CEVA
Annual Report 2017

Plain-text annual report

  UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2017 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to ____________ Commission file number: 000-49842 CEVA, INC. (Exact name of registrant as specified in its charter) Delaware (State or other jurisdiction of incorporation or organization) 1174 Castro Street, Suite 210, Mountain View, California (Address of principal executive offices) 77-0556376 (I.R.S. Employer Identification No.) 94040 (Zip Code) (650) 417-7900 (Registrant’s telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of each class Common Stock, $0.001 par value per share Name of each exchange on which registered NASDAQ GLOBAL MARKET Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X] Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes [ ] No [X] Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. Large accelerated filer [ ] Non-accelerated filer [ ] (Do not check if a smaller reporting company) Accelerated filer [X ] Smaller reporting company [ ] Emerging growth company  If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X] As of June 30, 2017, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $666,888,000 based on the closing sale price as reported on the National Association of Securities Dealers Automated Quotation System National Market System on June 30, 2017. Shares of common stock held by each officer, director, and holder of 5% or more of the outstanding common stock of the Registrant have been excluded from this calculation in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. Class Common Stock, $0.001 par value per share Outstanding at February 22, 2018 22,219,427 shares DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant’s definitive Proxy Statement for its Annual Meeting of Stockholders to be held on May 17, 2018 (the “2018 Proxy Statement”) are incorporated by reference into Item 5 of Part II and Items 10, 11, 12, 13, and 14 of Part III. TABLE OF CONTENTS PART I Item 1. Business ........................................................................................................................................................... 4 Item 1A. Risk Factors .................................................................................................................................................... 12 Item 1B. Unresolved Staff Comments .......................................................................................................................... 24 Item 2. Properties ....................................................................................................................................................... 24 Item 3. Legal Proceedings .......................................................................................................................................... 25 Item 4. Mine Safety Disclosures ................................................................................................................................ 25 Page PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities ........................................................................................................................................................................ 27 Item 6. Selected Financial Data .................................................................................................................................. 29 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations ........................ 31 Item 7A. Quantitative and Qualitative Disclosures About Market Risk ....................................................................... 49 Item 8. Financial Statements and Supplementary Data .............................................................................................. 50 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ........................ 50 Item 9A. Controls and Procedures ................................................................................................................................ 50 Item 9B. Other Information........................................................................................................................................... 50 PART III Item 10. Directors, Executive Officers and Corporate Governance ............................................................................. 51 Item 11. Executive Compensation ................................................................................................................................ 51 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stock Holder Matters .... 51 Item 13. Certain Relationships and Related Transactions, and Director Independence ............................................... 51 Item 14. Principal Accountant Fees and Services ........................................................................................................ 51 PART IV Item 15. Exhibits and Financial Statement Schedules .................................................................................................. 52 Financial Statements ......................................................................................................................................................F-1 Signatures 1 FORWARD-LOOKING STATEMENTS AND INDUSTRY DATA This Annual Report contains forward-looking statements that involve risks and uncertainties, as well as assumptions that if they materialize or prove incorrect, could cause the results of CEVA to differ materially from those expressed or implied by such forward-looking statements and assumptions. All statements other than statements of historical fact are statements that could be deemed forward-looking statements. Forward-looking statements are generally written in the future tense and/or are preceded by words such as “will,” “may,” “should,” “could,” “expect,” “suggest,” “believe,” “anticipate,” “intend,” “plan,” or other similar words. Forward-looking statements include the following: • Our belief that companies increasingly seek to license proven IPs, such as processor cores, connectivity products, memory and application-specific platforms, from silicon intellectual property companies like CEVA rather than develop those technologies in-house; • Our belief that there is a growing demand for high performance and low power signal processing IPs and specialized AI platforms incorporating all the necessary hardware and software for target applications and that we can capitalize on this industry shift; • Our belief that the adoption of our signal processing platform and artificial intelligence processors outside of the cellular baseband market continues to progress; • Our belief that we may benefit from the handset market transitioning from feature phones to LTE smartphones , if and when it occurs, particularly in emerging economies; • Our belief that we may benefit from the base station chip ramp up in coming years, as a large customer of ours is forecasted to start ramping up production in the second half of 2018; • Our belief that our Bluetooth and Wi-Fi IPs allow us to expand further into IoT applications and increase our overall addressable market which is expected to be 35 billion devices by 2020, as per ABI Research; • Our belief that our proven track record in audio/voice processing and the growing market potential for voice assisted services offer an additional market opportunity for the company in voice enabled devices such as smartphones, headsets, earbuds, smart speakers, smart home and automotive; • Our belief that our specialization and competitive edge in signal processing platforms for next generation long and short range wireless such as 5G, NB-IoT, 802.11ac and 802.11ax Wi-Fi technologies, and the inherent low cost, power and performance balance of our designs, put us in a strong position to simultaneously capitalize on mass market adoption of such technologies and address multiple markets and product sectors; • Our belief that our vision processing IPs, neural net software and coprocessor hardware IPs and the newly announced AI processor, offer additional growth potentials in both licensing and royalty revenues in segments such as smartphones, tablets, drones, surveillance, automotive ADAS and industrial IoT applications; • Our belief that the transformation in vision processing and neural net software and hardware needs is an opportunity for us to expand our footprint in smartphones, tablets, drones, surveillance, automotive ADAS and industrial IoT applications; • Per ABI Research, cameras equipped with vision processing are expected to exceed 2.7 billion units by 2018; • Our belief that the market opportunity for AI at the edge is on top of our existing product lines and represents a new licensing and royalty driver for the company in the coming years; • Our belief that royalty revenue growth in the next few years for non-handset baseband applications will be a combination of higher unit shipments of Bluetooth products that bear lower ASPs, along with higher ASPs driven by base station and vision products; 2 • Our belief that our licensing business is progressing well with strong interest, diverse customer base and a myriad of target markets; • Our anticipation that our research and developments costs will increase in 2018 as compared to prior years, partially due to accelerated strategic research and development programs for artificial intelligence processors and further collaboration with our customers to expedite their production ramp-ups, as well as from higher expenses associated with foreign currency exchange effects due to the devaluation mainly of the USD compared to the NIS and Euros; • Our anticipation 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; and • Our belief that changes in interest rates within our investment portfolio will not have a material effect on our financial position on an annual or quarterly basis. Forward-looking statements are not guarantees of future performance and involve risks and uncertainties. The forward-looking statements contained in this report are based on information that is currently available to us and expectations and assumptions that we deem reasonable at the time the statements were made. We do not undertake any obligation to update any forward-looking statements in this report or in any of our other communications, except as required by law. All such forward-looking statements should be read as of the time the statements were made and with the recognition that these forward-looking statements may not be complete or accurate at a later date. Many factors may cause actual results to differ materially from those expressed or implied by the forward-looking statements contained in this report. These factors include, but are not limited to, those risks set forth in Item 1A: Risk Factors. This report contains market data prepared by third party research firms. Actual market results may differ from their projections. This report includes trademarks and registered trademarks of CEVA. Products or service names of other companies mentioned in this Annual Report on Form 10-K may be trademarks or registered trademarks of their respective owners. 3 ITEM 1. BUSINESS Company Overview PART I Headquartered in Mountain View, California, CEVA is the leading licensor of signal processing platforms and artificial intelligence processors for a smarter, connected world. We partner with semiconductor companies and OEMs worldwide to create power-efficient, intelligent and connected devices for a range of end markets, including mobile, consumer, automotive, industrial and IoT. Our ultra-low-power hardware IPs and software solutions address many of the most complex technologies for imaging and computer vision, neural networks, sound, long (cellular) and short range wireless and artificial intelligent (AI) processors. Our portfolio includes comprehensive platforms for 5G baseband processing for handsets and RAN, complete end-to-end offerings for cellular IoT, front-end voice software and algorithms along with DSPs for voice enabled devices and AI assistants, advanced imaging computer vision for any camera-enabled device, and a family of self-contained AI processors that address a wide range of applications. For short range wireless, we offer the industry’s most widely adopted IPs for Bluetooth (low energy and dual mode) and Wi-Fi (802.11 b/g/n/ac/ax up to 4x4). Our technologies are licensed to leading semiconductor and OEM companies throughout the world. These companies incorporate our IP into application-specific integrated circuits (“ASICs”) and application-specific standard products (“ASSPs”) that they manufacture, market and sell into wireless, consumer, automotive and IoT companies. Our state-of-the-art technology has shipped in more than 9 billion chips to date for a wide range of diverse end markets. One in three handsets sold worldwide is powered by CEVA. Our revenue mix comprises primarily of IP licensing fees and related revenues, and royalties generated from the shipments of products deploying our IP. Related revenues include revenues from post contract support, training and sale of development systems. We have built a strong network of licensing customers who rely on our technologies to deploy their silicon solutions. Our comprehensive customer base includes many of the world’s leading semiconductors and OEMs. Actions, ASR, Autotalks, Beken, Brite, Broadcom, Celeno, Cirrus Logic, Dialog Semiconductor, DSP Group, Espressif, FujiFilm, iCatch, Intel, Leadcore, LG Electronics, Mediatek, Nextchip, Novatek, NXP, ON Semiconductor, Oticon, Panasonic, RDA, Renesas, Rockchip, Rohm, Samsung, Sanechips, Sharp, Silver Spring Networks, Socionext, Sony, Socionext, Spreadtrum, STMicroelectronics, Toshiba, Vatics, Yamaha and ZTE all leverage CEVA’s industry-leading processors, platforms and connectivity IPs. CEVA was created through the combination of the DSP IP licensing division of DSP Group, Inc. and Parthus Technologies plc (“Parthus”) in November 2002. On July 4, 2014, we acquired 100% of RivieraWaves SAS, a privately- held, French company and a provider of wireless connectivity intellectual property for Wi-Fi and Bluetooth technologies. We have over 300 employees worldwide, with research and development facilities in Israel, France, Ireland and the United Kingdom, and sales and support offices throughout Asia Pacific (APAC), Japan, Sweden, France, Israel and the United States. CEVA is traded on the NASDAQ Global Market under the symbol “CEVA”. Industry Background DSP Cores Digital signal processing is a key technology that is powering many of today's fastest growing electronics markets. Digital signal processors (DSPs) are specialized high-speed processors that are optimized for performing repetitive arithmetic calculations on an array of data. DSPs provide the foundation supporting a vast majority of today's electronic products that are smart and connected and enable sensing and wireless communications capabilities (e.g. LTE and 5G baseband processing, computer vision, deep neural network, sound processing and analytics). 4 AI Processors Artificial intelligence processors are a new breed of processors designed to enable AI-related workloads such as classification, pattern matching, prediction and detection to be performed on a device, with no cloud connection required. These processors mimic the human brain, allowing them to perform cognitive tasks for a wide range of functions, including vision, sound, real-time translation, user behavior and malware detection. AI processors will make their way into billions of devices in the coming years, including IoT, mobile, medical, industrial and automotive applications. Short Range Wireless IPs Wi-Fi and Bluetooth low energy and dual mode are key technologies for any company looking to address the Internet-of-Things (“IoT”). Moreover, many companies wish to integrate these connectivity technologies into SoC designs rather than provide connectivity through an additional chip in the system. Through our connectivity business unit, we are able to expand further into the Wi-Fi and Bluetooth smart connectivity markets. The advent of IoT has resulted in significant demand for connectivity IPs that solves a crucial void in many companies’ strategies to address this burgeoning market. Wi-Fi and Bluetooth standards are constantly evolving, and the many different end applications where these technologies are being deployed require further customization. By licensing rather than developing these technologies in house, companies can now get access to the latest standards and profiles from CEVA without undertaking the expensive research and development costs required to develop these technologies internally. Design Gap The demand for smarter, better connected mobile, consumer, automotive, industrial and IoT devices continues to grow. These devices require more connectivity, greater feature sets and a richer user experience. Semiconductor manufacturers face ever growing pressures to make smaller, feature-rich integrated circuits that are more reliable, less expensive and have greater performance. These two trends are occurring concurrently in the face of decreasing product lifecycles and constrained battery power. The advent of wireless and connectivity technologies like 5G, Wi-Fi 802.11ac and Bluetooth 5 and multimedia technologies such as advanced image enhancement, computer vision, deep learning and voice and audio pre- and post-processing have further increased these pressures. While semiconductor manufacturing processes have advanced significantly to allow a substantial increase in the number of circuits placed on a single chip, resources for design capabilities have not kept pace with the advances in manufacturing processes, resulting in a growing “design gap” between the increasing manufacturing potential and the constrained design capabilities. CEVA Business CEVA addresses the requirements of the mobile, consumer, automotive, industrial and IoT markets by designing and licensing a broad range of robust, application-specific signal processing platforms which enable the rapid design of solutions for developing a wide variety of applications, including communications & connectivity, audio & voice, imaging & vision and storage. Given the “design gap,” as well as the increasing complexity and the unique skill set required to develop a system- on-chip, many semiconductor design and manufacturing companies increasingly choose to license proven intellectual property, such as processor cores (e.g. DSP, CPU, GPU and AI), connectivity products, memory and application-specific platforms, from silicon intellectual property (SIP) companies like CEVA rather than develop those technologies in-house. In addition, with more complex designs and shorter time to market, it is no longer cost efficient and becoming progressively more difficult for most semiconductor companies to develop the signal processing platform, incorporating the DSP, subsystem and software, for their target application. For connectivity, with ever-evolving standards and a huge variety of uses, most semiconductor companies cannot develop and maintain this technology in-house. As a result, companies increasingly seek to license these IPs from CEVA or a third-party community of developers, such as CEVAnet, CEVA’s third-party network. Our IP Business Model Our objective is for our CEVA signal processing platforms and AI processors to become the de facto technologies across the mobile, consumer, automotive, industrial and IoT markets. To enable this goal, we license our technologies on a 5 worldwide basis to semiconductor and OEM companies that design and manufacture products that combine CEVA-based solutions with their own differentiating technology. We believe our business model offers us some key advantages. By not focusing on manufacturing or selling silicon products, we are free to widely license our technology and free to focus most of our resources on research and development. By choosing to license our IP, manufacturers can achieve the advantage of creating their own differentiated solutions and develop their own unique product roadmaps. Through our licensing efforts, we have established a worldwide community developing CEVA-based solutions, and therefore we can leverage their strengths, customer relationships, proprietary technology advantages, and existing sales and marketing infrastructure. As an example, our CEVA-XCnet partner program focuses on various technology and solution providers with complimentary offerings for our CEVA-XC communication processor addressing wireless, infrastructure, smart grid and connectivity markets. In addition, as our intellectual property is widely licensed and deployed, system OEM companies can obtain CEVA-based chipsets from a wide range of suppliers, thus reducing dependence on any one supplier and fostering price competition, both of which help to contain the cost of CEVA-based products. We operate a licensing and royalty business model. We typically charge a license fee for access to our technology and a royalty fee for each unit of silicon which incorporates our technology. License fees are invoiced in accordance with agreed-upon contractual terms. Royalties are reported and invoiced one quarter in arrears and generally are based on a fixed unit rate or a percentage of the sale price for the CEVA-based silicon product. Strategy We believe there is a growing demand for high performance and low power signal processing IPs and specialized AI platforms incorporating all the necessary hardware and software for target applications. Our IP portfolio is strategically aligned to allow us to exploit the most lucrative “design gaps” in the growing demand for smarter, connected devices. As CEVA offers expertise developing complete solutions in a number of key growth markets, including cellular baseband, wireless infrastructure, cellular IoT, advanced imaging, computer vision, deep neural networks, sound and audio processing and analytics, Wi-Fi, Bluetooth and AI, we believe we are well positioned to take full advantage of this growing demand. To capitalize on this industry shift, we intend to: • • • • • • • • continue to develop and enhance our range of DSP cores and AI processors with additional features, performance and capabilities; continue to develop and invest in our short range wireless IPs, providing the newest standards and the most complete offerings to address our customers’ needs; continue to develop and enhance our range of complete and highly integrated platform solutions to deliver to our licensing partners a complete and verified system solution; continue to develop an ecosystem of third party partners developing software and solutions based on our technologies; continue to invest in strategic technologies that enable us to strengthen our presence in existing market or enter new addressable markets; capitalize on our relationships and leadership within our worldwide community of semiconductor and OEM licensees who are developing CEVA-based solutions; capitalize on our technology leadership in the development of advanced processor technologies and connectivity IPs to create and develop new, strategic relationships with OEMs and semiconductor companies to replace their internal DSPs or incumbent DSP suppliers with CEVA-based solutions; and capitalize on our IP licensing and royalty business model which we believe is the best vehicle for a pervasive adoption of our technology and allows us to focus our resources on research and development of new licensable technologies and applications. 