconductor space from whom we collect royalties are experiencing more pressure on their operations due to, among other reasons, longer manufacturing lead times as semiconductor demand surpasses supply and severe pandemic infections in large markets like India and Brazil may lead to lock downs and related reduction in economic activities. We will continue to closely monitor the effects of the ongoing pandemic on our operations, employees and customers. CRITICAL ACCOUNTING POLICIES, ESTIMATES AND ASSUMPTIONS Our consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States (U.S. GAAP). These accounting principles require us to make certain estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions upon which we rely are reasonable based upon information available to us at the time that these estimates, judgments and assumptions are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements, as well as the reported amounts of revenues and expenses during the periods presented. To the extent there are material differences between these estimates, judgments or assumptions and actual results, our financial statements will be affected. The significant accounting policies that we believe are the most critical to aid in fully understanding and evaluating our reported financial results include the following: [[GREPCENT_TABLE]] [["","\u25cf","revenue recognition;"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u25cf","business combinations and valuation of goodwill and other acquired intangible assets;"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u25cf","income taxes;"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u25cf","equity-based compensation; and"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u25cf","impairment of marketable securities."]] [[/GREPCENT_TABLE]] In many cases, the accounting treatment of a particular transaction is specifically dictated by U.S. GAAP and does not require management’s judgment in its application. There are also areas in which management’s judgment in selecting among available alternatives would not produce a materially different result. Revenue Recognition Significant management judgments and estimates must be made and used in connection with the recognition of revenue in any accounting period. Material differences in the amount of revenue in any given period may result if these judgments or estimates prove to be incorrect or if management’s estimates change on the basis of development of business or market conditions. Management’s judgments and estimates have been applied consistently and have been reliable historically. 34 The following is a description of principal activities from which we generate 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 we expect to receive in exchange for those goods or services. We determine revenue recognition through the following steps: [[GREPCENT_TABLE]] [["","\u25cf","identification of the contract with a customer;"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u25cf","identification of the performance obligations in the contract;"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u25cf","determination of the transaction price;"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u25cf","allocation of the transaction price to the performance obligations in the contract; and"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u25cf","recognition of revenue when, or as, we satisfy a performance obligation."]] [[/GREPCENT_TABLE]] We enter 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. We generate our revenues from (1) licensing intellectual properties, which in certain circumstances are modified for customer-specific requirements, (2) royalty revenues and (3) other revenues, which include revenues from NRE payments and from support, training and sale of development systems and chips. We license our IP to semiconductor companies throughout the world. These semiconductor companies then manufacture, market and sell custom-designed chipsets to OEMs of a variety of consumer electronics products.  We also license our technology directly to OEMs, which are considered end users. We account for our IP license revenues and related services, which provide our customers with rights to use our IP, in accordance with ASC 606. A license may be perpetual or time limited in its application. In accordance with ASC 606, we 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. We have concluded that our IP license is distinct as the customer can benefit from the software on its own. Most of our contracts with customers contain multiple performance obligations. For these contracts, we account 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. Stand-alone selling prices of IP license are typically estimated using the residual approach. Stand-alone 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, we adjust 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 our IP to customer-specific specifications are performance obligations we generally account for as performance obligations satisfied over time. Our performance obligation does not create an asset with alternative use, and we have an enforceable right to payment. We recognize 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 our IP are classified as royalty revenues. Royalty revenues are recognized during the quarter in which the sale of the product incorporating our IP occurs. Royalties are calculated either as a percentage of the revenues received by our licensees on sales of products incorporating our IP or on a per unit basis, as specified in the agreements with the licensees. For a majority of our revenues, we receive the actual sales data from our customers after the quarter ends and accounts for it as unbilled receivables. When we do not receive actual sales data from the customer prior to the finalization of its financial statements, royalty revenues are recognized based on our estimation of the customer’s sales during the quarter. We may engage a third party to perform royalty audits of our licensees, and if these audits indicate any over- or under-reported royalties, we account for the results when the audits are resolved. 35 We recently acquired Intrinsix, which derives revenues primarily from NRE payments. Revenues that are derived from NRE payments are performance obligations that are recognized over time as the services are rendered. For time-and-materials contracts, the performance obligation is satisfied and revenue is recognized over time as the services are performed. Generally, contracts call for billings on a time-and-materials basis; however, in instances when a fixed-fee contract is signed, revenue is recognized over time, based on an input method of labor costs expended, relative to total expected labor costs to complete the contract. In addition to license and NRE 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.  We consider the post contract support performance obligation as a distinct performance obligation that is satisfied over time, and as such, we recognize 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 12 months.  Revenues from the sale of development systems and chips 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 and NRE agreements, unearned technical support and amounts paid by customers not yet recognized as revenues. Business Combinations and Valuation of Goodwill and Other Acquired Intangible Assets We allocate the fair value of purchase price consideration to the tangible assets acquired, liabilities assumed and intangible assets acquired based on their estimated fair values. The excess of the fair value of purchase price consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. Such valuations require management to make significant estimates and assumptions, especially with respect to intangible assets. Significant estimates in valuing certain intangible assets include, but are not limited to, future expected cash flows from acquired customers, acquired technology, and trade names from a market participant perspective, useful lives, and discount rates. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. We review goodwill for impairment at least annually or more frequently if events or changes in circumstances indicate that the carrying value of goodwill may not be recoverable in accordance with ASC 350 “Intangibles – Goodwill and other” (ASC 350). ASC 350 allows an entity to first assess qualitative factors to determine whether it is necessary to perform the quantitative goodwill impairment test. If the qualitative assessment does not result in a more likely than not indication of impairment, no further impairment testing is required. If an entity elects not to use this option, or if an entity determines that it is more likely than not that the fair value of a reporting unit is less than its carrying value, then the entity prepares a quantitative analysis to determine whether the carrying value of a reporting unit exceeds its estimated fair value. If the carrying value of a reporting unit exceeds its estimated fair value, the entity recognizes an impairment of goodwill for the amount of this excess, in accordance with the guidance in FASB Accounting Standards Update (ASU) No. 2017-04, Intangibles - Goodwill and Other (Topic 350), Simplifying the Test for Goodwill Impairment. For each of the three years for the period ended December 31, 2021, no impairment of goodwill has been identified. Acquired finite-lived intangible assets are amortized over their estimated useful lives. We evaluate the recoverability of our intangible assets for possible impairment whenever events or circumstances indicate that the carrying amount of such assets may not be recoverable. Recoverability of these assets is measured by a comparison of the carrying amounts to the 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. We have not recorded any such impairment charge during the years presented. 36 In addition to the recoverability assessment, we routinely review the remaining estimated useful lives of our finite-lived intangible assets. If we reduce the estimated useful life assumption for any asset, the remaining unamortized balance would be amortized over the revised estimated useful life. Income Taxes We are subject to income taxes mainly in Israel, France, the U.S. and Ireland. Significant judgment is required in evaluating our uncertain tax positions and determining our provision for income taxes. We recognize income taxes under the liability method. Tax benefits are recognized from uncertain tax positions only if we believe that it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. Although we believe we have adequately reserved for our uncertain tax positions, no assurance can be given that the final tax outcome of these matters will not be different. We adjust these reserves when facts and circumstances change, such as the closing of a tax audit, the refinement of an estimate or changes in tax laws. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will impact the provision for income taxes in the period in which such determination is made. The provision for income taxes includes the effects of any reserves that are considered appropriate, as well as the related net interest and penalties. We recognize deferred tax assets and liabilities for future tax consequences arising from differences between the carrying amounts of existing assets and liabilities under GAAP and their respective tax bases, and for net operating loss carryforwards and tax credit carryforwards. We regularly review our deferred tax assets for recoverability and record a valuation allowance if it is more likely than not that some portion or all of the deferred tax assets will not be realized. To make this judgment, we make predictions of the amounts and category of taxable income from various sources and weigh all available positive and negative evidence about these possible sources of taxable income. Accounting for tax positions requires judgments, including estimating reserves for potential uncertainties. We also assess our ability to utilize tax attributes, including those in the form of carry-forwards for which the benefits have already been reflected in the financial statements. While we believe the resulting tax balances as of December 31, 2020 and 2021 are appropriately accounted for, the ultimate outcome of such matters could result in favorable or unfavorable adjustments to our consolidated financial statements and such adjustments could be material. See Note 14 to our Consolidated Financial Statements for the year ended December 31, 2021 for further information regarding income taxes. We have filed or are in the process of filing local and foreign tax returns that are subject to audit by the respective tax authorities. The amount of income tax we pay is subject to ongoing audits by the tax authorities, which often result in proposed assessments. We believe that we adequately provided for any reasonably foreseeable outcomes related to tax audits and settlement. However, our future results may include favorable or unfavorable adjustments to our estimated tax liabilities in the period the assessments are made or resolved, audits are closed or when statute of limitations on potential assessments expire. We are subject to taxation in the United States, as well as a number of foreign jurisdictions.  In December 2017, the United States enacted U.S. tax reform. The legislation implements many new U.S. domestic and international tax provisions. Some aspects of U.S. tax reform still remain unclear, and although additional clarifying guidance has been issued (by the Internal Revenue Services, and the U.S. Treasury Department), there are still some areas that may not be clarified for some time. Also, many of U.S. states have not yet updated their laws to take into account the new federal legislation. As a result, there may be further impact of the new laws on our future results of operations and financial condition. It is possible that U.S. tax reform, or interpretations under it, could change and could have an adverse effect on us, and such effect could be material. We have elected to account for global intangible low-taxed income (GILTI) as a current-period expense when incurred. Legislation and clarifying guidance are expected to continue to be issued by the U.S. Treasury Department and various states in 2022, which could have a material adverse impact on the value of our U.S. deferred tax assets, result in significant changes to currently computed income tax liabilities for past and current tax periods, and increase our future U.S. tax expense. Equity-Based Compensation We account 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. Equity-based compensation primarily includes restricted stock unit (RSUs), as well as options, stock appreciation right (SAR), performance-based stock units (PSUs) and employee stock purchase plan awards. 