6 Products We are the leading licensor of signal processing platforms and a primary player in AI processors for semiconductor companies and OEMs serving the mobile, consumer, automotive, industrial and IoT markets. Our portfolio includes comprehensive platforms for 5G baseband processing for handsets and infrastructure, complete end-to-end offerings for cellular IoT, front-end voice software and algorithm along with DSPs for voice enabled devices, advanced imaging and computer vision, deep neural network for any camera-enabled device, and a family of self-contained AI processors that address a wide range of applications. For short range wireless, we offer the industry’s most widely adopted IPs for Bluetooth (low energy and dual mode) and Wi-Fi (802.11 b/g/n/ac/ax up to 4x4). Our categories of products include the following: 1) Communications • 5G DSPs for gNodeB • PentaG - 5G modem platform for UE (announced in 2018) • Dragonfly - Complete end-to-end offering for narrowband IoT (NB-IoT) • SDR DSPs for complex signal processing targeting V2X, satellites, smart grid, G.fast and Wi-Fi 2) Imaging & vision • Imaging and computer vision platforms, including processors, accelerators and software framework for any camera-enabled device • Deep neural network software 3) Sound • DSPs, algorithms and software for sound-enabled application, including complete voice front-end software package for near and far-field voice-enabled devices 4) AI at the edge • NeuPro family of specialized AI processors designed to target any neural network workload (vision, sound, user behavior, real-time translation etc.) and scaling in performance to address IoT through to automotive (announced in 2018) 5) Connectivity • RivieraWaves Bluetooth 5 dual mode and low energy platforms • RivieraWaves Wi-Fi 802.11a/b/g/n/ac platforms • Wi-Fi 802.11ax platforms, scaling in performance to address low power wearables through to access points and infrastructure We deliver our DSP cores, platforms and AI processors in the form of a hardware description language definition (known as a soft core or a synthesizable core). All CEVA cores can be manufactured on any process using any physical library, and all are accompanied by a complete set of tools and an integrated development environment. An extensive third- party network supports CEVA DSP cores, platforms and AI processors with a wide range of complementing software and platforms. In addition, we provide development platforms, software development kits and software debug tools, which facilitate system design, debug and software development. 7 In order to reduce the cost, complexity, and risk in bringing products to market, CEVA has developed a suite of system platforms and solutions. These platforms and solutions combine the hardware and software elements that are essential for designers deploying CEVA’s state-of-the-art DSP cores, platforms and AI processors. Platforms typically integrate a CEVA DSP core, hardware accelerators and coprocessors, optimized software, libraries and tool chain. Our family of DSP-based platforms are targeted for baseband processing within cellular handsets, Machine to Machine (M2M) type devices and base stations RAN, wired communications, advanced imaging, computer vision and deep neural networks, and audio, voice & sensing and Internet-of-Things related applications. Customers We have licensed our signal processing cores, platforms, AI processors and connectivity IPs to leading semiconductor and OEM companies throughout the world. These companies incorporate our IP into application-specific chipsets or custom-designed chipsets that they manufacture, market and sell to consumer electronics companies. We also license our technologies to OEMs directly. Included among our licensees are the following customers: Actions, ASR, Autotalks, Beken, Brite, Broadcom, Celeno, Cirrus Logic, Dialog Semiconductor, DSP Group, Espressif, FujiFilm, iCatch, Intel, Leadcore, LG Electronics, Mediatek, Nextchip, Novatek, NXP, ON Semiconductor, Oticon, Panasonic, RDA, Renesas, Rockchip, Rohm, Samsung, Sanechips, Sharp, Silver Spring Networks, Socionext, Sony, Socionext, Spreadtrum, STMicroelectronics, Toshiba, Vatics, Yamaha and ZTE. We derive a significant amount of revenues from a limited number of customers. Sales to Spreadtrum represented 23%, 27% and 31% of our total revenues for 2017, 2016 and 2015, respectively. With respect to our royalty revenues, two royalty paying customers each represented 10% or more of our total royalty revenues for 2017, and collectively represented 70% of our total royalty revenues for 2017; two royalty paying customers each represented 10% or more of our total royalty revenues for 2016, and collectively represented 80% of our total royalty revenues for 2016, and two royalty paying customers each represented 10% or more of our total royalty revenues for 2015, and collectively represented 72% of our total royalty revenues for 2015. In 2017, we concluded forty five new licensing deals, of which sixteen were with first time new customers and forty four were for non-handset baseband applications. International Sales and Operations Customers based in EME (Europe and Middle East) and APAC (Asia Pacific) accounted for 92% of our total revenues for 2017, 87% of our total revenues for 2016 and 84% for 2015. Customers in each of China and South Korea accounted for greater than 10% of our total revenues for 2017, 2016 and 2015. Information on the geographic breakdown of our revenues and location of our long-lived assets is contained in Note 10 to our consolidated financial statements, which appear elsewhere in this annual report. Moreover, the majority of our expenses, mainly employee salaries, are paid in currencies other than the U.S. dollar, principally the Israeli currency, New Israeli Shekel (NIS), and the EURO, which subjects us to the risks of foreign currency fluctuations and economic pressures in those regions. As a result, an increase in the value of the currencies other than the U.S. dollar in comparison to the U.S. dollar could increase the cost of our operating expenses. To protect against the increase in value of forecasted foreign currency cash flows 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-US employees denominated in currencies other than the U.S. dollar for a period of one to twelve months with forward and options contracts. Sales and Marketing We license our technology through a direct sales force. As of December 31, 2017, we had 36 employees in sales and marketing. We have sales offices and representation in Asia Pacific (APAC) region, Sweden, Israel, France and the United States. Maintaining close relationships with our customers and strengthening these relationships are central to our strategy. From time to time we develop a new signal processors, platforms, software solutions or connectivity products with close alignment with a number of tier-one industry players which signifies to the market that we are focused on viable applications 8 that meet broad industry needs or try to get similar inputs and insight for our new developments from our marketing team. Generally, these industry leaders become licensees for these products allows us to create a roadmap for the future development of existing cores and application platforms and connectivity products, and helps us to anticipate the next potential applications for the market. We seek to use our customer relationships to deliver new products in a faster time to market. We use a variety of marketing initiatives to stimulate demand and brand awareness in our target markets. These marketing efforts include contacts with industry analysts, presenting at key industry trade shows and conferences, and a comprehensive digital marketing program aimed at developing and nurturing relationships with potential customers. Our marketing group runs competitive benchmark analyses to help us maintain our competitive position. Technical Support We offer technical support services through our offices in Israel, Ireland, Asia Pacific (APAC) region, Sweden, France and the United States. As of December 31, 2017, we had 23 employees in technical support. Our technical support services include: • • assistance with implementation, responding to customer-specific inquiries, training and, when and if they become available, distributing updates and upgrades of our products; application support, consisting of providing general hardware and software design examples, ready-to-use software modules and guidelines to our licensees to assist them in using our technology; and • design services, consisting of creating customer-specific implementations of our signal processing IPs and application platforms. We believe that our technical support services are a means to assist our licensees to embed our cores and platforms in their designs and products. Our technology is highly complex, combining sophisticated signal processing IP core architectures, integrated circuit designs and development tools. Effective customer support in helping our customers to implement our solutions enables them to shorten the time to market for their applications. Our support organization is made up of experienced engineers and professional support personnel. We conduct technical training for our licensees and their customers, and meet with them from time to time to track the implementation of our technology. Research and Development Our research and development team is focused on improving and enhancing our existing products, as well as developing new products to broaden our offerings and market opportunities. These efforts are largely driven by current and anticipated customer and market needs. Our research and development team, consisting of 228 engineers as of December 31, 2017, work in six development centers located in Israel, France, Ireland and the United Kingdom. This team consists of engineers who possess significant experience in developing DSP cores, application platforms, connectivity products (Wi-Fi and Bluetooth) and serial storage technology (SATA and SAS). In addition, we engage third party contractors with specialized skills as required to support our research and development efforts. Our research and development expenses, net of related research grants, were approximately $28 million, $31 million and $40 million for 2015, 2016 and 2017, respectively. We encourage our research and development personnel to maintain active roles in various international organizations that develop and maintain standards in the electronics and related industries. This involvement allows us to influence the development of new standards; keeps us informed as to important new developments regarding standards; and allows us to demonstrate our expertise to existing and potential customers who also participate in these standards-setting bodies. Competition The markets in which we operate are intensely competitive. They are subject to rapid change and are significantly affected by new product introductions. We compete with other suppliers of licensed signal processing IPs. We believe that 9 the principal competitive elements in our field are signal processing IP performance, overall chip cost, power consumption, flexibility, reliability, communication and multimedia software and algorithms availability, design cycle time, tool chain, customer support, financial strength, name recognition and reputation. We believe that we compete effectively in each of these areas, but can offer no assurance that we will have the financial resources, technical expertise, and marketing or support capabilities to compete successfully in the future. The markets in which we compete are dominated by large, highly competent semiconductor companies that have significant brand recognition, a large installed base and a large network of support and field application engineers. We face direct and indirect competition from: • • • • • • • IP vendors that offer programmable or configurable DSP cores; IP vendors that offer vision processing units for computer vision applications; IP vendors that offer neural network processing units for AI applications; IP vendors that offer voice software packages, including beamforming, direction of arrival and echo cancellation; IP vendors that offer Bluetooth and Wi-Fi connectivity IPs; IP vendors that offer hardware-based DSP implementation as opposed to software-based DSP, which is our specialization; and internal design groups of large chip companies or OEMs that develop proprietary signal processing IP cores or engines for their own application-specific chipsets. We face direct competition in the DSP and configurable core space mainly from Verisilicon, Cadence and Synopsys, which licenses DSP cores in addition to their respective semiconductor and EDA businesses. In AI processors, we face direct competition from EDA players in addition to a host of companies offering AI cores and accelerators such as Digital Media Professionals, (DMP), Imagination, AImotive, Cambricon and Graphcore. In the short range wireless space, we face direct competition from Arm Limited, Imagination Technologies, Mindtree and STMicroelectronics (previously ST Ericsson). In recent years, we also have faced competition from companies that offer Central Processor Unit (CPU) intellectual property. These companies’ products are used for host functions in various applications, such as in mobile and home entertainment products. These applications typically also incorporate a programmable DSP or neural network accelerator that is responsible for communication and video/audio/voice-related tasks, neural network or in some cases connectivity capabilities. CPU companies, such as Arm Limited, Cadence, Imagination Technologies and Synopsys have added DSP acceleration, CNN acceleration and /or connectivity solutions and make use of it to provide platform solutions in the areas of baseband, video, imaging, vision, AI, audio and connectivity. With respect to certain large potential customers, we also compete with internal engineering teams, which may design programmable signal processing IP core products in-house. Companies such as Mediatek, Qualcomm, Samsung, Huawei and STMicroelectronics license our designs for some applications and use their own proprietary cores for other applications. These companies also may choose to license their proprietary signal processing IP cores to third parties and, as a result, become direct competitors. Aside from the in-house research and development groups, we do not compete with any individual company across the range of our market offerings. Within particular market segments, however, we do face competition to a greater or lesser extent from other industry participants. For example, in the following specific areas we compete with the companies indicated: • GPU IP providers such as Arm Limited, Imagination Technologies and Verisilicon; and in the digital embedded imaging and vision market – Arm Limited, Synopsys, Cadence and Videantis, as well as 10 • in audio and voice applications market – Arm Limited, Cadence, Synopsys and Verisilicon. Proprietary Rights Our success and ability to compete are dependent on our ability to develop and maintain the proprietary aspects of our intellectual property and to operate without infringing the proprietary rights of others. We rely on a combination of patent, trademark, trade secret and copyright laws and contractual restrictions to protect the proprietary aspects of our technology. These legal protections afford only limited protection of our technology. We also seek to limit disclosure of our intellectual property and trade secrets by requiring employees and consultants with access to our proprietary information to execute confidentiality agreements with us and by restricting access to our source code and other intellectual property. Due to rapid technological change, we believe that factors such as the technological and creative skills of our personnel, new product developments and enhancements to existing products are more important than specific legal protections of our technology in establishing and maintaining a technology leadership position. We have an active program to protect our proprietary technology through the filing of patents. Our patents relate to our signal processing IP cores and application-specific platform technologies. As of December 31, 2017, we hold 52 patents in the United States, four patents in Canada, 37 patents in the EME (Europe and Middle East) region and seven patents in Asia Pacific (APAC) region, totaling 100 patents, with expiration dates between 2018 and 2035. In addition, as of December 31, 2017, we have 11 patent applications pending in the United States, five pending patent applications in Canada, 10 pending patent applications in the EME region and seven pending patent applications in the APAC region, totaling 33 pending patent applications. We actively pursue foreign patent protection in countries where we feel it is prudent to do so. Our policy is to apply for patents or for other appropriate statutory protection when we develop valuable new or improved technology. The status of patents involves complex legal and factual questions, and the breadth of claims allowed is uncertain. Accordingly, there are no assurances that any patent application filed by us will result in a patent being issued, or that our issued patents, and any patents that may be issued in the future, will afford us adequate protection against competitors with similar technology; nor can we be assured that patents issued to us will not be infringed or that others will not design around our technology. In addition, the laws of certain countries in which our products are or may be developed, manufactured or sold may not protect our products and intellectual property rights to the same extent as the laws of the United States. We can provide no assurance that our pending patent applications or any future applications will be approved or will not be challenged by third parties, that any issued patents will effectively protect our technology, or that patents held by third parties will not have an adverse effect on our ability to do business. The semiconductor industry is characterized by frequent litigation regarding patent and other intellectual property rights. Questions of infringement in the semiconductor field involve highly technical and subjective analyses. In addition, patent infringement claims are increasingly being asserted by patent holding companies (so-called patent “trolls”), which do not use technology and whose sole business is to enforce patents against companies, such as us, for monetary gain. Because such patent holding companies do not provide services or use technology, the assertion of our own patents by way of counter-claim may be ineffective. Litigation may in the future be necessary to enforce our patents and other intellectual property rights, to protect our trade secrets, to determine the validity and scope of the proprietary rights of others, or to defend against claims of infringement or invalidity. We cannot assure you that we would be able to prevail in any such litigation, or be able to devote the financial resources required to bring such litigation to a successful conclusion. In any potential dispute involving our patents or other intellectual property, our licensees also could become the targets of litigation. We are generally bound to indemnify licensees under the terms of our license agreements. Although our indemnification obligations are generally subject to a maximum amount, these obligations could nevertheless result in substantial expenses. In addition to the time and expense required for us to indemnify our licensees, a licensee’s development, marketing and sale of products embodying our solutions could be severely disrupted or shut down as a result of litigation. We also rely on trademark, copyright and trade secret laws to protect our intellectual property. We have registered trademark in the United States for our name CEVA and the related CEVA logo, and currently market our signal processing cores and other technology offerings under this trademark. 11 Employees The table below presents the number of employees of CEVA as of December 31, 2017 by function and geographic location. Total employees Function Research and development Sales and marketing Administration Technical support Location Israel France Ireland China United States United Kingdom Elsewhere Number 313 228 36 26 23 202 44 13 15 13 12 14 Our employees are not represented by any collective bargaining agreements, and we have never experienced a work stoppage. We believe our employee relations are good. A number of our employees are located in Israel. Certain provisions of Israeli law and the collective bargaining agreements between the Histadrut (General Federation of Labor in Israel) and the Coordination Bureau of Economic Organizations (the Israeli federation of employers’ organizations) apply to our Israeli employees. In 2004, we finalized and adopted a new Code of Business Conduct and Ethics regarding the standards of conduct of our directors, officers and employees. The code is reviewed and updated periodically by our Board or Directors and is available on our website at www.ceva-dsp.com. Corporate History Our company was incorporated in Delaware on November 22, 1999 under the name DSP Cores, Inc. We changed our name to ParthusCeva, Inc. in November 2002 and to CEVA, Inc. in December 2003. Available Information Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to reports pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, are available, free of charge, on our website at www.ceva-dsp.com, as soon as reasonably practicable after such reports are electronically filed with the Securities and Exchange Commission and are also available on the SEC’s website at www.sec.gov. Our website and the information contained therein or connected thereto are not intended to be incorporated into this Annual Report on Form 10-K. ITEM 1A. RISK FACTORS We caution you that the following important factors, among others, could cause our actual future results to differ materially from those expressed in forward-looking statements made by or on behalf of us in filings with the Securities and Exchange Commission, press releases, communications with investors and oral statements. Any or all of our forward- looking statements in this annual report, and in any other public statements we make, may turn out to be wrong. They can be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties. Many factors mentioned in the discussion below will be important in determining future results. We undertake no obligation to publicly 12 update any forward-looking statements, whether as a result of new information, future events or otherwise. You are advised, however, to consult any further disclosures we make in our reports filed with the Securities and Exchange Commission. The markets in which we operate are highly competitive, and as a result we could experience a loss of sales, lower prices and lower revenues. The markets for the products in which our technology is incorporated are highly competitive. Aggressive competition could result in substantial declines in the prices that we are able to charge for our intellectual property or lose design wins to competitors. Many of our competitors are striving to increase their share of the growing signal processing IP markets and are reducing their licensing and royalty fees to attract customers. The following industry players and factors may have a significant impact on our competitiveness: • we compete directly in the signal processing cores space with Verisilicon, Cadence and Synopsys; • we compete with CPU IP or configurable CPU IP (offering DSP configured CPU and/or DSP acceleration and/or connectivity capabilities to