37 We elect the straight-line recognition method for awards subject to graded vesting based only on a service condition and the accelerated method for awards that are subject to performance or market. The fair value of each RSU and PSU (excluding PSUs based on market condition awards) is the market value as determined by the closing price of the common stock on the grant date. We estimate the fair value of PSU based on market condition awards on the date of grant using the Monte Carlo simulation model. Impairment of Marketable Securities Marketable securities consist mainly of corporate bonds. We determine the appropriate classification of marketable securities at the time of purchase and re-evaluate such designation at each balance sheet date. In accordance with FASB ASC No. 320, “Investments Debt and Equity Securities,” we classify 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. We have classified all marketable securities as short-term, even though the stated maturity date may be one year or more beyond the current balance sheet date, because it is probable that we will sell these securities prior to maturity to meet liquidity needs or as part of risk versus reward objectives. Starting on January 1, 2020, as a result of the adoption of ASC 326, available-for-sale debt securities with an amortized cost basis in excess of estimated fair value are assessed to determine what amount of that difference, if any, is caused by expected credit losses. Expected credit losses on available-for-sale debt securities are recognized in financial income, net, on our consolidated statements of income (loss), and any remaining unrealized losses, net of taxes, are included in accumulated other comprehensive income (loss) in stockholders' equity. The determination of credit losses requires significant judgment and actual results may be materially different from our estimates. The amount of credit losses recorded for the years ended December 31, 2021 and 2020 was immaterial. We determine realized gains or losses on sale of marketable securities using a specific identification method and records such gains or losses as financial income, net. Prior to 2020, we recognized an impairment charge when a decline in the fair value of our investments in debt securities below the cost basis of such securities was considered 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 were deemed other-than-temporarily impaired, the amount of impairment was recognized in the statement of income (loss) and was limited to the amount related to credit losses, while impairment related to other factors was recognized in other comprehensive income (loss). During the year ended December 31, 2019, no other-than temporary impairment were recorded related to our marketable securities. Recently Adopted Accounting Pronouncement In December 2019, the FASB issued Accounting Standard Update No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (ASU 2019-12), which simplifies the accounting for income taxes. ASU 2019-12 is effective for annual reporting periods, and interim periods within those years, beginning after December 15, 2020. The adoption of the new guidance did not have a material impact on our consolidated financial statements. Recently Issued Accounting Pronouncement In October 2021, the FASB issued ASU No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers (ASU 2021-08), which clarifies that an acquirer of a business should recognize and measure contract assets and contract liabilities in a business combination in accordance with Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers (Topic 606). This guidance will be effective for us in the first quarter of 2023 on a prospective basis, with early adoption permitted. We are currently evaluating the impact of the new guidance on our consolidated financial statements. 38 RESULTS OF OPERATIONS The following table presents line items from our consolidated statements of income (loss) as percentages of our total revenues for the periods indicated: [[GREPCENT_TABLE]] [["","","2019","","","2020","","","2021"],["Consolidated Statements of Income (Loss) Data:"],["Revenues:"],["Licensing, NRE and related revenue","","","54.9","%","","","52.3","%","","","59.4","%"],["Royalties","","","45.1","%","","","47.7","%","","","40.6","%"],["Total revenues","","","100.0","%","","","100.0","%","","","100.0","%"],["Cost of revenues","","","11.6","%","","","10.7","%","","","13.7","%"],["Gross profit","","","88.4","%","","","89.3","%","","","86.3","%"],["Operating expenses:"],["Research and development, net","","","60.6","%","","","61.8","%","","","59.1","%"],["Sales and marketing","","","14.2","%","","","11.9","%","","","10.5","%"],["General and administrative","","","13.6","%","","","14.1","%","","","11.7","%"],["Amortization of intangible assets","","","2.2","%","","","2.3","%","","","2.2","%"],["Total operating expenses","","","90.6","%","","","90.1","%","","","83.5","%"],["Operating income (loss)","","","(2.2",")%","","","(0.8",")%","","","2.8","%"],["Financial income, net","","","3.8","%","","","3.3","%","","","0.2","%"],["Remeasurement of marketable equity securities","","","\u2014","","","","\u2014","","","","1.6","%"],["Income before taxes on income","","","1.6","%","","","2.5","%","","","4.6","%"],["Taxes on income","","","1.5","%","","","4.9","%","","","4.3","%"],["Net income (loss)","","","0.1","%","","","(2.4",")%","","","0.3","%"]] [[/GREPCENT_TABLE]] Discussion and Analysis Below we provide information on the significant line items in our consolidated statements of income (loss) for each of the past three fiscal years, including the percentage changes year-on-year, as well as an analysis of the principal drivers of change in these line items from year-to-year. Revenues Total Revenues [[GREPCENT_TABLE]] [["","","2019","","","2020","","","2021"],["Total revenues (in millions)","","$","87.2","","","$","100.3","","","$","122.7"],["Change year-on-year","","","\u2014","","","","15.1","%","","","22.3","%"]] [[/GREPCENT_TABLE]] We derive a significant amount of revenues from a limited number of customers. Sales to UNISOC represented 21%, 14% and 15% of our total revenues for 2021, 2020 and 2019, respectively. Sales to Intel represented 6%, 15% and 19% of our total revenues for 2021, 2020 and 2019, respectively, and are expected to decline significantly in future periods following the sale of its 5G modem business.  Generally, the identity of our other customers representing 10% or more of our total revenues varies from period to period, especially with respect to our licensing customers as we generate licensing revenues generally from new customers on a quarterly basis.  With respect to our royalty revenues, three royalty paying customers each represented 10% or more of our total royalty revenues for 2021, and collectively represented 57% of our total royalty revenues for 2021. Four royalty paying customers each represented 10% or more of our total royalty revenues for 2020, and collectively represented 72% of our total royalty revenues for 2020.  Three royalty paying customers each represented 10% or more of our total royalty revenues for 2019, and collectively represented 73% of our total royalty revenues for 2019.  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 loss of any significant customer could adversely affect our near-term future operating results. 39 The following table sets forth the products and services as percentages of our total revenues in each of the periods set forth below: [[GREPCENT_TABLE]] [["","","Year ended December 31,"],["","","2019","","","2020","","","2021"],["Connectivity products (baseband for handset and other devices, Bluetooth, Wi-Fi, NB-IoT, and SATA/SAS)","","","81","%","","","78","%","","","73","%"],["Smart sensing products (AI, sensor fusion, audio/sound and imaging and vision)","","","19","%","","","22","%","","","27","%"]] [[/GREPCENT_TABLE]] We expect to continue to generate a significant portion of our revenues for 2021 from the above products and services. Licensing, NRE and related revenue [[GREPCENT_TABLE]] [["","","2019","","","2020","","","2021"],["Licensing, NRE and related revenue (in millions)","","$","47.9","","","$","52.5","","","$","72.8"],["Change year-on-year","","","\u2014","","","","9.7","%","","","38.7","%"]] [[/GREPCENT_TABLE]] Total 2021 licensing, NRE and related revenue reached a new all-time record high, due to the contribution of the acquisition of Intrinsix on May 31, 2021 to our revenues, and from diversification of technologies, markets, new and recurring customers and overall sales execution. The increase in licensing, NRE and related revenues from 2019 to 2020 principally reflected an increase in Bluetooth and base station licensing deals, partially offset by decreased revenues from licensing of handset baseband and vision products. For 2022, our licensing, NRE and related revenues business is expected to continue to expand as we benefit from multiple growth vectors where we excel, in particular 5G, Wi-Fi 6 & 7, Edge AI and wearables and hearables. In addition, our new integrated IP solution offerings and expanded access to the lucrative aerospace & defense markets via Intrinsix present further compelling opportunities for years to come. Our licensing, NRE and related revenues business hit another record high number of license agreements signed, reaching 73, of which 25 were first-time customers. Our customer pipeline at the end of the year was historically high. We believe our key customers are keenly receptive to our products road map and priorities and willing to expand the scope of engagements with us. Licensing, NRE and related revenue accounted for 59.4% of our total revenues for 2021, compared with 52.3% and 54.9% of our total revenues for 2020 and 2019, respectively. Royalty Revenues [[GREPCENT_TABLE]] [["","","2019","","","2020","","","2021"],["Royalty revenues (in millions)","","$","39.3","","","$","47.8","","","$","49.9"],["Change year-on-year","","","\u2014","","","","21.8","%","","","4.3","%"]] [[/GREPCENT_TABLE]] We generate royalty revenues from our customers who ship units of chips incorporating our technologies. Our royalty revenues represent what our customers shipped during any quarter, or our best estimates for such shipments. The royalty rate is based either on a certain percent of the chipset price or a fixed amount per chipset based on volume discounts. 40 Based on internal data and Strategy Analytics’ provisional worldwide shipment data, CEVA’s worldwide market share of handset baseband chips that incorporate our technologies represented approximately 17%, 26% and 26% of the worldwide baseband volume in 2021, 2020 and 2019, respectively, and accounted for approximately 43%, 53% and 67% of our total royalty revenues for 2021, 2020 and 2019, respectively. Our 2021 royalty revenue reached to a new record high. The main growth driver was attributed to our base station and IoT product categories, which increased 28% in revenue compared to 2020, reaching a new high of $28.6 million, up from $22.3 million in 2020. Our technologies are being deployed in wearables, PCs, smart TVs, robot vacuum cleaners, surveillance cameras and in plenty of other IoT devices are key drivers for that growth. On 5G RAN, a key customer of ours released for field testing new 5G RAN products enabled by our latest and most advanced DSP, the XC16 and we hope to enjoy new royalties from this in 2022. Overall, we also believe that this growth trend will continue into 2022, although we cannot assess its magnitude and timing. The increase in royalty revenues partially offset by lower handset baseband based royalties, as a large US based handset OEM moved to 5G, for which it uses chips from a competitor. Total shipments in 2021 increased 24% year-over-year to over 1.6 billion units, up from 1.3 billion in 2020. Total shipment volume in 2019 was 1 billion. Annual shipments of base station & IoT customers reached a new record of 1.3 million units in 2021, up significantly 69% year-over-year. The five largest royalty-paying customers accounted for 68% of our total royalty revenues for 2021, compared to 76% of our total royalty revenues for 2020 and 84% of our total royalty revenues for 2019. Geographic Revenue Analysis [[GREPCENT_TABLE]] [["","","2019","","","2020","","","2021"],["","","(in millions, except percentages)"],["United States","","$","16.6","","","","19.0","%","","$","20.8","","","","20.8","%","","$","26.7","","","","21.8","%"],["Europe, Middle East (EME) (2)","","$","21.5","","","","24.7","%","","$","12.0","","","","11.9","%","","$","6.9","","","","5.6","%"],["Asia Pacific (APAC) (1)","","$","49.0","","","","56.3","%","","$","67.5","","","","67.3","%","","$","89.1","","","","72.6","%"],["(1) China","","$","33.2","","","","38.1","%","","$","51.7","","","","51.6","%","","$","67.5","","","","55.0","%"],["(2) Germany","","$","16.1","","","","18.5","%","","","*)","","","","*)","","","","*)","","","","*)"]] [[/GREPCENT_TABLE]] *) Less than 10% A majority of our revenues during the past three years have originated in the APAC region, with China representing the largest revenue share of countries in the APAC region. The increase in revenues in absolute dollars and percentage terms in APAC from 2020 to 2021 was due to strong execution in licensing of our wireless platforms for Bluetooth, Wi-Fi and 5G. Bluetooth royalties from customers in China also showed strong growth year over year. The increase in revenues in absolute dollars and percentage terms in APAC from 2019 to 2020 was due to strong licensing execution and higher royalties from our base station and IoT product lines. The increase in revenues in absolute dollars and percentage terms in the United States from 2020 to 2021 reflected NRE revenues following the acquisition of Intrinsix, coupled with good licensing execution for our Wi-Fi platforms. The increase in revenues in absolute dollars and percentage terms in the United States from 2019 to 2020 reflected mainly higher royalties from one customer that moved its billing