their IP) providers, such as Arm Limited (acquired by SoftbBank), Imagination Technologies (acquired by Canyon Bridge), Synopsys and Cadence; • we compete with internal engineering teams at companies such as Mediatek, Qualcomm, Samsung, Huawei and NXP that may design programmable DSP core products and signal processing cores in-house and therefore not license our technologies; • we compete in the short range wireless markets with Arm Limited, Mindtree, Imagination Technologies and STMicroelectronics; • we compete in embedded imaging and vision market with Cadence, Synopsys, Videantis, Verislicon, Arm Limited (NEON technology) and GPU IP providers such as Arm Limited, Imagination Technologies and Verisilicon; • we compete in AI processor marketing with AI processor and accelerator providers, including AImotive, Arm Limited, Digital Media Professionals (DMP), Imagination, Cambricon and Graphcore; and • we compete in the audio and voice applications market with Arm Limited, Synopsys, Cadence and Verisilicon. In addition, we may face increased competition from smaller, niche semiconductor design companies in the future. Some of our customers also may decide to satisfy their needs through in-house design. We compete on the basis of signal processing IP performance, overall chip cost, power consumption, flexibility, reliability, communication and multimedia software availability, design cycle time, tool chain, customer support, name recognition, reputation and financial strength. Our inability to compete effectively on these bases could have a material adverse effect on our business, results of operations and financial condition. Our quarterly operating results fluctuate from quarter to quarter due to a variety of factors, including our lengthy sales cycle, and may not be a meaningful indicator of future performance. In some quarters our operating results could be below the expectations of securities analysts and investors, which could cause our stock price to fall. Factors that may affect our quarterly results of operations in the future include, among other things: • the gain or loss of significant licensees, partly due to our dependence on a limited number of customers generating a significant amount of quarterly revenues; any delay in execution of any anticipated licensing arrangement during a particular quarter; • • delays in revenue recognition for some license agreements based on percentage of completion of • • customized work or other accounting reasons; the timing and volume of orders and production by our customers, as well as fluctuations in royalty revenues resulting from fluctuations in unit shipments by our licensees; royalty pricing pressures and reduction in royalty rates due to an increase in volume shipments by customers, end-product price erosion and competitive pressures; 13 • • • • earnings or other financial announcements by our major customers that include shipment data or other information that implicates expectations for our future royalty revenues; the mix of revenues among licensing and related revenues, and royalty revenues; the timing of the introduction of new or enhanced technologies by us and our competitors, as well as the market acceptance of such technologies; the discontinuation, or public announcement thereof, of product lines or market sectors that incorporate our technology by our significant customers; • our lengthy sales cycle and specifically in the third quarter of any fiscal year during which summer vacations slow down decision-making processes of our customers in executing contracts; • • • • delays in the commercialization of end products that incorporate our technology; • currency fluctuations, mainly the EURO and the NIS versus the U.S. dollar; • fluctuations in operating expenses and gross margins associated with the introduction of, and research and development investments in, new or enhanced technologies and adjustments to operating expenses resulting from restructurings; the approvals, amounts and timing of Israeli R&D government grants from the Israeli Innovation Authority of the Ministry of Economy and Industry in Israel (the “IIA”), EU grants and French research tax credits; the impact of new accounting pronouncements, including the new revenue recognition rules; the timing of our payment of royalties to the IIA, which is impacted by the timing and magnitude of license agreements and royalty revenues derived from technologies that were funded by grant programs of the IIA; statutory changes associated with research tax benefits applicable to French technology companies; • • our ability to scale our operations in response to changes in demand for our technologies; • entry into new end markets that utilize our signal processing IPs, software and platforms; • changes in our pricing policies and those of our competitors; • restructuring, asset and goodwill impairment and related charges, as well as other accounting changes or adjustments; and • general economic conditions, including the current economic conditions, and its effect on the semiconductor industry and sales of consumer products into which our technologies are incorporated. Each of the above factors is difficult to forecast and could harm our business, financial condition and results of operations. Also, we license our technology to OEMs and semiconductor companies for incorporation into their end products for consumer markets, including handsets and consumer electronics products. The royalties we generate are reported by our customers. Our royalty revenues are affected by seasonal buying patterns of consumer products sold by our OEM customers that incorporate our technology and the market acceptance of such end products supplied by our OEM customers. In accordance with the new revenue recognition rules, the royalties we generate will be based on royalty reports of units shipped during the quarter as estimated by our customers, not a quarter in arrears that we previously reported. The first quarter in any given year therefore will be a sequentially down quarter for us in relation to royalty revenues as this period represents lower post-Christmas fourth quarter consumer product shipments. However, the magnitude of this first quarter decrease varies annually and has been impacted by global economic conditions, market share changes, exiting or refocusing of market sectors by our customers and the timing of introduction of new and existing handset devices powered by CEVA technology sold in any given quarter compared to the prior quarter. Moreover, the semiconductor and consumer electronics industries remain volatile, which makes it extremely difficult for our customers and us to accurately forecast financial results and plan for future business activities. As a result, our past operating results should not be relied upon as an indication of future performance. We rely significantly on revenues derived from a limited number of customers who contribute to our royalty and license revenues. We derive a significant amount of revenues from a limited number of customers. One customer, Spreadtrum, accounted for 23%, 27% and 31% of our total revenues for 2017, 2016 and 2015, respectively. With respect to our royalty revenues, two royalty paying customers each represented 10% or more of our total royalty revenues for 2017, and collectively represented 70% of our total royalty revenues for 2017; two royalty paying customers each represented 10% or more of our total royalty revenues for 2016, and collectively represented 80% of our total royalty revenues for 2016, and 14 two royalty paying customers each represented 10% or more of our total royalty revenues for 2015, and collectively represented 72% of our total royalty revenues for 2015. We expect that a significant portion of our future revenues will continue to be generated by a limited number of customers. The loss of any significant royalty paying customer could adversely affect our near-term future operating results. Furthermore, consolidation among our customers may negatively affect our revenue source, increase our existing customers’ negotiation leverage and make us further dependent on a limited number of customers. Moreover, the discontinuation of product lines or market sectors that incorporate our technology by our significant customers or a change in direction of their business and our inability to adapt our technology to their new business needs could have material negative implications for our future royalty revenues. Our business is dependent on licensing revenues which may vary period to period. License agreements for our signal processing IP cores and platforms have not historically provided for substantial ongoing license payments so past licensing revenues may not be indicative of the amount of such revenues in any future period. We believe that there is a similar risk with RivieraWaves’ operations associated with Bluetooth and Wi-Fi connectivity technologies. Significant portions of our anticipated future revenues, therefore, will likely depend upon our success in attracting new customers or expanding our relationships with existing customers. However, revenues recognized from licensing arrangements vary significantly from period to period, depending on the number and size of deals closed during a quarter, and is difficult to predict. In addition, as we expand our business into the non-handset baseband markets, our licensing deals may be smaller but greater in volume which may further fluctuate our licensing revenues quarter to quarter. Our ability to succeed in our licensing efforts will depend on a variety of factors, including the performance, quality, breadth and depth of our current and future products, including our newly announced AI processor cores as well as our sales and marketing skills. In addition, some of our licensees may in the future decide to satisfy their needs through in-house design and production. Our failure to obtain future licensing customers would impede our future revenue growth and could materially harm our business. Royalty rates could decrease for existing and future license agreements, which could materially adversely affect our operating results. Royalty payments to us under existing and future license agreements could be lower than currently anticipated for a variety of reasons. Average selling prices for semiconductor products generally decrease over time during the lifespan of a product. In addition, there is increasing downward pricing pressures in the semiconductor industry on end products incorporating our technology, especially end products for the handsets and consumer electronics markets. As a result, notwithstanding the existence of a license agreement, our customers may demand that royalty rates for our products be lower than our historic royalty rates. We have in the past and may be pressured in the future to renegotiate existing license agreements with our customers. In addition, certain of our license agreements provide that royalty rates may decrease in connection with the sale of larger quantities of products incorporating our technology. Furthermore, our competitors may lower the royalty rates for their comparable products to win market share which may force us to lower our royalty rates as well. As a consequence of the above referenced factors, as well as unforeseen factors in the future, the royalty rates we receive for use of our technology could decrease, thereby decreasing future anticipated revenues and cash flow. Royalty revenues were approximately 51%, 56% and 46% of our total revenues for 2017, 2016 and 2015, respectively. Therefore, a significant decrease in our royalty revenues could materially adversely affect our operating results. Moreover, royalty rates may be negatively affected by macroeconomic trends or changes in products mix. Furthermore, consolidation among our customers may increase the leverage of our existing customers to extract concessions from us in royalty rates. Moreover, changes in products mix such as an increase in lower royalty bearing products shipped in high volume like low-cost feature phones and Bluetooth-based products in lieu of higher royalty bearing products like LTE phones could lower our royalty revenues. We generate a significant amount of our total revenues from the handset baseband market (for mobile handsets and for other modem connected devices) and our business and operating results may be materially adversely affected if we do not continue to succeed in these highly competitive markets. Our total revenues derived solely from baseband for handset and for other devices represented 64%, 69% and 68% of our total revenues for 2017, 2016 and 2015, respectively. Any adverse change in our ability to compete and maintain our competitive position in the handset baseband market, including through the introduction by competitors of enhanced 15 technologies that attract OEM customers that target those markets, would harm our business, financial condition and results of operations. Moreover, the handset baseband market is extremely competitive and is facing intense pricing pressures, and we expect that competition and pricing pressures will only increase. Furthermore, it can be very volatile with regards to volume shipments of different phones, standards and connected devices due to inventory build out or consumer demand changes or geographical macroeconomics, pricing changes, product discontinuations due to technical issues and timing of introduction of new phones and products. Our existing OEM customers also may fail to introduce new handset devices that attract consumers, or encounter significant delays in developing, manufacturing or shipping new or enhanced products in those markets or find alternative technological solutions and suppliers. The inability of our OEM customers to compete would result in lower shipments of products powered by our technologies which in turn would have a material adverse effect on our business, financial condition and results of operations. Since a significant portion of our revenues are derived from the handset baseband market, adverse conditions in this market would have a material adverse effect on our business, financial condition and results of operations. Because our IP solutions are components of end products, if semiconductor companies and electronic equipment manufacturers do not incorporate our solutions into their end products or if the end products of our customers do not achieve market acceptance, we may not be able to generate adequate sales of our products. We do not sell our IP solutions directly to end-users; we license our technology primarily to semiconductor companies and electronic equipment manufacturers, who then incorporate our technology into the products they sell. As a result, we rely on our customers to incorporate our technology into their end products at the design stage. Once a company incorporates a competitor’s technology into its end product, it becomes significantly more difficult for us to sell our technology to that company because changing suppliers involves significant cost, time, effort and risk for the company. As a result, we may incur significant expenditures on the development of a new technology without any assurance that our existing or potential customers will select our technology for incorporation into their own product and without this “design win,” it becomes significantly difficult to sell our IP solutions. Moreover, even after a customer agrees to incorporate our technology into its end products, the design cycle is long and may be delayed due to factors beyond our control, which may result in the end product incorporating our technology not reaching the market until long after the initial “design win” with such customer. From initial product design-in to volume production, many factors could impact the timing and/or amount of sales actually realized from the design-in. These factors include, but are not limited to, changes in the competitive position of our technology, our customers’ financial stability, and our customers' ability to ship products according to our customers’ schedule. Moreover, current economic conditions may further prolong a customer’s decision-making process and design cycle. Further, because we do not control the business practices of our customers, we do not influence the degree to which they promote our technology or set the prices at which they sell products incorporating our technology. We cannot assure you that our customers will devote satisfactory efforts to promote their end products which incorporate our IP solutions. In addition, our royalties from licenses and therefore the growth of our business, are dependent upon the success of our customers in introducing products incorporating our technology and the success of those products in the marketplace. The primary customers for our products are semiconductor design and manufacturing companies, system OEMs and electronic equipment manufacturers, particularly in the telecommunications field. All of the industries we license into are highly competitive, cyclical and have been subject to significant economic downturns at various times. These downturns are characterized by production overcapacity and reduced revenues, which at times may encourage semiconductor companies or electronic product manufacturers to reduce their expenditure on our technology. If we do not retain our current customers and continue to attract new customers, our business may be harmed. We depend on market acceptance of third-party semiconductor intellectual property. The semiconductor intellectual property (SIP) industry is a relatively small and emerging industry. Our future growth will depend on the level of market acceptance of our third-party licensable intellectual property model, the variety of intellectual property offerings available on the market, and a shift in customer preference away from in-house development of proprietary signal processing IP towards licensing open signal processing IP cores and platforms. Furthermore, the third-party licensable intellectual property model is highly dependent on the market adoption of new services and products, such as low cost smartphones in emerging markets, LTE-based smartphones, mobile broadband, small cell base stations and the increased use of advanced audio, voice, computational photography and embedded vision 16 in mobile, automotive and consumer products, as well as in IoT and connectivity applications. Such market adoption is important because the increased cost associated with ownership and maintenance of the more complex architectures needed for the advanced services and products may motivate companies to license third-party intellectual property rather than design them in-house. The trends that would enable our growth are largely beyond our control. Semiconductor customers also may choose to adopt a multi-chip, off-the-shelf chip solution versus licensing or using highly-integrated chipsets that embed our technologies. If the above referenced market shifts do not materialize or third-party SIP does not achieve market acceptance, our business, results of operations and financial condition could be materially harmed. Because we have significant international operations, we may be subject to political, economic and other conditions relating to our international operations that could increase our operating expenses and disrupt our revenues and business. Approximately 92% of our total revenues for 2017, 87% for 2016 and 84% for 2015 were derived from customers located outside of the United States. We expect that international customers will continue to account for a significant portion of our revenues for the foreseeable future. As a result, the occurrence of any negative international political, economic or geographic events could result in significant revenue shortfalls. These shortfalls could cause our business, financial condition and results of operations to be harmed. Some of the risks of doing business internationally include: fluctuations in the exchange rate for the U.S. dollar; imposition of tariffs and other barriers and restrictions; • unexpected changes in regulatory requirements; • • • potential negative international community’s reaction to the U.S. Tax Cuts and Jobs Act; • burdens of complying with a variety of foreign laws, treaties and technical standards; • uncertainty of laws and enforcement in certain countries relating to the protection of intellectual property; • multiple and possibly overlapping tax structures and potentially adverse tax consequences; • political and economic instability, including terrorist attacks and protectionist polices; and • changes in diplomatic and trade relationships. We depend on a limited number of key personnel who would be difficult to replace. Our success depends to a significant extent upon certain of our key employees and senior management, the loss of which could materially harm our business. Competition for skilled employees in our field is intense. We cannot assure you that in the future we will be successful in attracting and retaining the required personnel. The sales cycle for our IP solutions is lengthy, which makes forecasting of our customer orders and revenues difficult. The sales cycle for our IP solutions is lengthy, often lasting three to nine months. Our customers generally conduct significant technical evaluations, including customer trials, of our technology as well as competing technologies prior to making a purchasing decision. In addition, purchasing decisions also may be delayed because of a customer’s internal budget approval process. Furthermore, given the current market conditions, we have less ability to predict the timing of our customers’ purchasing cycle and potential unexpected delays in such a cycle. Because of the lengthy sales cycle and potential delays, our dependence on a limited number of customers to generate a significant amount of revenues for a particular period and the size of customer orders, if orders forecasted for a specific customer for a particular period do not occur in that period, our revenues and operating results for that particular quarter could suffer. Moreover, a portion of our expenses related to an anticipated order is fixed and difficult to reduce or change, which may further impact our operating results for a particular period. Because our IP solutions are complex, the detection of errors in our products may be delayed, and if we deliver products with defects, our credibility will be harmed, the sales and market acceptance of our products may decrease and product liability claims may be made against us. Our IP solutions are complex and may contain errors, defects and bugs when introduced. If we deliver products with errors, defects or bugs, our credibility and the market acceptance and sales of our products could be significantly 17 harmed. Furthermore, the nature of our products may also delay the detection of any such error or defect. If our products contain errors, defects and bugs, then we may be required to expend significant capital and resources to alleviate these problems. This could result in the diversion of technical and other resources from our other development efforts. Any actual or perceived problems or delays may also adversely affect our ability to attract or retain customers. Furthermore, the existence of any defects, errors or failure in our products could lead to product liability claims or lawsuits against us or against our customers. A successful product liability claim could result in substantial cost and divert management’s attention and resources, which would have a negative impact on our financial condition and results of operations. Our success will depend on our ability to successfully manage our geographically dispersed operations. Most of our employees are located in Israel. We also added French employees after the RivieraWaves acquisition in 2014. Accordingly, our ability to compete successfully will depend in part on the ability of a limited number of key executives located in geographically dispersed offices to integrate management, address the needs of our customers and respond to changes in our markets. If we are unable to effectively manage and integrate our remote operations, our business may be materially harmed. 