process from EME to the United States, which also explained the decrease in EME revenues in absolute dollars and percentage terms. The decrease in revenues in absolute dollars and percentage in the EME region from 2020 to 2021 primarily reflected lower royalties from one customer that moved its billing process from EME to the United States and an overall weaker licensing environment during the year. 41 Cost of Revenues [[GREPCENT_TABLE]] [["","","2019","","","2020","","","2021"],["Cost of revenues (in millions)","","$","10.1","","","$","10.7","","","$","16.8"],["Change year-on-year","","","\u2014","","","","6.4","%","","","56.5","%"]] [[/GREPCENT_TABLE]] Cost of revenues accounted for 13.7% of our total revenues for 2021, compared to 10.7% of our total revenues for 2020 and 11.6% of our total revenues for 2019. The absolute dollar increases in cost of revenues for 2021 as compared to 2020 principally reflected higher service costs for our customers, mainly due to incorporating for the first time, salary and related NRE costs associated with the Intrinsix business. The absolute dollar increase in cost of revenues for 2020 as compared to 2019 principally reflected higher salaries and related costs (partially due to salary and related costs associated with the Hillcrest Labs employees being included in the results for the first half of 2020, which costs were not incurred for the first half of 2019), higher payments to the Israeli Innovation Authority of the Ministry of Economy and Industry in Israel (the IIA), higher materials related to the Hillcrest Labs business and higher amortization cost related to acquired assets (Immervision technologies), partially offset by lower customization work for our licensees, lower third-party IP costs associated with the NB-IoT product line and lesser travel due to COVID-19. Cost of revenues includes labor-related costs and, where applicable, costs related to overhead, subcontractors, materials, travel, royalty expenses payments to the IIA, amortization of acquired assets and non-cash equity-based compensation expenses. In 2021, cost of revenues also includes for the first-time salary and related NRE costs and amortization of acquired assets associated with the Intrinsix business. Non-cash equity-based compensation expenses included in cost of revenues for the years 2021, 2020 and 2019 were $818,000, $639,000, and $630,000, respectively. Royalty expenses relate to royalties payable to the IIA that amount to 3%-3.5% of the actual sales of certain of our products, the development of which previously included grants from the IIA. The obligation to pay these royalties is contingent on actual sales of these products. Amortization of acquired assets related to the purchase of a license of NB-IoT technologies in the first quarter of 2018, to a strategic investment in Immervision in the third quarter of 2019, and to certain intangible assets associated with the Intrinsix acquisition in the second quarter of 2021. Our amortization charges were $1.6 million, $0.7 million and $0.4 million for 2021, 2020 and 2019, respectively. We anticipate that our cost of revenues will increase in 2022 as compared to 2021 in the amount of approximately $12.5 million, due mainly to our operating the Intrinsix business on a full year basis, compared to only a seven month period in 2021. Operating Expenses [[GREPCENT_TABLE]] [["","","2019","","","2020","","","2021"],["","","(in millions)"],["Research and development, net","","$","52.8","","","$","62.0","","","$","72.5"],["Sales and marketing","","$","12.4","","","$","11.9","","","$","12.9"],["General and administration","","$","11.8","","","$","14.1","","","$","14.3"],["Amortization of intangible assets","","$","1.9","","","$","2.3","","","$","2.7"],["Total operating expenses","","$","78.9","","","$","90.3","","","$","102.4"],["Change year-on-year","","","\u2014","","","","14.4","%","","","13.3","%"]] [[/GREPCENT_TABLE]] The increase in total operating expenses for 2021 as compared to 2020 principally reflected (1) higher salary and employee-related costs, which mainly include: (i) higher number of research and development personnel, including first time salary and related costs associated with the Intrinsix employees; and (ii) higher currency exchange expenses as a result of the devaluation of the U.S. dollar against the Israeli NIS and the Euro, (2) higher professional services cost associated with the Intrinsix transaction, and (3) higher facilities expenses, partially offset by lower allowance for credit losses. The increase in total operating expenses for 2020 as compared to 2019 principally reflected (1) higher salary and employee-related costs, mainly due to higher headcount, and the inclusion of salary and related costs associated with the Hillcrest Labs employees for the first half of 2020, which costs were not incurred for the first half of 2019 as the acquisition of the Hillcrest Labs business was consummated in July 2019, (2) lower research grants received from the IIA, and (3) higher non-cash equity-based compensation expenses. 42 Research and Development Expenses, Net [[GREPCENT_TABLE]] [["","","2019","","","2020","","","2021"],["Research and development expenses, net (in millions)","","$","52.8","","","$","62.0","","","$","72.5"],["Change year-on-year","","","\u2014","","","","17.3","%","","","16.9","%"]] [[/GREPCENT_TABLE]] The net increase in research and development expenses for 2021 as compared to 2020 principally reflected (1) higher salary and employee-related costs, which mainly include: (i) a higher number of research and development personnel, including first time salary and related costs associated with the Intrinsix employees; (ii) Holdback Merger Consideration costs for the Intrinsix executives; and (iii) higher currency exchange expenses as a result of the devaluation of the U.S. dollar against the Israeli NIS and the Euro, (2) lower Crédit Impôt Recherche (CIR) received from the French tax authorities, and (3) higher facilities expenses. The net increase in research and development expenses for 2020 as compared to 2019 principally reflected (1) higher salary and employee-related costs, mainly due to higher headcount, and the inclusion of salary and related costs associated with the Hillcrest Labs employees for the first half of 2020, which costs were not incurred for the first half of 2019 as the acquisition of the Hillcrest Labs business was consummated in July 2019, (2) lower research grants received, mainly from the IIA, and (3) higher non-cash equity-based compensation expenses, partially offset by higher CIR granted. The average number of research and development personnel in 2021 was 310, compared to 298 in 2020 and 273 in 2019. The number of research and development personnel was 311 at December 31, 2021 as compared to 304 in 2020 and 289 in 2019. We anticipate that our research and development expenses cost will continue to increase in 2022, mainly as we continue to support new customers and reinforce our leadership with disciplined investments in research and development costs, which contribute to the licensing revenues and further down the road to royalty revenues, as well as from operating the Intrinsix business on a full year basis, compared to only a seven month period in 2021. We anticipate research and development costs will increase in 2022, compared to 2021, by approximately $6.5 million. Research and development expenses, net of related government grants and French research tax benefits applicable to CIR, were 59.1% of our total revenues for 2021, as compared with 61.8% for 2020 and 60.6% for 2019. We recorded research grants under funding programs of $3,595,000 in 2021, compared with $2,844,000 in 2020 and $5,643,000 in 2019. We recorded UK tax credits and CIR benefits of $2,547,000, $3,485,000 and $2,513,000 for 2021, 2020 and 2019, respectively. Research and development expenses consist primarily of salaries and associated costs, facilities expenses associated with research and development activities, project-related expenses connected with the development of our intellectual property which are expensed as incurred, and non-cash equity-based compensation expenses. Non-cash equity-based compensation expenses included in research and development expenses, net for the years 2021, 2020 and 2019 were $7,287,000, $6,874,000 and $5,857,000, respectively. Research and development expenses are net of related government research grants, UK tax credits and research tax benefits applicable to CIR. We view research and development as a principal strategic investment and have continued our commitment to invest heavily in this area, which represents the largest of our ongoing operating expenses. We will need to continue to invest in research and development and such expenses may increase in the future to keep pace with new trends in our industry. Sales and Marketing Expenses [[GREPCENT_TABLE]] [["","","2019","","","2020","","","2021"],["Sales and marketing expenses (in millions)","","$","12.4","","","$","11.9","","","$","12.9"],["Change year-on-year","","","\u2014","","","","(3.7",")%","","","8.0","%"]] [[/GREPCENT_TABLE]] The increase in sales and marketing expenses for 2021 as compared to 2020 principally reflected higher salary and employee related costs, mainly associated with the Intrinsix employees, and higher commission expenses, partially offset by lower non-cash equity-based compensation expenses. The decrease in sales and marketing expenses for 2020 as compared to 2019 principally reflected lesser travel and physical marketing activities and events (like trade shows), but more digital related activities at lesser costs, due to COVID-19, partially offset by higher non-cash equity-based compensation expenses. 43 Sales and marketing expenses as a percentage of our total revenues were 10.5% for 2021, as compared with 11.9% for 2020 and 14.2% for 2019. The total number of sales and marketing personnel was 36 in 2021, as compared with 35 in 2020 and 33 in 2019. Sales and marketing expenses consist primarily of salaries, commissions, travel and other costs associated with sales and marketing activities, as well as advertising, trade show participation, public relations and other marketing costs and non-cash equity-based compensation expenses. Non-cash equity-based compensation expenses included in sales and marketing expenses for the years 2021, 2020 and 2019 were $1,626,000, $2,038,000 and $1,495,000, respectively. General and Administrative Expenses [[GREPCENT_TABLE]] [["","","2019","","","2020","","","2021"],["General and administrative expenses (in millions)","","$","11.8","","","$","14.1","","","$","14.3"],["Change year-on-year","","","\u2014","","","","19.2","%","","","1.3","%"]] [[/GREPCENT_TABLE]] The slight increase in general and administrative expenses for 2021 as compared to 2020 principally reflected higher professional services cost associated with the Intrinsix transaction and higher salaries and employee related costs, partially offset by lower allowance for credit losses and lower non-cash equity-based compensation expenses. The increase in general and administrative expenses for 2020 as compared to 2019 principally reflected higher allowance for credit losses and higher non-cash equity-based compensation expenses. General and administrative expenses as a percentage of our total revenues were 11.7% for 2021, as compared with 14.1% for 2020 and 13.6% for 2019. The total number of general and administrative personnel was 50 in 2021, as compared with 34 in 2020 and 32 in 2019. General and administrative expenses consist primarily of fees for directors, salaries for management and administrative employees, accounting and legal fees, expenses related to investor relations and facilities expenses associated with general and administrative activities, allowance for credit losses and non-cash equity-based compensation expenses. Non-cash equity-based compensation expenses included in general and administrative expenses for the years 2021, 2020 and 2019 were $3,324,000, $4,085,000 and $2,736,000, respectively. Amortization of Intangible Assets Our amortization charges were $2.7 million, $2.3 million and $1.9 million for 2021, 2020 and 2019 respectively. The amortization charges in 2019 were incurred in connection with the amortization of intangible assets associated with (1) the acquisition of RivieraWaves in July 2014, which was fully amortized in 2019 (2) the acquisition of the Hillcrest Labs business in July 2019, and (3) the strategic investment in Immervision in August 2019. The amortization charges in 2020 were incurred in connection with the amortization of intangible assets associated with (1) the acquisition of the Hillcrest Labs business, and (2) the strategic investment in Immervision. The amortization charges in 2021 were incurred in connection with the amortization of intangible assets associated with (1) the acquisition of the Hillcrest Labs business, (2) the strategic investment in Immervision, and (3) the acquisition of Intrinsix in 2021. As of December 31, 2021, the net amount of intangible assets associated with the acquisitions was $10.9 million. Financial Income, net [[GREPCENT_TABLE]] [["","","2019","","","2020","","","2021"],["","","(in millions)"],["Financial income, net","","$","3.29","","","$","3.28","","","$","0.20"],["of which:"],["Interest income and gains and losses from marketable securities, net","","$","3.64","","","$","2.84","","","$","1.47"],["Foreign exchange gain (loss)","","$","(0.35",")","","$","0.44","","","$","(1.27",")"]] [[/GREPCENT_TABLE]] Financial income, net, consists of interest earned on investments, gains and losses from sale of marketable securities, accretion (amortization) of discount (premium) on marketable securities and foreign exchange movements. 44 The decrease in interest income and gains and losses from marketable securities, net, for 2021 as compared to 2020 mainly reflected lower yields. The decrease in interest income and gains and losses from marketable securities, net, for 2020 as compared to 2019 reflected lower combined cash, bank deposits and marketable securities balances held (mainly as a result of the acquisition of the Hillcrest Labs business and the strategic investment in Immervision during the third quarter of 2019) and lower yields.  