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 some of our directors are residents of Israel. Although substantially all of our sales currently are being made to customers outside Israel, we are nonetheless directly influenced by the political, economic and military conditions affecting Israel. Any major hostilities involving Israel could significantly harm our business, operating results and financial condition. 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. Although we have operated effectively under these requirements since our inception, we cannot predict the effect of these obligations on the company in the future. Our operations could be disrupted by the absence, for a significant period, of one or more of our key employees due to military service. Terrorist attacks, acts of war or military actions and/or other civil unrest may adversely affect the territories in which we operate, and our business, financial condition and operating results. Terrorist attacks such as those that have occurred in France, where we have our wireless connectivity operations as a result of our acquisition of RivieraWaves, and attempted terrorist attacks, military responses to terrorist attacks, other military actions, or governmental action in response to or in anticipation of a terrorist attack, or civil unrest, may adversely affect prevailing economic conditions, resulting in work stoppages, reduced consumer spending or reduced demand for end products that incorporate our technologies. These developments subject our worldwide operations to increased risks and, depending on their magnitude, could reduce net sales and therefore could have a material adverse effect on our business, financial condition and operating results. Our research and development expenses may increase if the grants we currently receive from the Israeli government are reduced or withheld. We currently receive research grants mainly from programs of the IIA. We recorded an aggregate of $4,417,000, $6,410,000 and $4,997,000 in 2017, 2016 and 2015, respectively. To be eligible for these grants, we must meet certain development conditions and comply with periodic reporting obligations. Although we have met such conditions in the past, should we fail to meet such conditions in the future our research grants may be repayable, reduced or withheld. The repayment or reduction of such research grants may increase our research and development expenses which in turn may reduce our operating income. Also, the timing of such payments from the IIA may vary from year to year and quarter to quarter, and we have no control on the timing of such payment. For example, in 2017, the amount of grants approved by the IIA was substantially lower than prior years due to different allocation and methodology that IIA has implemented. As a result, our research and developments costs increased in 2017 as compared to prior years. Recently enacted tax legislation in the United States may impact our business. 18 We are subject to taxation in the United States, as well as a number of foreign jurisdictions. On December 22, 2017, the U.S. President signed into law federal tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act provides for significant and wide-ranging changes to the U.S. Internal Revenue Code. The reforms are complex, and it will take some time to assess the implications thoroughly. Broadly, the implications most relevant to the company include: a) a reduction in the U.S. federal corporate income tax rate from 35% to 21%, with various “base erosion” rules that may effectively limit the tax deductibility of certain payments made by U.S. entities to non-U.S. affiliates and additional limitations on deductions attributable to interest expense; and b) adopting elements of a territorial tax system. To transition into the territorial tax system, the Tax Cuts and Jobs Act includes a one-time tax on cumulative retained earnings of U.S.-owned foreign subsidiaries, at a rate of 15.5% for earnings represented by cash or cash equivalents and 8.0% for the balance of such earnings. Taxpayers may make an election to pay this tax over eight years. These tax reforms will give rise to significant consequences, both immediately in terms of one-off impacts relating to the transition tax and the measurement of deferred tax assets and liabilities and going forward in terms of the company’s taxation expense. An initial review and estimate has been undertaken by us, which will be updated over the coming weeks and months as we work through these complex changes with our advisors. The Tax Act could be subject to potential amendments and technical corrections, any of which could lessen or increase adverse impacts of the law. The final transitional impact of the Tax Act may differ from the estimates provided in this Annual Report, due to, among other things, changes in interpretations of the Tax Act, any legislative action to address questions that arise because of the Tax Act, any changes in accounting standards for income taxes or related interpretations in response to the Tax Act, or any updates or changes to estimates we utilized to calculate the transitional impacts, including impacts related to changes to current year earnings estimates and the amount of the repatriation tax. Given the unpredictability of these and other tax laws and related regulations, and their potential interdependency, it is difficult to currently assess the overall effect of such changes. Nonetheless, any material negative effect of such changes to our earnings and cash flow could adversely impact our financial results. The nature of our business requires the application of complex revenue recognition rules. Significant changes in U.S. generally accepted accounting principles, or GAAP, including the adoption of the new revenue recognition rules, could materially affect our financial position and results of operations. We prepare our financial statements in accordance with GAAP, which is subject to interpretation or changes by the Financial Accounting Standards Board, or FASB, the SEC, and other various bodies formed to promulgate and interpret appropriate accounting principles. New accounting pronouncements and changes in accounting principles have occurred in the past and are expected to occur in the future, which may have a significant effect on our financial results. For example, pursuant to the new revenue recognition rules, an entity recognizes sales- and usage-based royalties as revenue only when the later of the following events occurs: (1) the subsequent sale or usage occurs or (2) the performance obligation to which some or all of the sales-based or usage-based royalty allocated has been satisfied (or partially satisfied). Recognizing royalty revenue on a lag time basis is not permitted. As a result, the royalties we generate from customers will be based on royalty of units shipped during the quarter as estimated by our customers, not a quarter in arrears that we previously report. We are continuing to evaluate the impact of the adoption of this standard on our financial statements and our preliminary assessments are subject to change. Adoption of this standard and any difficulties in implementation of changes in accounting principles, including uncertainty associated with royalty revenues for the quarter based on estimates provided by our customer, could cause us to fail to meet our financial reporting obligations, which could result in regulatory discipline and harm investors’ confidence in us. The Israeli tax benefits that we currently receive and the government programs in which we participate require us to meet certain conditions and may be terminated or reduced in the future, which could increase our tax expenses. We enjoy certain tax benefits in Israel, particularly as a result of the “Approved Enterprise” and the “Benefited Enterprise” status of our facilities and programs. To maintain our eligibility for these tax benefits, we must continue to meet certain conditions, relating principally to adherence to the investment program filed with the Investment Center of the Israeli Ministry of Industry and Trade and to periodic reporting obligations. Should we fail to meet such conditions in the future, these benefits would be cancelled and we would be subject to corporate tax in Israel at the standard corporate rate (24% in 2017) and could be required to refund tax benefits already received. In addition, we cannot assure you that these tax benefits will be continued in the future at their current levels or otherwise. The tax benefits under our active investment programs are scheduled to gradually expire starting in 2020. The termination or reduction of certain programs and tax benefits (particularly benefits available to us as a result of the “Approved Enterprise” and the “Benefited Enterprise” status 19 of our facilities and programs) or a requirement to refund tax benefits already received may seriously harm our business, operating results and financial condition. Our failure to maintain certain research tax benefits applicable to French technology companies may adversely affect the results of operations of our RivieraWaves operations. Pursuant to our acquisition of the RivieraWaves operations, we will benefit from certain research tax credits applicable to French technology companies, including, for example, the Crédit Impôt Recherche (“CIR”). The CIR is a French tax credit aimed at stimulating research activities. The CIR can be offset against French corporate income tax due and the portion in excess (if any) may be refunded every three years. The French Parliament can decide to eliminate, or reduce the scope or the rate of, the CIR benefit, at any time or challenge our eligibility or calculations for such tax credits, all of which may have an adverse impact on our results of operations and future cash flows. We are exposed to fluctuations in currency exchange rates. A significant portion of our business is conducted outside the United States. Although most of our revenues are transacted in U.S. dollars, we may be exposed to currency exchange fluctuations in the future as business practices evolve and we are forced to transact business in local currencies. Moreover, the majority of our expenses are denominated in foreign currencies, mainly New Israeli Shekel (NIS) and the EURO, which subjects us to the risks of foreign currency fluctuations. Our primary expenses paid in currencies other than the U.S. dollar are employee salaries. Increases in the 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 in currencies other than the U.S. dollar when remeasured into U.S. dollars for financial reporting purposes. We have instituted a foreign cash flow hedging program to minimize the effects of currency fluctuations. However, hedging transactions may not successfully mitigate losses caused by currency fluctuations, and our hedging positions may be partial or may not exist at all in the future. We also review our monthly expected non-U.S. dollar denominated expenditure and look to hold equivalent non-U.S. dollar cash balances to mitigate currency fluctuations. However, in some cases, we expect to continue to experience the effect of exchange rate currency fluctuations on an annual and quarterly basis. For example, our EURO cash balances increase significantly on a quarterly basis beyond our EURO liabilities from the CIR, which is generally refunded every three years. We are exposed to the credit risk of our customers, which could result in material losses. As we diversify and expand our addressable market, we will enter into licensing arrangements with first time customers with whom we don’t have full visible of their creditworthiness. Furthermore, we have increased business activities in the Asia Pacific region. As a result, our future credit risk exposure may increase. Although we monitor and attempt to mitigate credit risks, there can be no assurance that our efforts will be effective. Although any losses to date relating to credit exposure of our customers have not been material, future losses, if incurred, could harm our business and have a material adverse effect on our operating results and financial condition. Our product development efforts are time-consuming and expensive and may not generate an acceptable return, if any. Our product development efforts require us to incur substantial research and development expense. Our research and development expenses were approximately $40.4 million, $30.8 million and $28.1 million for 2017, 2016 and 2015, respectively. We may not be able to achieve an acceptable return, if any, on our research and development efforts. The development of our products is highly complex. We occasionally have experienced delays in completing the development and introduction of new products and product enhancements, and we could experience delays in the future. Unanticipated problems in developing products could also divert substantial engineering resources, which may impair our ability to develop new products and enhancements and could substantially increase our costs. Furthermore, we may expend significant amounts on research and development programs that may not ultimately result in commercially successful products. Our research and development expense levels have increased steadily in the past few years. As a result of these and other factors, we may be unable to develop and introduce new products successfully and in a cost- effective and timely manner, and any new products we develop and offer may never achieve market acceptance. Any 20 failure to successfully develop future products would have a material adverse effect on our business, financial condition and results of operations. If we are unable to meet the changing needs of our end-users or address evolving market demands, our business may be harmed. The markets for signal processing IPs are characterized by rapidly changing technology, emerging markets and new and developing end-user needs, and requiring significant expenditure for research and development. We cannot assure you that we will be able to introduce systems and solutions that reflect prevailing industry standards, on a timely basis, meet the specific technical requirements of our end-users or avoid significant losses due to rapid decreases in market prices of our products, and our failure to do so may seriously harm our business. We may seek to expand our business in ways that could result in diversion of resources and extra expenses. We may in the future pursue acquisitions of businesses, products and technologies, establish joint venture arrangements, make minority equity investments or enhance our existing CEVAnet partner eco-system to expand our business. We are unable to predict whether or when any prospective acquisition, equity investment or joint venture will be completed. The process of negotiating potential acquisitions, joint ventures or equity investments, as well as the integration of acquired or jointly developed businesses, technologies or products may be prolonged due to unforeseen difficulties and may require a disproportionate amount of our resources and management’s attention. We cannot assure you that we will be able to successfully identify suitable acquisition or investment candidates, complete acquisitions or investments, or integrate acquired businesses or joint ventures with our operations. If we were to make any acquisition or investment or enter into a joint venture, we may not receive the intended benefits of the acquisition, investment or joint venture or such an acquisition, investment or joint venture may not achieve comparable levels of revenues, profitability or productivity as our existing business or otherwise perform as expected. The expansion of our CEVAnet partner eco-system also may not achieve the anticipated benefits. The occurrence of any of these events could harm our business, financial condition or results of operations. Future acquisitions, investments or joint ventures may require substantial capital resources, which may require us to seek additional debt or equity financing. Future acquisitions, joint ventures or minority equity investments by us could result in the following, any of which could seriously harm our results of operations or the price of our stock: issuance of equity securities that would dilute our current stockholders’ percentages of ownership; large one-time write-offs or equity investment impairment write-offs; incurrence of debt and contingent liabilities; • • • • difficulties in the assimilation and integration of operations, personnel, technologies, products and information • systems of the acquired companies; inability to realize cost efficiencies or synergies, thereby incurring higher operating expenditures as a result of the acquisition; • diversion of management’s attention from other business concerns; • • • potential loss of key employees of acquired organizations. contractual disputes; risks of entering geographic and business markets in which we have no or only limited prior experience; and We may not be able to adequately protect our intellectual property. Our success and ability to compete depend in large part upon the protection of our proprietary technologies. We rely on a combination of patent, copyright, trademark, trade secret, mask work and other intellectual property rights, confidentiality procedures and licensing arrangements to establish and protect our proprietary rights. These agreements and measures may not be sufficient to protect our technology from third-party infringement or protect us from the claims of others. As a result, we face risks associated with our patent position, including the potential need to engage in significant legal proceedings to enforce our patents, the possibility that the validity or enforceability of our patents may be denied, the possibility that third parties will be able to compete against us without infringing our patents and the possibility that our products may infringe patent rights of third parties. 21 Our trade names or trademarks may be registered or utilized by third parties in countries other than those in which we have registered them, impairing our ability to enter and compete in those markets. If we were forced to change any of our brand names, we could lose a significant amount of our brand identity. Our business will suffer if we are sued for infringement of the intellectual property rights of third parties or if we cannot obtain licenses to these rights on commercially acceptable terms. We are subject to the risk of adverse claims and litigation alleging infringement of the intellectual property rights of others. There are a large number of patents held by others, including our competitors, pertaining to the broad areas in which we are active. We have not, and cannot reasonably, investigate all such patents. From time to time, we have become aware of patents in our technology areas and have sought legal counsel regarding the validity of such patents and their impact on how we operate our business, and we will continue to seek such counsel when appropriate in the future. In addition, patent infringement claims are increasingly being asserted by patent holding companies (so-called patent “trolls”), which do not use technology and whose sole business is to enforce patents against companies, such as us, for monetary gain. Because such patent holding companies do not provide services or use technology, the assertion of our own patents by way of counter-claim may be ineffective. Infringement claims may require us to enter into license arrangements or result in protracted and costly litigation, regardless of the merits of these claims. Any necessary licenses may not be available or, if available, may not be obtainable on commercially reasonable terms. If we cannot obtain necessary licenses on commercially reasonable terms, we may be forced to stop licensing our technology, and our business would be seriously harmed. The future growth of our business depends in part on our ability to license to system OEMs and small-to-medium- sized semiconductor companies directly and to expand our sales geographically. Historically, a substantial portion of our licensing revenues has been derived in any given period from a relatively small number of licensees. Because of the substantial license fees we charge, our customers tend to be large semiconductor companies or vertically integrated system OEMs. Part of our current growth strategy is to broaden the adoption of our products by small and mid-size companies by offering different versions of our products targeted at these companies. If we are unable to develop and market effectively our intellectual property through these models, our revenues will continue to be dependent on a smaller number of licensees and a less geographically dispersed pattern of licensees, which could materially harm our business and results of operations. Our operating results are affected by the highly cyclical nature of the semiconductor industry. We operate within the semiconductor industry which experiences significant fluctuations in sales and profitability. Downturns in the semiconductor industry are characterized by diminished product demand, excess customer inventories, accelerated erosion of prices and excess production capacity. These factors could cause substantial fluctuations in our revenues and in our results of operations. We may dispose of or discontinue existing product lines and technology developments, which may adversely impact our future results. On an ongoing basis, we evaluate our various product offerings and technology developments in order to determine whether any should be discontinued or, to the extent possible, divested. We cannot guarantee that we have correctly forecasted, or will correctly forecast in the future, the right product lines and technology developments to dispose or discontinue or that our decision to dispose of or discontinue various investments, products lines and technology developments is prudent if market conditions change. In addition, there are no assurances that the discontinuance of various product lines will reduce our operating expenses or will not cause us to incur material charges associated with such decision. Furthermore, the discontinuance of existing product lines entails various risks, including the risk that we will not be able to find a purchaser for a product line or the purchase price obtained will not be equal to at least the book value of the net assets for the product line. Other risks include managing the expectations of, and maintaining good relations with, our customers who previously purchased products from our disposed or discontinued product lines, which could prevent us from selling other products to them in the future. We may also incur other significant liabilities and costs associated with our disposal or discontinuance of product lines, including employee severance costs and excess facilities costs. 