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 the French research tax benefits applicable to CIR, which is generally refunded every three years. This has resulted in an increase in foreign exchange loss during 2021 due to the devaluation of our Euro cash balances as the U.S. dollar strengthened significantly during this period as compared to the Euro. This has resulted in a foreign exchange loss of $1.27 million, a foreign exchange gain of 0.44 million and a foreign exchange loss of $0.35 million for 2021, 2020 and 2019, respectively. Remeasurement of marketable equity securities We recorded a gain of $2.0 million in 2021 related to remeasurement of marketable equity securities, which we hold at cost. During the years ended December 31, 2021, 2020 and 2019, no impairment loss was identified. 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, including the effects of COVID-19, could result in a significant change in the value of our investments. Provision for Income Taxes During the years 2021, 2020 and 2019, we recorded tax expenses of $5.3 million, $4.9 million and $1.3 million, respectively. The increase in provision for income taxes in 2021 as compared to 2020 principally reflected a significant increase in income earned in France, which has a relatively high corporate tax rate of 26.5%, offset by lower withholding tax expenses for which we will not be able to obtain a refund from certain tax authorities, and a one time Income tax benefit recorded in 2021 associated with the purchase price allocation related to the Intrinsix acquisition. The increase in provision for income taxes in 2020 as compared to 2019 principally reflected withholding tax expenses for which we will not be able to obtain a refund from certain tax authorities, and a tax benefit of $1.0 million recorded in the third quarter of 2019 due to the release of a tax provision as a result of the completion of a tax audit in a certain foreign tax jurisdiction. 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. Although our Israeli and Irish subsidiaries 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. Starting in 2020 and continuing into 2021, our French subsidiary was in a profit position and local French tax rate of 26.5% was applied, that is significantly higher than the Company’s overall blended tax rate. 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%. 45 In 2017, the French government passed a series of tax reforms allowing for a phased reduction in the corporate tax rate. In accordance with the tax reforms, our French subsidiary qualified in 2018 for a corporate tax rate of 28% for taxable profit up to €500,000 (approximately $559,930) and the standard rate of 33.33% for taxable profit above €500,000 (approximately $559,930). In 2019, the standard corporate income tax rate was reduced to 31%, with the first €500,000 (approximately $559,930) of taxable profit still being subject to the reduced 28% rate. In 2020, a corporate income tax rate of 28% has become the new standard rate for all taxable profits. In 2021, the corporate income tax rate was reduced to 26.5%. In 2022, the standard corporate income tax rate will be further reduced to 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. To maintain our Israeli subsidiary’s eligibility for the above tax benefits, it must continue to meet certain conditions under the Investment Law. Should our Israeli subsidiary fail to meet such conditions in the future, these benefits would be cancelled and it would be subject to corporate tax in Israel at the standard corporate rate and could be required to refund tax benefits already received, with interest and adjustments for inflation based on the Israeli consumer price index. For more information about our provision for income taxes, see Note 14 to the attached Notes to Consolidated Financial Statement for the year ended December 31, 2021. LIQUIDITY AND CAPITAL RESOURCES As of December 31, 2021, we had approximately $33.2 million in cash and cash equivalents, $31.4 million in short term bank deposits, $90.3 million in marketable securities, and $0 million in long term bank deposits, totaling $154.9 million, as compared to $159.6 million at December 31, 2020. The decrease in 2021 as compared to 2020 principally reflected $29.9 million cash used for the acquisition of Intrinsix, partially offset by cash provided by operations. Out of total cash, cash equivalents, bank deposits and marketable securities of $154.9 million at year end 2021, $144.5 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 2021, we invested $40.7 million of cash in bank deposits and marketable securities with maturities up to 57 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 $56.1 million. During 2020, we invested $99.9 million of cash in bank deposits and marketable securities with maturities up to 56 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 $87.6 million. During 2019, we invested $66.5 million of cash in bank deposits and marketable securities with maturities up to 53 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 $85.9 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 consolidated statements of income (loss). The amount of credit losses recorded for the twelve months ended December 31, 2021, and 2020, was immaterial. We did not recognize any other-than-temporarily-impaired charges on marketable securities in 2019.  For more information about our marketable securities, see Notes 1 and 3 to the attached Notes to Consolidated Financial Statement for the year ended December 31, 2021. 46 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. Operating Activities Cash provided by operating activities in 2021 was $25.8 million and consisted of a net income of $0.4 million, adjustments for non-cash items of $19.6 million, and changes in operating assets and liabilities of $5.8 million. Adjustments for non-cash items primarily consisted of $7.0 million of depreciation and amortization of intangible assets, and $13.1 million of equity-based compensation expenses. The increase in cash from changes in operating assets and liabilities primarily consisted of a decrease in trade receivables of $5.8 million, a decrease in prepaid expenses and other assets of $3.6 million, and an increase in deferred revenues of $5.1 million, partially offset by an increase in deferred taxes, net of $6.3 million (mainly due to an increase in withholding tax assets which can be utilized in future years), a decrease in accrued expenses and other payables of $1.7 million, and a decrease in accrued payroll and related benefits of $0.9 million. Cash provided by operating activities in 2020 was $15.2 million and consisted of a net loss of $2.4 million, adjustments for non-cash items of $19.3 million, and changes in operating assets and liabilities of $1.7 million. Adjustments for non-cash items primarily consisted of $5.8 million of depreciation and amortization of intangible assets, and $13.6 million of equity-based compensation expenses. The decrease in cash from changes in operating assets and liabilities primarily consisted of an increase in trade receivables of $2.9 million, an increase in prepaid expenses and other assets of $0.6 million, and a decrease in deferred revenues of $1.2 million, partially offset by a decrease in accrued interest on bank deposits of $1.2 million, and an increase in accrued payroll and related benefits of $1.8 million. Cash provided