22 Cybersecurity threats or other security breaches could compromise sensitive information belonging to us or our customers and could harm our business and our reputation. We store sensitive data, including intellectual property, proprietary business information and our customer and employee information. Despite our security measures, our information technology and infrastructure may be vulnerable to attacks by hackers or breached due to employee error, malfeasance or other disruptions that could result in unauthorized disclosure or loss of sensitive data. Because the techniques used to obtain unauthorized access to networks, or to sabotage systems, change frequently and generally are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. Furthermore, in the operation of our business we also use third-party vendors that store certain sensitive data. Any security breach of our own or a third-party vendor’s systems could cause us to be non-compliant with applicable laws or regulations, subject us to legal claims or proceedings, disrupt our operations, damage our reputation, and cause a loss of confidence in our products and services, any of which could adversely affect our business. Our corporate tax rate may increase, which could adversely impact our cash flow, financial condition and results of operations. We have significant operations in Israel, as well operations in the Republic of Ireland and France. A substantial portion of our taxable income historically has been generated in Israel. Currently, our Israeli and Irish subsidiaries are taxed at rates lower than the U.S. tax rates. If our Israeli and Irish subsidiaries were no longer to qualify for these lower tax rates or if the applicable tax laws were rescinded or changed, our operating results could be materially adversely affected. Moreover, if U.S. or other authorities were to change applicable tax laws or successfully challenge the manner in which our subsidiaries’ profits are currently recognized, our overall tax expenses could increase, and our business, cash flow, financial condition and results of operations could be materially adversely affected. Also our taxes on the Irish interest income may be double taxed both in Ireland and in the U.S. due to U.S. tax regulations and Irish tax restrictions on NOLs to off-set interest income. In addition, our Israeli interest income also may be taxed both in Israel and the U.S due to different Controlled Foreign Corporation rules. Our stock price may be volatile so you may not be able to resell your shares of our common stock at or above the price you paid for them. Announcements of developments related to our business, announcements by competitors, quarterly fluctuations in our financial results, changes in the general conditions of the highly dynamic industry in which we compete or the national economies in which we do business, and other factors could cause the price of our common stock to fluctuate, perhaps substantially. In addition, in recent years, the stock market has experienced extreme price fluctuations, which have often been unrelated to the operating performance of affected companies. These factors and fluctuations could have a material adverse effect on the market price of our common stock. ITEM 1B. UNRESOLVED STAFF COMMENTS None. ITEM 2. PROPERTIES Our headquarters are located in Mountain View, California and we have principal offices in Herzliya, Israel, Sophia Antipolis, France and Dublin, Ireland. 23 We lease buildings for our executive offices, and engineering, sales, marketing, administrative and support operations and design centers. The following table summarizes information with respect to the principal facilities leased by us as of December 31, 2017: Location Term Expiration Area (Sq. Feet) Principal Activities Mountain View, CA, U.S. (1) 8 years 2023 3,769 Headquarters; sales and marketing; administration Herzliya, Israel (2) 6 years 2020 43,337 Research and development; administration; sales and marketing Dublin, Ireland (3) 10 years 2026 1,755 Research and development; administration Cork, Ireland (4) 5 years 2021 2,870 Research and development Belfast, UK (5) 15 years 2019 2,600 Research and development Sophia Antipolis, France 9 years 2021 7,535 Research and development; administration; sales and marketing Shanghai, China 3 years 2018 3,438 sales and marketing Tokyo, Japan 3 years 2019 1,713 sales and marketing (1) Break clause in the lease exercisable in 2020. (2) Break clause in the lease exercisable in 2018. (3) Break clause in the lease exercisable in 2021. (4) Break clause in the lease exercisable in 2018. (5) Break clause in the lease exercisable on payment of one year rent. ITEM 3. LEGAL PROCEEDINGS From time to time, we are involved in litigation relating to claims arising out of our operations in the normal course of business. We are not a party to any legal proceedings, the adverse outcome of which, in management’s opinion, would have a material adverse effect on our results of operations or financial position ITEM 4. MINE SAFETY DISCLOSURES Not applicable. 24 EXECUTIVE OFFICERS OF THE REGISTRANT Below are the names, ages and principal recent business experience of our current executive officers. All such persons have been appointed by our board of directors to serve until their successors are elected and qualified or until their earlier resignation or removal. Gideon Wertheizer, age 61, has served as our Chief Executive Officer since May 2005. He joined our board of directors in January 2010. Mr. Wertheizer has 34 years of experience in the semiconductor and Silicon Intellectual Property (SIP) industries. He previously served as the Executive Vice President and General Manager of the DSP business unit at CEVA. Prior to joining CEVA in November 2002, Mr. Wertheizer held various executive positions at DSP Group, Inc., including such roles as Executive VP - Strategic Business Development, Vice President for Marketing and Vice President of VLSI design. Mr. Wertheizer holds a BsC for electrical engineering from Ben Gurion University in Israel and executive MBA from Bradford University in the United Kingdom. Yaniv Arieli, age 49, has served as our Chief Financial Officer since May 2005. Prior to his current position, Mr. Arieli served as President of U.S. Operations and Director of Investor Relations of DSP Group beginning in August 2002 and Vice President of Finance, Chief Financial Officer and Secretary of DSP Group’s DSP Cores Licensing Division prior to that time. Before joining DSP Group in 1997, Mr. Arieli served as an account manager and certified public accountant at Kesselman & Kesselman, a member of PricewaterhouseCoopers, a leading accounting firm. Mr. Arieli is a CPA and holds a B.A. in Accounting and Economics from Haifa University in Israel and an M.B.A. from Newport University and is also a member of the National Investor Relation Institute. Issachar Ohana, age 52, has served as our Vice President, Worldwide Sales, since November 2002 and our Executive Vice President, Worldwide Sales, since July 2006. Prior to joining CEVA in November 2002, Mr. Ohana was with DSP Group beginning in August 1994 as a VLSI design engineer. He was appointed Project Manager of DSP Group’s research and development in July 1995, Director of Core Licensing in August 1998, and Vice President—Sales of the Core Licensing Division in May 2000. Mr. Ohana holds a B.Sc. in Electrical and Computer Engineering from Ben Gurion University in Israel and an MBA from Bradford University in the United Kingdom. 25 PART II ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Our common stock began trading on The NASDAQ Global Market on November 1, 2002. Our common stock currently trades under the ticker symbol “CEVA” on NASDAQ. As of February 24, 2018, there were approximately 925 holders of record, which we believe represents approximately 9,900 beneficial holders. The closing price of our common stock on The NASDAQ Global Market on February 23, 2018 was $37.10 per share. The following table sets forth, for the periods indicated, the range of high and low closing prices per share of our common stock, as reported on The NASDAQ Global Market. 2017 First Quarter Second Quarter Third Quarter Fourth Quarter 2016 First Quarter Second Quarter Third Quarter Fourth Quarter Price Range of Common Stock Low High $ 36.35 $ 32.35 $ 48.05 $ 33.45 $ 47.90 $ 39.40 $ 51.10 $ 42.25 $ 23.15 $ 17.41 $ 27.90 $ 21.77 $ 36.29 $ 26.13 $ 35.55 $ 28.50 We have never paid any cash dividends. We intend to retain future earnings, if any, to fund the development and growth of our business and currently do not anticipate paying cash dividends in the foreseeable future. Equity Compensation Plan Information Information as of December 31, 2017 regarding options, SARs and RSUs granted under our stock plans and remaining available for issuance under those plans will be contained in the definitive 2018 Proxy Statement for the 2018 annual meeting of stockholders to be held on May 17, 2018 and incorporated herein by reference. Issuer Purchases of Equity Securities There were no repurchases of our common stock during the three months ended December 31, 2017. 2018 Annual Meeting of Stockholders We anticipate that the 2018 annual meeting of our stockholders will be held on May 17, 2018 in New York City, NY. Stock Performance Graph Notwithstanding anything to the contrary set forth in any of the Company’s previous or future filings under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, that might incorporate this proxy statement or future filings made by the Company under those statutes, the below Stock Performance Graph shall not be 26 deemed filed with the United States Securities and Exchange Commission and shall not be deemed incorporated by reference into any of those prior filings or into any future filings made by the Company under those statutes. Comparison of 5 Year Cumulative Total Return Assumes Initial Investment of $100 December 2017 350.00 300.00 250.00 200.00 150.00 100.00 50.00 0.00 2012 CEVA, Inc. 2013 2014 NASDAQ Composite Index 2015 2017 Morningstar Semiconductor Index 2016 12/31/12 12/31/13 12/31/14 12/31/15 12/31/16 12/31/17 CEVA, Inc. 100.00 96.63 115.17 148.32 213.02 293.02 NASDAQ Composite 100.00 140.12 160.78 171.97 187.22 242.71 Morningstar Semiconductor 100.00 124.61 160.75 171.82 224.55 303.44 The stock performance graph above compares the percentage change in cumulative stockholder return on the common stock of our company for the period from December 31, 2012, through December 31, 2017, with the cumulative total return on The NASDAQ Global Market (U.S.) Composite Index and the Morningstar Semiconductor Group Index. This graph assumes the investment of $100 in our common stock (at the closing price of our common stock on December 31, 2012), the NASDAQ Global Market (U.S.) Composite Index and the Morningstar Semiconductor Group Index on December 31, 2012, and assumes dividends, if any, are reinvested. Comparisons in the graph above are based upon historical data and are not indicative of, nor intended to forecast, future performance of our common stock. 27 ITEM 6. SELECTED FINANCIAL DATA The following selected financial data should be read in conjunction with, and are qualified by reference to, our consolidated financial statements and the related notes, as well as our “Management’s Discussion and Analysis of Financial Condition and Results of Operations for the fiscal year ended December 31, 2017,” both appearing elsewhere in this annual report. 2013 2014 Year Ended December 31, 2015 (in thousands) 2016 2017 Consolidated Statements of Income Data: Revenues: Licensing and related revenue Royalties Total revenues Cost of revenues Gross profit Operating expenses: Research and development, net Sales and marketing General and administrative Amortization of intangible assets Total operating expenses Operating income Financial income, net Other loss Income before taxes on income Income taxes Net income (loss) Basic net income (loss) per share Diluted net income (loss) per share Consolidated Balance Sheet Data: Working capital Total assets Total long-term liabilities Total stockholders’ equity QUARTERLY FINANCIAL INFORMATION $ 22,372 $ 28,348 $ 32,135 $ 31,874 $ 42,899 44,608 87,507 6,953 80,554 40,779 72,653 6,086 66,567 22,460 50,808 5,000 45,808 26,528 48,900 5,163 43,737 27,364 59,499 5,424 54,075 21,216 10,092 7,670 — 38,978 4,759 2,714 — 7,473 788 6,685 $ 0.30 $ 0.30 $ 25,828 9,815 8,054 649 44,346 1,462 975 (404) 2,033 2,852 (819) $ (0.04) $ (0.04) $ $ $ $ 40,385 30,838 28,113 12,572 11,540 10,168 10,488 8,567 8,184 1,236 1,236 1,298 64,681 52,181 47,763 15,873 14,386 6,312 3,026 2,039 1,069 — — — 18,899 16,425 7,381 1,114 1,871 3,325 6,267 $ 13,100 $ 17,028 0.78 0.75 0.63 $ 0.61 $ 0.31 $ 0.30 $ 2013 2014 December 31, 2015 (in thousands) 2016 2017 $ 131,433 $ 93,777 $ 87,044 $ 122,117 $ 136,281 276,812 9,347 $ 190,895 $ 179,049 $ 186,095 $ 211,551 $ 244,670 242,495 8,349 207,005 7,961 212,327 7,255 212,649 7,571 March 31, June 30, September 30, 2016 Three months ended December 31, March 31, June 30, September 30, December 31, 2017 Revenues: Licensing and related revenue Royalties Total revenues $ 8,650 $ 7,470 $ 7,456 $ 8,298 $ 9,535 $ 10,337 $ 14,021 $ 9,006 7,858 9,633 10,390 12,898 11,752 10,238 10,023 12,595 16,508 17,103 17,846 21,196 21,287 20,575 24,044 21,601 28 March 31, June 30, September 30, 2016 Three months ended December 31, March 31, June 30, September 30, December 31, 2017 1,628 1,403 1,422 1,633 1,696 1,608 1,726 1,923 14,880 15,700 16,424 19,563 19,591 18,967 22,318 19,678 309 309 7,914 7,811 7,346 7,767 9,873 10,509 10,031 9,972 2,845 2,855 2,763 3,077 2,938 3,427 3,057 3,150 1,990 2,078 2,218 2,281 2,125 2,552 2,711 3,100 309 13,058 13,053 12,636 13,434 15,245 16,797 16,108 16,531 1,822 2,647 3,788 6,129 4,346 2,170 6,210 3,147 879 2,263 3,208 4,403 6,551 4,917 2,925 7,031 4,026 863 $ 1,800 $ 2,711 $ 3,388 $ 5,201 $ 4,107 $ 3,908 $ 5,850 $ 3,163 497 1,015 1,350 (983) 1,181 810 309 615 309 463 309 309 755 571 441 422 309 821 561 $ 0.09 $ 0.13 $ 0.16 $ 0.24 $ 0.19 $ 0.18 $ 0.27 $ 0.14 $ 0.09 $ 0.13 $ 0.15 $ 0.24 $ 0.19 $ 0.17 $ 0.26 $ 0.14 Cost of revenues Gross profit Operating expenses: Research and development, net Sales and marketing General and administrative Amortization of intangible assets Total operating expenses Operating income Financial income, net Income before taxes on income Income taxes expense (benefit) Net income Basic net income per share diluted net income per share Weighted average shares used to compute net income per share (in thousands): Basic Diluted 20,520 20,604 21,025 21,239 21,398 21,712 21,946 22,017 20,926 21,371 21,883 22,068 22,187 22,563 22,683 22,801 29 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, 2017, both appearing elsewhere in this annual report. Headquartered in Mountain View, California, CEVA is a leading licensor of signal processing platforms and a primary player in Artificial Intelligence (AI) processors for a smarter, connected world. We partner with semiconductor companies and OEMs worldwide to create power-efficient, intelligent and connected devices for a range of end markets, including mobile, consumer, automotive, industrial and Internet of Things (IoT). Our ultra-low-power IPs address many of the most complex technologies for imaging and computer vision, neural networks, sound and long and short range wireless. Our portfolio includes comprehensive platforms for 5G baseband processing in handsets and infrastructure, highly integrated cellular IoT solutions, DSP and voice input algorithms and software for voice enabled devices, advanced imaging and computer vision DSP platforms for any camera-enabled device, and a family of self-contained AI processors that address a wide range of applications. For short range wireless, we offer the industry’s most widely adopted IPs for Bluetooth (low energy and dual mode) and Wi-Fi (802.11 b/g/n/ac up to 4x4). Our technologies are licensed to leading semiconductor and original equipment manufacturer (OEM) companies throughout the world. These companies incorporate our IP into application-specific integrated circuits (“ASICs”) and application-specific standard products (“ASSPs”) that they manufacture, market and sell to wireless, consumer, automotive and IoT companies. We believe that our licensing business is progressing well with strong interest, diverse customer base and a myriad of target markets. Our state-of-the-art technology has shipped in more than 9 billion chips to date for a wide range of diverse end markets. One in three handsets sold worldwide is powered by CEVA. Our signal processing platforms power many of the world’s leading handset OEMs, including a tier-one U.S. brand, ASUS, Coolpad, HTC, Huawei, Intex, Karbonn, Lava, Lenovo, LG, Meizu, Micromax, OPPO, Samsung, Vivo, Xiaomi, ZTE and hundreds of local handset manufacturers in China and India. Based on internal data and Strategy Analytics’ provisional worldwide shipment data, CEVA’s worldwide market share of handset baseband chips that incorporate our technologies was approximately 36% of the worldwide shipment volume in 2017. Moreover, we believe the adoption of our signal processing platform and AI processors outside of the cellular baseband market continues to progress. As a testament to this growing trend, during 2017, we concluded 45 licensing deals, 43 of which are for non-cellular baseband applications. These license deals demonstrate that our technologies are being integrated into a broad range of end devices, including 5G base stations, smartphones, automotive ADAS, drones, surveillance cameras, wearables, industrial IoT and a variety of Bluetooth and Wi-Fi connected consumer and medical products. Moreover, during the 2017, our royalty revenues derived from non-cellular baseband products approximately doubled year-over-year, contributing to more than $8 million of royalty revenues. We believe the following key elements represent significant growth drivers for the company: • CEVA is firmly established in the largest space in the semiconductor industry – baseband for mobile handsets. In particular, our presence in the LTE smartphone markets continue to grow as our customers targeting those markets are gaining market share at the expense of the incumbents. During 2017, we reported 311 million LTE chipsets shipped, up from 226 million in 2016. The royalty we derive from smartphones is higher on average than that of feature phones, so we may benefit if and when LTE handset markets around the world transition 30 and shift away from feature phones to smartphones, particularly in emerging economies. Furthermore, we believe that we may benefit from the base station chip ramp up in coming years, as a large customer of ours is forecasted to start ramping up production in the second half of 2018. • Our specialization and competitive edge in signal processing platforms for next generation long and short range wireless such as 5G, NB-IoT, 802.11ac and 802.11ax Wi-Fi technologies, and the inherent low cost, power and performance balance of our designs, put us in a strong position to simultaneously capitalize on mass market adoption of such technologies and address multiple markets and product sectors, including handsets, fixed wireless access, macro base stations, remote radio heads, cellular backhaul, small cells, Wi-Fi routers and a variety of machine type communications such as connected cars, smart cities and industrial markets. • Together with our presence in the handset baseband market, our Bluetooth and Wi-Fi IPs allow us to expand further into IoT applications and substantially increase our overall addressable market. Our addressable market size is expected to be 35 billion devices by 2020, per data from ABI Research. Already, shipments of products incorporating our Bluetooth IP are sizeable, with more than 200 million CEVA-powered Bluetooth chips shipped in 2017, up 45% from 138 million units in 2016. • The growing market potential for voice assisted devices, as voice is becoming the primary user interface for IoT applications, including mobile, automotive and consumer devices, offers an additional growth segment for the company in voice enabled devices such as smartphones, headsets, earbuds, smart speakers, smart home and automotive. To better address this market, we recently introduced ClearVox, a new voice input software and algorithm, that is offered in conjunction with our audio/voice DSPs. ClearVox, plus our proven track record in audio/voice processing, with more than 6 billion audio chips shipped to date, puts us in a strong position to power audio and voice roadmaps across this new range of addressable end markets. • Our CEVA-XM4 and CEVA-XM6 imaging and vision platforms for deep learning provide highly compelling offerings for any camera-enabled device such as smartphones, tablets, automotive safety (ADAS), autonomous driving (AD), drones, robotics, security and surveillance, augmented reality (AR) and virtual reality (VR), drones, and signage. Per ABI Research, camera shipments are expected to exceed 2.7 billion units by 2018. We have already signed more than 50 licensing agreements for our imaging and vision DSPs across those markets, where our customers can add camera-related enhancements such as smarter autofocus, better picture using super resolution algorithms, and better image capture in low-light environments. Other customers can add video analytics support to enable new services like augmented reality, gesture recognition and advanced safety capabilities in cars. This transformation in vision processing and neural net software and hardware needs is an opportunity for us to expand our footprint and content in smartphones, tablets, drones, surveillance, automotive ADAS and industrial IoT applications. • Beyond vision, neural networks are increasingly being deployed for a wide range of markets in order to make devices ‘smarter’. These markets include IoT, smartphones, surveillance, automotive, robotics, medical and industrial. To address this significant and lucrative opportunity, we recently announced NeuPro™ - a family of AI processors for deep learning at the edge. These self-contained AI processors are the first non-DSP processors ever developed by CEVA and bring the power of deep learning to the device, without relying on connectivity to the cloud. We believe this market opportunity for AI at the edge is on top of our existing product lines and represents a new licensing and royalty driver for the company in the coming years. As a result of our diversification strategy beyond baseband for handsets and our progress in addressing those new markets under the IoT umbrella, we expect significant growth in royalty revenues derived from non-handset baseband applications over the next few years, due to a combination of higher unit shipments of Bluetooth products that bear lower ASPs, along with higher ASPs driven by base station and vision products. Notwithstanding the various growth opportunities we have outlined above, our business operates in a highly competitive and cyclical environment. The maintenance of our competitive position and our future growth are dependent 31 on our ability to adapt to ever-changing technologies, short product life cycles, evolving industry standards, changing customer needs and the trend towards Internet-of-Things, handset baseband, connectivity, and voice, audio and video convergence in the markets that we operate. Also, our business relies significantly on revenues derived from a limited number of customers. The discontinuation of product lines or market sectors that incorporate our technology by our significant customers or a change in direction of their business and our inability to adapt our technology to their new business needs could have material negative implications for our future royalty revenues. Moreover, competition has historically increased pricing pressures for our products and decreased our average selling prices. Royalty payments under our existing license agreements also could be lower than currently anticipated for a variety of reasons, including decreased royalty rates triggered by larger volume shipments, lower royalty rates negotiated with customers due to competitive pressure or consolidation among our customers. Some of our competitors have reduced their licensing and royalty fees to attract customers and expand their market share. In order to penetrate new markets and maintain our market share with our existing products, we may need to offer our products in the future at lower prices which may result in lower profits. In addition, our future growth is dependent not only on the continued success of our existing products but also the successful introduction of new products, which requires the dedication of resources into research and development which in turn may increase our operating expenses. Furthermore, since our products are incorporated into end products of our OEM and semiconductor customers, our business is very dependent on their ability to achieve market acceptance of their end products in the handset and consumer electronic markets, which are similarly very competitive. In addition, macroeconomic trends may significantly affect our operating results. For example, consolidation among our customers may negatively affect our revenue source, increase our existing customers’ negotiation leverage and make us more dependent on a limited number of customers. Also, since we continue to derive a significant portion of our revenues from the handset baseband market, any negative trends in that market would adversely affect our financial results. Moreover, the semiconductor and consumer electronics industries remain volatile, which makes it extremely difficult for our customers and us to accurately forecast financial results and plan for future business activities. Our license arrangements have not historically provided for substantial ongoing license payments so revenue recognized from licensing arrangements vary significantly from period to period, depending on the number and size of deals closed during a quarter, and is difficult to predict. Moreover, our royalty revenues are based on the sales of products incorporating the semiconductors or other products of our customers, and as a result we do not have direct access to information that will help us anticipate the timing and amount of future royalties. We have very little visibility into the timetable of product shipments incorporating our technology by our customers. As a result, our past operating results should not be relied upon as an indication of future results. 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: • revenue recognition; • business combinations and valuation of goodwill and other acquired intangible assets; • • • income taxes; equity-based compensation; and impairment of marketable securities; 32 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. We generate our revenues from (1) licensing intellectual property, which in certain circumstances is modified for customer-specific requirements, (2) royalty revenues and (3) other revenues, which include revenues from support, training and sale of development systems. 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 in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) No. 985-605, “Software Revenue Recognition.” Revenues are recognized when persuasive evidence of an arrangement exists and no further obligation exists, delivery has occurred, the license fee is fixed or determinable, and collection is reasonably assured. A license may be perpetual or time limited in its application. Revenue earned on licensing arrangements involving multiple elements are allocated to each element based on the “residual method” when vendor specific objective evidence (“VSOE”) of fair value exists for all undelivered elements and VSOE does not exist for one of the delivered elements. VSOE of fair value of the undelivered elements is determined based on the substantive renewal rate as stated in the agreement. Extended payment terms in a licensing arrangement may indicate that the license fees are not deemed to be fixed or determinable. If the fee is not fixed or determinable, revenue is recognized as payments become due from the customer unless collection is not considered reasonably assured, then revenue is recognized as payments are collected from the customer, provided all other revenue recognition criteria have been met. Revenues from license fees that involve significant customization of our IP to customer-specific specifications are recognized in accordance with the principles set out in FASB ASC No. 605-35-25, “Construction-Type and Production- Type Contracts Recognition,” using contract accounting on a percentage of completion method. The amount of revenue recognized is based on the total license fees under the agreement and the percentage of completion achieved. The percentage of completion is measured by the actual time incurred to date on the project compared to the total estimated project requirements, which correspond to the costs related to earned revenues. 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 we receive a report from the licensee detailing the shipment of products that incorporate our IP, which receipt is in the quarter following the licensee’s sale of such products to its customers. 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. 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. In addition to license fees, contracts with customers generally contain an agreement to provide for post contract support and training, 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 recognize revenue for post contract support on a straight-line basis over the period 33 for which technical support is contractually agreed to be provided to the licensee, typically 12 months. Revenues from training are recognized as the training is performed. Revenues from the sale of development systems are recognized when title to the product passes to the customer and all other revenue recognition criteria have been met. We usually do not provide rights of return. When rights of return are included in the license agreements, revenue is deferred until rights of return expire. 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”. There is a two-phase process for impairment testing of goodwill. The first phase screens for potential impairment, while the second phase (if necessary) measures impairment. Goodwill impairment is deemed to exist if the net book value of a reporting unit exceeds its estimated fair value. In such a case, the second phase is then performed, and the reporting unit measures impairment by comparing the carrying amount of the reporting unit’s goodwill to the implied fair value of that goodwill. An impairment loss is recognized in an amount equal to the excess. For each of the three years for the period ended December 31, 2017, no impairment of goodwill was 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 review indicates that the carrying amount of property and equipment and intangible assets is not recoverable, the carrying amount of such assets is reduced to fair value. We have not recorded any such impairment charge during the years presented. 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 establish a 34 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 must make predictions of the amount 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, 2016 and 2017 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 12 to our Consolidated Financial Statements for the year ended December 31, 2017 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. On December 22, 2017, the 2017 Tax Cuts and Jobs Act (the Tax Act) was enacted into law and the new legislation contains several key tax provisions that affected us, including a one-time mandatory transition tax on accumulated foreign earnings and a reduction of the corporate income tax rate to 21% effective January 1, 2018, among others. We are required to recognize the effect of the tax law changes in the period of enactment, such as determining the transition tax, remeasuring our U.S. deferred tax assets and liabilities as well as reassessing the net realizability of our deferred tax assets and liabilities. In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (SAB 118), which allows us to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. Since the Tax Act was passed late in the fourth quarter of 2017, and ongoing guidance and accounting interpretation are expected over the next 12 months, we consider the accounting of the transition tax, deferred tax re-measurements, and other items to be incomplete due to the forthcoming guidance and our ongoing analysis of final year-end data and tax positions. We expect to complete our analysis within the measurement period in accordance with SAB 118. 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. In March 2016, the FASB issued ASU 2016-09, “Compensation - Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting” (“ASU 2016-09”). ASU 2016-09 simplifies several aspects of the accounting for share-based payment transaction, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. For public companies, ASU 2016-09 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. We adopted ASU 2016-09 during the first quarter of 2017, at which time it changed our accounting policy to account for forfeitures as they occur. There was no material impact of the adoption of this standard on our financial statements. In addition, historically, excess tax benefits or deficiencies from our equity awards were recorded as additional paid-in capital in our consolidated balance sheets and were classified as a financing activity in our consolidated statements of cash flows. As a result of adoption, we prospectively record any excess tax benefits or deficiencies from our equity awards as part of our provision for income taxes in our consolidated statements of operations during the reporting periods during which equity vesting occurs. Excess tax benefits for share-based payments are presented as an operating activity in the statements of cash flows rather than financing activity. We elected to apply the cash flow classification requirements related to excess tax benefits prospectively in accordance with ASU 2016-09 and prior periods have not been adjusted. We estimate the fair value of options and stock appreciation right (“SAR”) awards on the date of grant using an option-pricing model. The value of the portion of an award that is ultimately expected to vest is recognized as an expense over the requisite service period in our consolidated statement of income. We recognize compensation expenses for the value of our options and SARs, which have graded vesting based on the accelerated attribution method over the requisite service period of each of the awards. Prior to January 1, 2017, we recognized compensation expenses for the value of our 35 options and SARs, net of estimated forfeitures. Estimated forfeitures were based on actual historical pre-vesting forfeitures and the rate was adjusted to reflect changes in facts and circumstances, if any. We recognize compensation expenses for the value of our restricted stock unit (“RSU”) awards, based on the straight-line method over the requisite service period of each of the awards. The fair value of each RSU is the market value as determined by the closing price of the common stock on the day of grant. We use the Monte-Carlo simulation model for options and SARs granted. Expected volatility was calculated based upon actual historical stock price movements over the most recent periods ending on the grant date, equal to the expected option and SAR term. We have historically not paid dividends and have no foreseeable plans to pay dividends. The risk- free interest rate is based on the yield from U.S. Treasury zero-coupon bonds with an equivalent term. The Monte-Carlo model also considers the suboptimal exercise multiple which is based on the average exercise behavior of our employees over the past years, the contractual term of the options and SARs, and the probability of termination or retirement of the holder of the options and SARs in computing the value of the options and SARs. Although our management believes that their estimates and judgments about equity-based compensation expense are reasonable, actual results and future changes in estimates may differ substantially from our current estimates. 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, “Investment 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. We recognize an impairment charge when a decline in the fair value of our investments in debt securities below the cost basis of such securities is judged to be other-than-temporary. The determination of credit losses requires significant judgment and actual results may be materially different from our estimates. Factors considered in making such a determination include the duration and severity of the impairment, the reason for the decline in value, the ability of the issuer to meet payment obligations and the potential recovery period . For securities that are deemed other-than-temporarily impaired, the amount of impairment is recognized in the statement of income and is limited to the amount related to credit losses, while impairment related to other factors is recognized in other comprehensive income (loss). During the years ended December 31, 2015, 2016 and 2017, no other-than temporary impairment were recorded related to our marketable securities. Recently Issued Accounting Pronouncement (a) Revenue recognition In May 2014, the FASB issued new guidance related to revenue recognition, which outlines a comprehensive revenue recognition model and supersedes most current revenue recognition guidance. The new guidance requires a company to recognize revenue as control of goods or services transfers to a customer at an amount that reflects the expected consideration to be received in exchange for those goods or services. It defines a five-step approach for recognizing revenue, which may require a company to use more judgment and make more estimates than under the current guidance. We adopted the new guidance during the first quarter of 2018 and apply the standard using modified retrospective approach, with the cumulative effect of applying the new guidance recognized as an adjustment to the opening retained earnings balance. Given the scope of work required to implement the new revenue recognition rules and disclosure requirements under the new guidance, we have made progress in the identification of changes to policy, processes and controls, and we continue to 36 assess data availability and presentation necessary to meet the additional disclosure requirements of the guidance in the notes to the consolidated financial statements for the adoption period and onwards. We finished analyzing the potential impact of the new guidance. We currently expect the adoption of this new guidance to most significantly impact our royalty business. Specifically, we expect a change in the timing of revenues recognized from sales-based royalties. We currently recognize sales-based royalties as revenues during the quarter during which such royalties are reported by licensees, which is after the conclusion of the quarter during which the licensees’ sales occur and when all other revenue recognition criteria are met. Under the new guidance, we are required to estimate and recognize sales-based royalties during the period during which the associated sales occur, resulting in an acceleration of revenue recognition compared to the current method. In addition, we expect an increase in trade receivables, due to royalty revenues now being recorded as accrued revenues in the statement of financial position, along with our current trade receivables. Furthermore, based on our current analysis, another effect on our revenue recognition relates to certain deliverables that may be considered as distinct performance obligations separate from other performance obligations, and are measured using the relative standalone selling price basis. Under the new standard, an entity recognizes revenue when or as it satisfies a performance obligation by transferring IP license or services to the customer, either at a point in time or over time. We expect to continue to recognize most of our revenues at a point in time upon delivery of our products. We expect to recognize revenue over time on significant license customization contracts that are covered by contract accounting standards using cost inputs to measure progress toward completion of our performance obligations, which is similar to the current method. In addition, incremental costs that are related to sales from contracts signed during the period will require capitalization. If the amortization period of those costs are one year or less, the costs are expensed as incurred, which is a practical expedient manner permitted under the new guidance. We currently do not expect that this change will have a material impact on our consolidated financial statements. We currently estimate the cumulative adjustment to increase our retained earnings by approximately $8.1 million, while increasing our assets by approximately $9.1 million. The most significant impact of the standard on our financial statements relates to the timing of revenues recognized from sales-based royalties (amounted to approximately $8.8 million). We will also record a provision for income taxes, which will increase our current liabilities, in an amount currently estimated at approximately $1.1 million. Other than specified above, we do not otherwise expect the adoption of the new guidance will have a material impact on our businesses. (b) Other accounting standards In January 2016, the FASB issued ASU No. 2016-01, “Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities,” which requires that equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) are to be measured at fair value with changes in fair value recognized in net income. However, an entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. We adopted this ASU during the first quarter of 2018 and we do not expect the adoption to have a material impact on our financial statements. In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842),” which will replace the existing guidance in ASC 840, "Leases." The updated standard aims to increase transparency and comparability among organizations by requiring lessees to recognize lease assets and lease liabilities on the balance sheet and requiring disclosure of key information about leasing arrangements. This ASU is effective for annual periods beginning after December 15, 2018, and interim periods within those annual periods; early adoption is permitted and modified retrospective application is required. We are in the process of evaluating this guidance to determine the impact it will have on our financial statements and related disclosures. 37 The FASB issued ASU 2016-13 “Measurement of Credit Losses on Financial Instruments” requiring an allowance to be recorded for all expected credit losses for financial assets. The allowance for credit losses is based on historical information, current conditions and reasonable and supportable forecasts. The new standard also makes revisions to the other than temporary impairment model for available-for-sale debt securities. Disclosures of credit quality indicators in relation to the amortized cost of financing receivables are further disaggregated by year of origination. The new accounting guidance is effective for interim and annual periods beginning after December 15, 2019 with early adoption permitted for interim and annual periods beginning after December 15, 2018. The amendments will be applied through a cumulative- effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. We are analyzing the impact of this new standard and, at this time, cannot estimate the impact of adoption on our net income. We plan to adopt ASU 2016-13 effective January 1, 2020. In January 2017, the FASB issued ASU No. 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business.” The amendments in this ASU provide a more robust framework to use in determining when a set of assets and activities is a business. Because the current definition of a business is interpreted broadly and can be difficult to apply, analyzing transactions is inefficient and costly and that the definition does not permit the use of reasonable judgment. The amendments provide more consistency in applying the guidance, reduce the costs of application, and make the definition of a business more operable. The amendments in this update become effective for annual periods and interim periods within those annual periods beginning after December 15, 2017. We are currently evaluating the impact of adopting this new guidance on our consolidated financial statements, but the adoption is not expected to have a material impact on our financial statements. In January 2017, the FASB issued ASU No. 2017-04, “Intangibles: Goodwill and Other: Simplifying the Test for Goodwill Impairment.” To simplify the subsequent measurement of goodwill, the amendments eliminate Step 2 from the goodwill impairment test. The annual, or interim, goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. In addition, the income tax effects of tax deductible goodwill on the carrying amount of the reporting unit should be considered when measuring the goodwill impairment loss, if applicable. The amendments also eliminate the requirements for any reporting unit with a zero or negative carrying amount to perform Step 2 of the goodwill impairment test. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the qualitative impairment test is necessary. The amendments should be applied on a prospective basis. The nature of and reason for the change in accounting principle should be disclosed upon transition. The amendments in this update should be adopted for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted on testing dates after January 1, 2017. We are currently evaluating the impact of adopting this new guidance on our consolidated financial statements, but the adoption is not expected to have a material impact on our financial statements. RESULTS OF OPERATIONS The following table presents line items from our consolidated statements of income as percentages of our total revenues for the periods indicated: Consolidated Statements of Income Data: Revenues: Licensing and related revenue Royalties Total revenues 2015 2016 2017 54.0% 46.0% 100.0% 43.9% 56.1% 100.0% 49.0% 51.0% 100.0% 38 Cost of revenues Gross profit Operating expenses: Research and development, net Sales and marketing General and administrative Amortization of intangible assets Total operating expenses Operating income Financial income, net Income before taxes on income Income taxes Net income Discussion and Analysis 2015 9.1% 90.9% 2016 8.4% 91.6% 2017 7.9% 92.1% 47.2% 17.1% 13.8% 2.2% 80.3% 10.6% 1.8% 12.4% 1.9% 10.5% 42.4% 15.9% 11.8% 1.7% 71.8% 19.8% 2.8% 22.6% 4.6% 18.0% 46.2% 14.4% 12.0% 1.4% 74.0% 18.1% 3.5% 21.6% 2.1% 19.5% Below we provide information on the significant line items in our consolidated statements of income 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 Total revenues (in millions) Change year-on-year 2015 $ 59.5 — 2016 $ 72.7 22.1% 20.4% 2017 $ 87.5 We derive a significant amount of revenues from a limited number of customers. Sales to Spreadtrum represented 23%, 27% and 31% of our total revenues for 2017, 2016 and 2015, respectively. 