by operating activities in 2019 was $9.7 million and consisted of net income of $28,000, adjustments for non-cash items of $16.8 million, and changes in operating assets and liabilities of $7.1 million. Adjustments for non-cash items primarily consisted of $5.3 million of depreciation and amortization of intangible assets, $10.7 million of equity-based compensation expenses, and $0.6 million of amortization of premiums on available-for-sale marketable securities. The decrease in cash from changes in operating assets and liabilities primarily consisted of an increase in trade receivables  of $2.2 million, an increase in prepaid expenses and other assets of $4.2 million (mainly as a result of a strategic investment in Immervision of $2.9 million), an increase in deferred taxes, net, of $3.6 million (mainly due to (1) a release of a tax provision as a result of the completion of a tax audit in a certain foreign tax jurisdiction, and (2) an increase in withholding tax assets which can be utilized in future years),  partially offset by an increase in accrued payroll and related benefits of $3.1 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 the IIA 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 used in investing activities in 2021 was $16.7 million, as compared to net cash used in investing activities of $15.2 million in 2020 and net cash used in investing activities of $2.4 million in 2019. We had a cash outflow of $39.2 million with respect to investments in marketable securities and a cash inflow of $36.1 million with respect to maturity, and sale, of marketable securities during 2021. Included in the cash inflow during 2021 was net proceeds of $18.5 million from bank deposits. We had a cash outflow of $56.0 million with respect to investments in marketable securities and a cash inflow of $32.2 million with respect to maturity, and sale, of marketable securities during 2020. Included in the cash inflow during 2020 was net proceeds of $11.5 million from bank deposits. We had a cash outflow of $27.2 million with respect to investments in marketable securities and a cash inflow of $40.5 million with respect to maturity, and sale, of marketable securities during 2019. Included in the cash inflow during 2019 was net proceeds of $6.1 million from bank deposits. Capital equipment purchases of computer hardware and software used in engineering development, furniture and fixtures amounted to approximately $2.2 million in 2021, $2.9 million in 2020 and $3.5 million in 2019. We had a cash outflow, net of cash acquired, of $29.9 million in 2021 for the acquisition of Intrinsix We had a cash outflow of $0.2 million and $18.1 million in 2020 and 2019, respectively, for the acquisition of the Hillcrest Labs business and the strategic investment in Immervision. We had a cash outflow of $0.3 million in 2019, from the purchase of a license of NB-IoT technologies. 47 Financing Activities Net cash provided by financing activities in 2021 was $3.2 million, as compared to net cash used in financing activities of $2.1 million in 2020 and net cash used in financing activities of $6.7 million in 2019. 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 5,700,000 shares in 2010, 2013, 2014 and 2018. In February 2020, our board of directors authorized the repurchase of an additional 700,000 shares of common stock. In 2021, we did not repurchase any shares of common stock. In 2020, we repurchased 202,392 shares of common stock at an average purchase price of $23.62 per share for an aggregate purchase price of $4.8 million. In 2019, we repurchased 355,180 shares of common stock at an average purchase price of $25.66 per share for an aggregate purchase price of $9.1 million. As of December 31, 2021, we had 497,608 shares available for repurchase. In 2021, 2020 and 2019, we received $3.2 million, $2.9 million and $2.4 million, respectively, from the exercise of stock-based awards. We believe that our cash and cash equivalent, short-term bank deposits and marketable securities, along with cash from operations, will provide sufficient capital to fund our operations for at least the next 12 months. We cannot provide assurance, however, that the underlying assumed levels of revenues and expenses will prove to be accurate. In addition, as part of our business strategy, we occasionally evaluate potential acquisitions of businesses, products and technologies and minority equity investments. Accordingly, a portion of our available cash may be used at any time for the acquisition of complementary products or businesses or minority equity investments. Such potential transactions may require substantial capital resources, which may require us to seek additional debt or equity financing. We cannot assure you that we will be able to successfully identify suitable acquisition or investment candidates, complete acquisitions or investments, integrate acquired businesses into our current operations, or expand into new markets. Furthermore, we cannot provide assurance that additional financing will be available to us in any required time frame and on commercially reasonable terms, if at all. See “Risk Factors—We may seek to expand our business in ways that could result in diversion of resources and extra expenses.” for more detailed information. Contractual Obligations The table below presents the principal categories of our contractual obligations as of December 31, 2021: [[GREPCENT_TABLE]] [["","","Payments Due by Period"],["","","($ in thousands)"],["","","Total","","","Less than 1 year","","","1-3 years","","","3-5 years","","","More than 5 years"],["Operating Lease Obligations \u2013 Leasehold properties","","","909","","","","513","","","","357","","","","27","","","","12"],["Purchase Obligations \u2013 design tools","","","7,127","","","","6,855","","","","272","","","","\u2014","","","","\u2014"],["Other purchase Obligations","","","2,396","","","","2,100","","","","276","","","","20","","","","\u2014"],["Total","","","10,432","","","","9,468","","","","905","","","","47","","","","12"]] [[/GREPCENT_TABLE]] 48 Operating leasehold obligations principally relate to our offices in Israel, Ireland, United Kingdom, France, China, Japan and the United States. Purchase obligations relate to license agreements entered into for maintenance of design tools. Other purchase obligations consist of capital and operating purchase order commitments. Other than set forth in the table above, we have no long-term debt or capital lease obligations. At December 31, 2021, our income tax payable, net of withholding tax credits, included $1,610,000 related to uncertain tax positions. Due to uncertainties in the timing of the completion of tax audits, the timing of the resolution of these positions is uncertain and we are unable to make a reasonably reliable estimate of the timing of payments. As a result, this amount is not included in the above table. In addition, at December 31, 2021, the amount of accrued severance pay was $10,551,000. Severance pay relates to accrued severance obligations to our Israeli employees as required under Israeli labor laws. These obligations are payable only upon termination, retirement or death of the respective employee. Of this amount, $376,000 is unfunded.