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, two royalty paying customers each represented 10% or more of our total royalty revenues for 2017, and collectively represented 70% of our total royalty revenues for 2017; two royalty paying customers each represented 10% or more of our total royalty revenues for 2016, and collectively represented 80% of our total royalty revenues for 2016; and two royalty paying customers each represented 10% or more of our total royalty revenues for 2015, and collectively represented 72% of our total royalty revenues for 2015. 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. The following table sets forth the products and services as percentages of our total revenues in each of the periods set forth below: DSP products (DSP cores and platforms): Baseband for handset and other devices Other non-baseband (audio, imaging and vision) Connectivity products (Bluetooth, WiFi and SATA/SAS) 68% 14% 18% 69% 15% 16% 64% 22% 14% Year ended December 31, 2017 2016 2015 We expect to continue to generate a significant portion of our revenues for 2018 from the above products and services. 39 Licensing and related revenue Licensing and related revenue (in millions) Change year-on-year 2015 $ 32.1 — 2016 $ 31.9 2017 $ 42.9 (0.8)% 34.6% The increase in licensing and related revenues from 2016 to 2017 principally reflected strong demand throughout the year for our products, in particular vision, deep neural networks, 5G base stations, backhaul and cellular IoT, offset by lower handset baseband licensing deals. The slight decrease in licensing and related revenues from 2015 to 2016 is explained by lower revenues from the handset baseband markets, partially offset by positive licensing demand and contribution for our connectivity IPs, in particular Bluetooth and our vision-related products. Our higher licensing and related revenue in 2017 and recent years reflect organic growth and investments in our research and development efforts that have strengthened our successful diversification strategy to develop and license products outside our traditional handset baseband markets. We also further strengthened our technology leadership in a number of key growth areas with the introduction of new products, among which are: CEVA-XC12, the most advanced DSP for infrastructure and networking applications; Dragonfly, a complete end-to-end solution for narrowband IoT; NeuPro, the first self-contained processor architecture for AI at the edge; ClearVox, a complete front-end voice processing software suite for voice-enabled devices and AI assistants, and Bluetooth 5 dual mode, the key enabling technology for the proliferation of wireless headsets, hearables and earbuds. In 2017, we concluded 45 licensing agreements (43 of which were for non-handset baseband and 16 were with first-time customers), compared to 49 and 47 in 2016 and 2015, respectively. Our technologies are now designed in by leading semiconductor companies and OEMs in their base stations, smartphone application processors, imaging chips, drones, surveillance systems, audio chips, as well as automotive, smart grid, Wi-Fi, satellite communication, connectivity, GPS devices and connectivity for Internet-of-Things. Licensing and related revenue accounted for 49.0% of our total revenues for 2017, compared with 43.9% and 54.0% of our total revenues for 2016 and 2015, respectively. Royalty Revenues Royalty revenues (in millions) Change year-on-year 2015 $ 27.4 — 2016 $ 40.8 49.0% 2017 $ 44.6 9.4% We generate royalty revenues from our customers who ship units of chips incorporating our technologies. Until the end of 2017, our royalties were invoiced and recognized on a quarterly basis in arrears as we receive quarterly shipment reports from our licensees. The royalty rate is based either on a certain percent of the chipset price or a fixed amount per chipset based on volume discounts. 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 36%, 35% and 30% of the worldwide baseband volume in 2017, 2016 and 2015, respectively, and accounted for approximately 82%, 91% and 88% of our total royalty revenues for 2017, 2016 and 2015, respectively. The increase in royalty revenues from 2016 to 2017 reflects higher non-handset baseband licensing revenues in recent years that contributed to higher-non handset baseband royalties in 2017, mainly from a new base station royalty payer, Bluetooth market expansion and vision based products, slightly off-set by lower handset baseband royalties due to softness at low tier smartphone shipments. The increase in royalty revenues from 2015 to 2016 mainly reflected an exceptional royalty revenue growth from CEVA-powered smartphones in general and LTE shipments in particular. The five largest royalty-paying customers accounted for 88% of our total royalty revenues for 2017, compared to 92% of our total royalty revenues for 2016 and 87% of our total royalty revenues for 2015. 40 Our customers reported sales of 1,156 million chipsets incorporating our technologies in 2017, compared to 1,076 million in 2016 and 917 million in 2015. The increase in units shipped in 2017 as compared to 2016 was attributable to a significant increase in Bluetooth shipments and first time ramp up volumes from our vision customers. The increase in units shipped in 2016 as compared to 2015 was attributable to a significant increase in smartphone baseband chip shipments, including LTE baseband chips (which also bear higher average selling prices than feature phone baseband products), partially offset by lower feature phone baseband chip shipments. Geographic Revenue Analysis United States Europe, Middle East (EME) Asia Pacific (APAC) (1) (2) (1) China (2) S. Korea *) Less than 10% 2015 2016 (in millions, except percentages) $ 9.7 16.4% $ 9.2 12.6% $ 7.2 8.2% $ 7.1 11.9% $ 10.9 15.0% $ 11.0 12.6% $ 42.7 71.7% $ 52.6 72.4% $ 69.3 79.2% 2017 $ 30.0 50.4% $ 30.0 41.3% $ 41.1 46.9% $ 6.2 10.4% $15.5 21.4% $17.8 20.4% Due to the nature of our license agreements and the associated potential large individual contract amounts, the geographic spilt of revenues both in absolute dollars and percentage terms generally varies from period to period. The decrease in revenues in absolute dollars and percentage terms in the United States from 2016 to 2017 reflected lower licensing and royalty revenues mainly due to less design starts and licensing activities, and a continued design-out of two of our handset baseband customers. The decrease in revenues in absolute dollars and percentage terms in the United States from 2015 to 2016 reflected lower licensing and royalty revenues, mainly due to less design starts and production ramp ups. The slight increase in revenues in absolute dollars and the decrease in percentage in the EME region from 2016 to 2017 primarily reflected lower licensing revenues for base station applications off-set by higher royalty revenues, mainly from handset baseband products. The increase in revenues in absolute dollars and percentage in the EME region from 2015 to 2016 primarily reflected higher licensing activities for base station applications and connectivity products, as well higher royalty revenues. The increase in revenues in absolute dollars in the APAC region from 2016 to 2017 primarily reflected higher licensing activities associated with many of our newer non-handset baseband customers and technologies for base stations and vision, as well as higher royalties, mainly from a first time base station customer that ramped up production in 2017. The increase in revenues in absolute dollars and percentage terms in the APAC region from 2015 to 2016 primarily reflected higher royalty revenues from production ramp up and market share gains of our customers. Cost of Revenues Cost of revenues (in millions) Change year-on-year 2015 $ 5.4 — 2016 $ 6.1 12.2% 14.2% 2017 $ 7.0 Cost of revenues accounted for 7.9% of our total revenues for 2017, compared to 8.4% of our total revenues for 2016 and 9.1% of our total revenues for 2015. The absolute dollar increase in cost of revenues for 2017 as compared to 41 2016 principally reflected higher salary and related costs, higher third party IP costs (associated with the NB-IoT product line), higher payments to the Israeli Innovation Authority of the Ministry of Economy and Industry in Israel (the “IIA”) and higher non-cash equity-based compensation expenses, partially offset by lower customization work for our licensees. The absolute dollar increase in cost of revenues for 2016 as compared to 2015 principally reflected higher customization work for our licensees. Cost of revenues includes labor-related costs and, where applicable, costs related to overhead, subcontractors, materials, travel, royalty expenses payments to the IIA and non-cash equity-based compensation expenses. Non-cash equity- based compensation expenses included in cost of revenues for the years 2017, 2016 and 2015 were $459,000, $246,000 and $155,000, 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. Operating Expenses Research and development, net Sales and marketing General and administration Amortization of intangible assets Total operating expenses Change year-on-year 2015 $ 28.1 $ 10.2 $ 8.2 $ 1.3 $ 47.8 — 2016 (in millions) $ 30.8 $ 11.5 $ 8.6 $ 1.2 $ 52.1 9.2% 2017 $ 40.4 $ 12.6 $ 10.5 $ 1.2 $ 64.7 24.0% The increase in total operating expenses for 2017 as compared to 2016 principally reflected lower research grants received from the IIA, higher non-cash equity-based compensation expenses and higher salary and related costs, mainly due to higher headcount associated with accelerated strategic research and development programs and collaborations with our customers to expedite their production ramps. The increase in total operating expenses for 2016 as compared to 2015 principally reflected higher salary and related costs mainly due to higher headcount, higher project-related expenses and higher non-cash equity-based compensation expenses, partially offset by higher research grants received from the IIA. Research and Development Expenses, Net Research and development expenses, net (in millions) Change year-on-year 2015 $ 28.1 — 2016 $ 30.8 2017 $ 40.4 9.7% 31.0% The net increase in research and development expenses for 2017 as compared to 2016 principally reflected higher salary and related costs, mainly due to higher headcount associated with accelerated strategic research and development programs and collaborations with our customers to expedite their production ramp-ups, lower research grants received from the IIA and higher non-cash equity-based compensation expenses associated with our employee retention efforts. The net increase in research and development expenses for 2016 as compared to 2015 principally reflected higher salary and related costs mainly due to higher headcount, higher project-related expenses and higher non-cash equity-based compensation expenses, partially offset by higher research grants received from the IIA. The average number of research and development personnel in 2017 was 217, compared to 194 in 2016 and 182 in 2015. The number of research and development personnel was 228 at December 31, 2017 as compared to 199 in 2016 and 184 in 2015. We anticipate that our research and developments costs will continue to increase in 2018 as compared to prior years, partially due to accelerated strategic research and development programs for artificial intelligence processors and further collaboration with our customers to expedite their production ramp-ups, as well as from higher equity-based compensation expenses and higher expenses associated with foreign currency exchange effects due to the devaluation mainly of the USD as compared to the NIS and Euros. 42 Research and development expenses, net of related government grants and French research tax benefits applicable to Crédit Impôt Recherche (“CIR”), were 46.2% of our total revenues for 2017, as compared with 42.4% for 2016 and 47.2% for 2015. We recorded research grants under funding programs of $4,417,000 in 2017, compared with $6,410,000 in 2016 and $4,997,000 in 2015. We recorded CIR benefits of $1,555,000, $1,485,000 and $1,414,000 for 2017, 2016 and 2015, 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 2017, 2016 and 2015 were $3,839,000, $2,860,000 and $1,838,000, respectively. Research and development expenses are net of related government research grants 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 Sales and marketing expenses (in millions) Change year-on-year 2015 $ 10.2 — 2016 $ 11.5 13.5% 2017 $ 12.6 8.9% The increase in sales and marketing expenses for 2017 as compared to 2016 principally reflected higher salary and related costs and higher non-cash equity-based compensation expenses. The increase in sales and marketing expenses for 2016 as compared to 2015 principally reflected higher salary and related costs, higher commission costs, higher travel costs and higher non-cash equity-based compensation expenses. Sales and marketing expenses as a percentage of our total revenues were 14.4% for 2017, as compared with 15.9% for 2016 and 17.1% for 2015. The total number of sales and marketing personnel was 36 in 2017, as compared with 35 in 2016 and 34 in 2015. 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 2017, 2016 and 2015 were $1,428,000, $922,000 and $568,000, respectively. General and Administrative Expenses General and administrative expenses (in millions) Change year-on-year 2015 2017 2016 $ 8.2 $ 8.6 $ 10.5 — 4.7% 22.4% The increase in general and administrative expenses for 2017 as compared to 2016 principally reflected higher professional service fees and higher non-cash equity-based compensation expenses. The increase in general and administrative expenses for 2016 as compared to 2015 principally reflected higher non-cash equity-based compensation expenses, partially offset by lower professional services costs. General and administrative expenses as a percentage of our total revenues were 12.0% for 2017, as compared with 11.8% for 2016 and 13.8% for 2015. The total number of general and administrative personnel was 26 in 2017, as compared with 23 in 2016 and 23 in 2015. 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 and non-cash equity-based compensation expenses. Non-cash equity-based compensation expenses included in general and administrative expenses for the years 2017, 2016 and 2015 were $2,967,000, $2,208,000 and $1,454,000, respectively. 43 Amortization of Intangible Assets Our amortization charges were $1.2 million, $1.2 million and $1.3 million for 2017, 2016 and 2015, respectively. The charges were incurred in connection with the amortization of intangible assets associated with the acquisition of RivieraWaves in July 2014. As of December 31, 2017, the net amount of intangible assets was $1.7 million. Financial Income, net Financial income, net of which: Interest income and gains and losses from marketable securities, net Foreign exchange loss Accretion of Contingent Consideration 2015 $1.07 $1.66 $(0.49) $(0.10) 2016 (in millions) $2.04 $2.23 $(0.19) — 2017 $3.03 $3.05 $(0.02) — 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, foreign exchange movements and changes in fair value related to contingent consideration as part of the acquisition of RivieraWaves. The increase in interest income and gains and losses from marketable securities, net, for both 2017 as compared to 2016 and 2016 as compared to 2015 reflected higher combined cash, bank deposits and marketable securities balances held and higher 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. This has resulted in a foreign exchange loss of $0.02 million, $0.19 million and $0.49 million for 2017, 2016 and 2015, respectively. Provision for Income Taxes During the years 2017, 2016 and 2015, we recorded tax expenses of $1.9 million, $3.3 million and $1.1 million, respectively. The decrease in provision for income taxes in 2017 as compared to 2016 principally reflected a tax benefit of $1.8 million due to the release of a tax provision as a result of the completion of a tax audit in a certain foreign tax jurisdiction, partially offset by higher income before taxes on income and a one-time recording of a deferred tax asset due to a change in the estimation for taxable income for future years. The increase in provision for income taxes in 2016 as compared to 2015 principally reflected: (1) higher income before taxes on income; (2) tax expenses relating to an uncertain tax position for prior years; and (3) a one-time write off of a deferred tax liabilities in 2015 related to the RivieraWaves acquisition. 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. Currently, our Israeli and Irish subsidiaries are taxed at rates substantially lower than U.S. tax rates. 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 French subsidiary qualified for a 33.33% tax rate on its profits. Our Israeli subsidiary is entitled to various tax benefits by virtue of the “Approved Enterprise” and/or “Benefited Enterprise” status granted to its eight investment programs, as defined by the Israeli Investment Law. In accordance with the Investment Law, our Israeli subsidiary’s first seven investment programs were subject to corporate tax rate of 24% in 2017, and our Israeli subsidiary’s eighth investment programs was subject to corporate tax rate of 10% in 2017. However, our Israeli subsidiary is eligible for the erosion of tax basis with respect to its first seven investment programs, and this resulted in an increase in the taxable income attributable to the eighth investment program, which was subject to a reduced tax rate of 10% in 2017. The tax benefits under our Israeli subsidiary’s active investment programs are scheduled to gradually expire starting in 2020. 44 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 12 to the attached Notes to Consolidated Financial Statement for the year ended December 31, 2017. LIQUIDITY AND CAPITAL RESOURCES As of December 31, 2017, we had approximately $21.7 million in cash and cash equivalents, $34.4 million in short term bank deposits, $82.7 million in marketable securities, and $44.5 million in long term bank deposits, totaling $183.3 million, as compared to $156.5 million at December 31, 2016. The increase in 2017 as compared to 2016 principally reflected cash provided by operating activities and cash proceeds from exercise of stock-based awards, offset by the purchase of computers and platform tools, mainly for our research and development activities. Out of total cash, cash equivalents, bank deposits and marketable securities of $183.3 million at year end 2017, $138.7 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 2017, we invested $101.9 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 $77.3 million. During 2016, we invested $85.0 million of cash in bank deposits and marketable securities with maturities up to 59 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 $66.4 million. During 2015, we invested $83.1 million of cash in bank deposits and marketable securities with maturities up to 40 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 $75.6 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 operations. We did not recognize any other-than-temporarily-impaired charges on marketable securities in 2017, 2016 and 2015. For more information about our marketable securities, see Notes 1 and 2 to the attached Notes to Consolidated Financial Statement for the year ended December 31, 2017. 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 2017 was $24.5 million and consisted of net income of $17.0 million, adjustments for non-cash items of $13.1 million, and changes in operating assets and liabilities of $5.6 million. Adjustments for non-cash items primarily consisted of $3.3 million of depreciation and amortization of intangible assets, $8.7 million of equity-based compensation expenses and $1.2 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 $1.4 million, an increase in prepaid expenses and other current assets of $2.5 million, an increase in deferred tax, net of $1.4 million, a decrease in deferred revenues of $1.9 million and a decrease in income tax payable of $1.5 million, 45 partially offset by an increase in accrued expenses and other payables of $1.3 million and an increase in accrued payroll and related benefits of $1.8 million. Cash provided by operating activities in 2016 was $14.5 million and consisted of net income of $13.1 million, adjustments for non-cash items of $10.0 million, and changes in operating assets and liabilities of $8.6 million. Adjustments for non-cash items primarily consisted of $2.6 million of depreciation and amortization of intangible assets, $6.2 million of equity-based compensation expenses and $1.1 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 $11.0 million, an increase in prepaid expenses and other current assets of $0.6 million, and an increase in deferred tax, net, of $0.6 million, partially offset by an increase in deferred revenues of $3.5 million and an increase in income tax payable of $0.7 million. Cash provided by operating activities in 2015 was $19.4 million and consisted of net income of $6.3 million, adjustments for non-cash items of $7.8 million, and changes in operating assets and liabilities of $5.3 million. Adjustments for non-cash items primarily consisted of $2.4 million of depreciation and amortization of intangible assets, $4.0 million of equity-based compensation expenses, $1.1 million of amortization of premiums on available-for-sale marketable securities and $0.2 million of unrealized foreign exchange loss. The increase in cash from changes in operating assets and liabilities primarily consisted of a decrease in trade receivables of $4.3 million, an increase in deferred revenues of $1.1 million and an increase in accrued payroll and related benefits of $1.7 million, partially offset by an increase in deferred tax assets, net, of $1.2 million and an increase in accrued interest on bank deposits of $0.3 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 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 2017 was $28.8 million, as compared to net cash used in investing activities of $21.0 million in 2016 and net cash used in investing activities of $9.6 million in 2015. We had a cash outflow of $54.9 million with respect to investments in marketable securities and a cash inflow of $32.8 million with respect to maturity, and sale, of marketable securities during 2017. Included in the cash outflow during 2017 was net investment of $2.6 million in bank deposits. We had a cash outflow of $43.5 million with respect to investments in marketable securities and a cash inflow of $28.8 million with respect to maturity and sale of marketable securities during 2016. Included in the cash outflow during 2016 was net investment of $3.9 million in bank deposits. We had a cash outflow of $29.8 million with respect to investments in marketable securities and a cash inflow of $28.1 million with respect to maturity and sale of marketable securities during 2015. Included in the cash outflow during 2015 was net investment of $5.9 million in bank deposits. Capital equipment purchases of computer hardware and software used in engineering development, furniture and fixtures amounted to approximately $4.1 million in 2017, $2.4 million in 2016 and $2.2 million in 2015. We had a cash inflow of $0.1 million in 2015 from the sale of our investment in Antcor. Financing Activities Net cash provided by financing activities in 2017 was $7.5 million, as compared to net cash provided by financing activities of $6.2 million in 2016 and cash used in financing activities of $7.0 million in 2015. 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 five million shares in 2010, 2013 and 2014. In 2017, we did not repurchase shares of our common stock. In 2016, we repurchased 180,013 shares of common stock at an average purchase price of $18.98 per share for an aggregate purchase price of $3.4 million. In 2015, we repurchased 508,931 shares of common stock at an average purchase price of $19.80 per share for an aggregate purchase price of $10.1 million. As of December 31, 2017, 311,056 shares of common stock remained authorized for repurchase pursuant to our share repurchase program. 46 In 2017, 2016 and 2015, we received $7.5 million, $9.6 million and $6.7 million, respectively, from the exercise of stock-based awards. In 2015, we paid $3.7 million of the Contingent Consideration in connection with our acquisition of RivieraWaves. In 2015, we classified $0.1 million of excess tax benefit from equity-based compensation expenses as financing cash flows. We believe that our cash and cash equivalent, short-term bank deposits and marketable securities, along with cash from operations, will provide sufficient capital to fund our operations for at least the next 12 months. We cannot provide assurance, however, that the underlying assumed levels of revenues and expenses will prove to be accurate. In addition, as part of our business strategy, we occasionally evaluate potential acquisitions of businesses, products and technologies and minority equity investments. Accordingly, a portion of our available cash may be used at any time for the acquisition of complementary products or businesses or minority equity investments. Such potential transactions may require substantial capital resources, which may require us to seek additional debt or equity financing. We cannot assure you that we will be able to successfully identify suitable acquisition or investment candidates, complete acquisitions or investments, integrate acquired businesses into our current operations, or expand into new markets. Furthermore, we cannot provide assurance that additional financing will be available to us in any required time frame and on commercially reasonable terms, if at all. See “Risk Factors—We may seek to expand our business in ways that could result in diversion of resources and extra expenses.” for more detailed information. Contractual Obligations The table below presents the principal categories of our contractual obligations as of December 31, 2017: Operating Lease Obligations – Leasehold properties Purchase Obligations – design tools Other purchase Obligations Total 2,074 1,226 808 4,491 3,168 1,323 2,237 2,237 — 8,802 6,631 2,131 Payments Due by Period ($ in thousands) Less than 1 year Total 1-3 years 3-5 years More than 5 years — — — — 40 — — 40 Operating leasehold obligations principally relate to our offices in Israel, Ireland, 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, 2017, our income tax payable, net of withholding tax credits, included $2,224,000 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, 2017, the amount of accrued severance pay was $9,347,000. 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, $437,000 is unfunded. Off-Balance Sheet Arrangements We do not have any off-balance sheet arrangements, as such term is defined in recently enacted rules by the Securities and Exchange Commission, that have or are reasonably likely to have a current or future effect on our financial 47 condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 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. This has resulted in a foreign exchange loss of $0.02 million, $0.19 million and $0.49 million for 2017, 2016 and 2015, respectively. 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 2017, 2016 and 2015, we recorded accumulated other comprehensive loss of $5,000, accumulated other comprehensive loss of $3,000 and accumulated other comprehensive gain of $65,000, respectively, from our forward and option contracts, net of taxes, with respect to anticipated payroll expenses for our non-U.S. employees. As of December 31, 2017, we had no gain from our forward and option contracts. We recognized a net gain of $0.19 million, $0.16 million and $0.10 million for 2017, 2016 and 2015, respectively, 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. Accordingly, as of December 31, 2017, we believe the losses associated with our investments are temporary and no impairment loss was recognized in 2017. However, we can provide no assurance that we will recover present declines in the market value of our investments. Interest income and gains and losses from marketable securities, net, were $3.05 million in 2017, $2.23 million in 2016 and $1.66 million in 2015. The increase in interest income and gains and losses from marketable securities, net, for both 2017 as compared to 2016 and 2016 as compared to 2015 reflected higher combined cash, bank deposits and marketable securities balances held and higher yields. 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 48 had, and we do not currently anticipate such fluctuations will have, a material effect on our financial position on an annual or quarterly basis. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See the Index to Financial Statements and Supplementary Data on page F-1. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not Applicable. ITEM 9A. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures. As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2017. 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. Management’s Annual Report on Internal Control Over Financial Reporting. CEVA, Inc.’s management is responsible for establishing and maintaining adequate internal control over the company’s financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. CEVA, Inc.’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. There are inherent limitations in the effectiveness of any internal control, including the possibility of human error and the circumvention or overriding of controls. Accordingly, even effective internal controls can provide only reasonable assurances with respect to financial statement preparation. Further because of changes in conditions, the effectiveness of internal controls may vary over time such that the degree of compliance with the policies or procedures may deteriorate. Management assessed the effectiveness of CEVA, Inc.’s internal control over financial reporting as of December 31, 2017. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework) (COSO) in Internal Control-Integrated Framework. Based on its assessment using those criteria, management believes that CEVA, Inc.’s internal control over financial reporting was effective as of December 31, 2017. CEVA, Inc.’s independent registered public accountants audited the financial statements included in this Annual Report on Form 10-K and have issued a report concurring with management’s assessment of the company’s internal control over financial reporting, which appears in Item 8 of this Annual Report. ITEM 9B. OTHER INFORMATION None. 49 PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE The information regarding our directors required by this item is incorporated herein by reference to the 2018 Proxy Statement. Information regarding the members of the Audit Committee, our code of business conduct and ethics, the identification of the Audit Committee Financial Expert, stockholder nominations of directors and compliance with Section 16(a) of the Securities Exchange Act of 1934 is also incorporated herein by reference to the 2018 Proxy Statement. The information regarding our executive officers required by this item is contained in Part I of this annual report. ITEM 11. EXECUTIVE COMPENSATION The information required by this item is incorporated herein by reference to the 2018 Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCK HOLDER MATTERS The information required by this item is incorporated herein by reference to the 2018 Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE The information required by this item is incorporated herein by reference to the 2018 Proxy Statement. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The information required by this item is incorporated herein by reference to the 2018 Proxy Statement. 50 ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) The following documents are filed as part of or are included in this Annual Report on Form 10-K: PART IV 1. Financial Statements: • Consolidated Balance Sheets as of December 31, 2017 and 2016. • Consolidated Statements of Income for the Years Ended December 31, 2017, 2016 and 2015. • Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2017, 2016 and 2015. • Statements of Changes in Stockholders’ Equity for the Years Ended December 31, 2017, 2016 and 2015. • Consolidated Statements of Cash Flows for the Years Ended December 31, 2017, 2016 and 2015. • Notes to the Consolidated Financial Statements. 2. Financial Statement Schedules: • Schedule II: Valuation and Qualifying Accounts. Other financial statement schedules have been omitted since they are either not required or the information is otherwise included. 3. Exhibits: The exhibits filed as part of this Annual Report on Form 10-K are listed on the exhibit index immediately preceding such exhibits, which exhibit index is incorporated herein by reference. Some of these documents have previously been filed as exhibits with the Securities and Exchange Commission and are being incorporated herein by reference to such earlier filings. CEVA’s file number under the Securities Exchange Act of 1934 is 000-49842. 51 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA CEVA, INC. CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2017 Reports of Independent Registered Public Accounting Firm Consolidated Balance Sheets Consolidated Statements of Income Consolidated Statements of Comprehensive Income Statements of Changes in Stockholders’ Equity Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements Page F-2 F-4 F-5 F-6 F-7 F-9 F-11 sf-3868279 F-1 CEVA, INC. REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and the Board of Directors of CEVA Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of CEVA Inc. (the “Company”) as of December 31, 2017 and 2016, the related consolidated statements of income, comprehensive income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2017, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the consolidated financial position of the Company at December 31, 2017 and 2016, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 1, 2018 expressed an unqualified opinion thereon. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/KOST FORER GABBAY & KASIERER A Member of Ernst & Young Global Tel Aviv, Israel March 1, 2018 We have served as the Company's auditor since 1999. sf-3868279 F-2 CEVA, INC. REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Stockholders of CEVA, Inc. Opinion on Internal Control over Financial Reporting We have audited CEVA, Inc.`s (the “Company”) internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2017 and 2016, and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 2017 and the related notes, and our report dated March 1, 2018 expressed an unqualified opinion thereon. Basis for Opinion The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures, as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/KOST FORER GABBAY & KASIERER A Member of Ernst & Young Global Tel Aviv, Israel March 1, 2018 sf-3868279 F-3 CEVA, INC. CONSOLIDATED BALANCE SHEETS (U.S. dollars in thousands, except share and per share data) ASSETS Current assets: Cash and cash equivalents Short-term bank deposits Marketable securities (Note 2) Trade receivables Prepaid expenses and other current assets Total current assets Long-term assets: Bank deposits Severance pay fund Deferred tax assets (Note 12) Property and equipment, net (Note 4) Goodwill Intangible assets, net (Note 5) Investments in other company Other long-term assets Total long-term assets Total assets LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Trade payables Deferred revenues Accrued expenses and other payables (Note 6) Accrued payroll and related benefits Total current liabilities Long-term liabilities: Accrued severance pay Total long-term liabilities Stockholders’ equity (Note 7): Preferred stock: December 31, 2016 2017 $ 18,401 $ 21,739 46,247 61,868 15,044 3,152 144,712 29,977 7,941 2,252 4,805 46,612 2,978 1,806 1,412 97,783 $ 242,495 34,432 82,664 16,494 3,747 159,076 44,518 8,910 3,643 6,926 46,612 1,742 1,806 3,579 117,736 $ 276,812 $ 571 6,258 4,015 11,751 22,595 $ 392 4,399 3,927 14,077 22,795 8,349 8,349 9,347 9,347 $0.001 par value: 5,000,000 shares authorized; none issued and outstanding — — Common stock: $0.001 par value: 60,000,000 shares authorized; 23,595,160 shares issued at December 31, 2016 and 2017; 21,273,500 and 22,064,007 shares outstanding at December 31, 2016 and 2017, respectively Additional paid in-capital Treasury stock at cost (2,321,660 and 1,531,153 shares of common stock at December 31, 2016 and 2017, respectively) Accumulated other comprehensive loss (Note 9) Retained earnings Total stockholders’ equity Total liabilities and stockholders’ equity 21 212,103 22 217,417 (39,507) (497) 39,431 211,551 $ 242,495 (26,056) (586) 53,873 244,670 $ 276,812 The accompanying notes are an integral part of the consolidated financial statements. sf-3868279 F-4 CEVA, INC. CONSOLIDATED STATEMENTS OF INCOME (U.S. dollars in thousands, except per share data) Year Ended December 31, 2016 2017 2015 Revenues: Licensing and related revenue Royalties Total revenues Cost of revenues Gross profit Operating expenses: Research and development, net Sales and marketing General and administrative Amortization of intangible assets (Note 5) Total operating expenses Operating income Financial income, net (Note 11) Income before taxes on income Income taxes (Note 12) Net income Basic net income per share Diluted net income per share Weighted average shares used to compute net income per share (in thousands): Basic Diluted $ 32,135 $ 31,874 40,779 72,653 6,086 66,567 27,364 59,499 5,424 54,075 $ 42,899 44,608 87,507 6,953 80,554 28,113 30,838 10,168 11,540 8,184 8,567 1,298 1,236 47,763 52,181 6,312 14,386 1,069 2,039 7,381 16,425 3,325 1,114 6,267 $ 13,100 40,385 12,572 10,488 1,236 64,681 15,873 3,026 18,899 1,871 $ 17,028 0.31 $ 0.30 $ 0.63 0.61 $ $ 0.78 0.75 20,480 20,989 20,850 21,565 21,771 22,561 $ $ $ The accompanying notes are an integral part of the consolidated financial statements. sf-3868279 F-5 CEVA, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (U.S. dollars in thousands) Net income: Other comprehensive loss before tax: Available-for-sale securities: Changes in unrealized losses Reclassification adjustments for losses included in net income Net change Cash flow hedges: Changes in unrealized gains Reclassification adjustments for gains included in net income Net change Other comprehensive loss before tax Income tax benefit related to components of other comprehensive loss Other comprehensive income (loss), net of taxes Comprehensive income Year Ended December 31, 2016 2017 2015 $ 6,267 $ 13,100 $ 17,028 (151) 78 (73) 177 (104) 73 — (17) 17 (95) 9 (86) (99) — (99) 158 (161) (3) (89) (11) (78) 183 (189) (6) (105) (16) (89) $ 16,939 $ 6,284 $ 13,022 The accompanying notes are an integral part of the consolidated financial statements. sf-3868279 F-6 CEVA, INC. STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (U.S. dollars in thousands, except share data) Balance as of January 1, 2015 Net income Other comprehensive income Equity-based compensation Tax benefit related to exercise of stock-based awards Purchase of Treasury stock Issuance of Treasury stock upon exercise of stock-based awards Balance as of December 31, 2015 Net income Other comprehensive loss Equity-based compensation Purchase of Treasury stock Issuance of Treasury stock upon exercise of stock-based awards Balance as of December 31, 2016 Net income Other comprehensive loss Equity-based compensation Issuance of treasury stock upon exercise of stock-based awards Balance as of December 31, 2017 Common Stock Number of shares outstanding Amount 20,252,490 — — — $ Additional paid-in capital Treasury stock Accumulated other comprehensive income (loss) 20 $ 209,426 — — — — — 4,015 $ (54,708) $ — — — Retained earnings (436) $ 24,747 6,267 — 17 — — — Total stockholders’ equity $ 179,049 6,267 17 4,015 — (508,931) 786,374 20,529,933 — — — (180,013) 923,580 21,273,500 — — — $ $ — — 112 — — (10,078) — — — — 112 (10,078) (4,809) $ 1 21 $ 208,744 — — — — (1) — 6,236 — (2,877) $ 1 21 $ 212,103 — — — — — 8,693 12,988 (51,798) $ — — — (3,416) 15,707 (39,507) $ — — — — (1,467) (419) $ 29,547 13,100 — — (78) — — — — 6,713 $ 186,095 13,100 (78) 6,236 (3,417) (3,216) — (497) $ 39,431 17,028 — (89) — — — 9,615 $ 211,551 17,028 (89) 8,693 790,507 22,064,007 $ 1 22 $ 217,417 (3,379) $ 13,451 (26,056) $ — (2,586) (586) (*) $ 53,873 7,487 $ 244,670 (*) Accumulated other comprehensive loss for the year ended December 31, 2017 is all from available-for-sale securities, net of taxes of $92. The accompanying notes are an integral part of the consolidated financial statements. sf-3868279 F-7 CEVA, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (U.S. dollars in thousands) Year ended December 31, 2016 2015 2017 Cash flows from operating activities: Net income Adjustments required to reconcile net income to net cash provided by operating $ 6,267 $ 13,100 $ 17,028 activities: Depreciation Amortization of intangible assets Equity-based compensation Realized loss, net on sale of available-for-sale marketable securities Amortization of premiums on available-for-sale marketable securities Unrealized foreign exchange (gain) loss, net Changes in operating assets and liabilities: Trade receivables Prepaid expenses and other assets Accrued interest on bank deposits Deferred tax, net Trade payables Deferred revenues Accrued expenses and other payables Accretion of contingent consideration Accrued payroll and related benefits Income taxes payable Excess tax benefit from equity-based compensation Accrued severance pay, net Net cash provided by operating activities Cash flows from investing activities: Purchase of property and equipment Investment in bank deposits Proceeds from bank deposits Investment in available-for-sale marketable securities Proceeds from maturity of available-for-sale marketable securities Proceeds from sale of available-for-sale marketable securities Proceeds from realization of investment in other company Net cash used in investing activities Cash flows from financing activities: Payment of contingent consideration Purchase of Treasury Stock Proceeds from exercise of stock-based awards Excess tax benefit from equity-based compensation Net cash provided by (used in) financing activities Effect of exchange rate changes on cash and cash equivalents Increase (decrease) in cash and cash equivalents Cash and cash equivalents at the beginning of the year Cash and cash equivalents at the end of the year 1,058 1,298 4,015 78 1,111 237 1,399 1,236 6,236 9 1,064 75 2,014 1,236 8,693 — 1,179 (42) 4,279 (10,966) (622) (136) (195) (318) (613) (1,213) (190) (161) 3,495 1,082 (277) (158) — 97 (94) 1,679 668 93 (112) — 134 184 (1,446) (2,478) 151 (1,375) (184) (1,859) 1,259 — 1,807 (1,493) — (21) 19,380 14,459 24,469 (2,184) (4,135) (53,328) (41,476) (47,027) 47,451 37,594 44,450 (2,387) (29,800) 4,392 23,713 111 (54,882) 9,296 23,512 — (9,645) (21,030) (28,786) (43,537) 8,022 20,754 — (3,700) (10,078) 6,713 112 (6,953) (39) 2,743 — — 7,487 — 7,487 168 3,338 16,166 18,909 18,401 $ 18,909 $ 18,401 $ 21,739 — (3,417) 9,615 — 6,198 (135) (508) The accompanying notes are an integral part of the consolidated financial statements. sf-3868279 F-8 CONSOLIDATED STATEMENTS OF CASH FLOWS—(Continued) CEVA, INC. (U.S. dollars in thousands) Year ended December 31, 2016 2015 2017 Supplemental information of cash-flows activities: Cash paid during the year for: Income and withholding taxes Property and equipment purchases incurred but unpaid at period end $ 2,185 $ 3,287 $ 5,203 — $ — $ 86 $ The accompanying notes are an integral part of the consolidated financial statements. sf-3868279 F-9 CEVA, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share data) NOTE 1: ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES Organization: CEVA, Inc. (“CEVA” or the “Company”) was incorporated in Delaware on November 22, 1999. The Company was formed through the combination of Parthus Technologies plc (“Parthus”) and the digital signal processor (DSP) cores licensing business and operations of DSP Group, Inc. in November 2002. The Company had no business or operations prior to the combination. CEVA licenses a family of signal processing platforms and Artificial Intelligence (AI) processors. These IPs include programmable DSP cores and application-specific platforms for advanced imaging, computer vision, deep learning, sound, voice and audio processing, as well as long range wireless technologies for LTE/5G baseband processing in IoT, handsets and infrastructure, short range wireless platforms for Wi-Fi and Bluetooth, and a new family of self-contained AI processor. CEVA’s technologies are licensed to leading semiconductor and original equipment manufacturer (OEM) companies in the form of intellectual property (IP). These companies design, manufacture, market and sell application- specific integrated circuits (“ASICs”) and application-specific standard products (“ASSPs”) based on CEVA’s technology to wireless, consumer electronics and automotive companies for incorporation into a wide variety of end products. Basis of presentation: The consolidated financial statements have been prepared according to U.S Generally Accepted Accounting Principles (“U.S. GAAP”). Use of estimates: The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates, judgments and assumptions. The Company’s management believes that the estimates, judgments and assumptions used are reasonable based upon information available at the time they are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the dates of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Financial statements in U.S. dollars: A majority of the revenues of the Company and its subsidiaries is generated in U.S. dollars (“dollars”). In addition, a portion of the Company and its subsidiaries’ costs are incurred in dollars. The Company’s management has determined that the dollar is the primary currency of the economic environment in which the Company and its subsidiaries principally operate. Thus, the functional and reporting currency of the Company and its subsidiaries is the dollar. Accordingly, monetary accounts maintained in currencies other than the dollar are remeasured into dollars in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) No. 830, “Foreign Currency Matters.” All transaction gains and losses from remeasurement of monetary balance sheet items are reflected in the consolidated statements of income as financial income or expenses, as appropriate, which is included in “financial income, net.” The foreign exchange losses arose principally on the EURO and the NIS monetary balance sheet items as a result of the currency fluctuations of the EURO and the NIS against the dollar. Principles of consolidation: The consolidated financial statements incorporate the financial statements of the Company and all of its subsidiaries. All significant inter-company balances and transactions have been eliminated on consolidation. sf-3868279 F-10 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (in thousands, except share data) CEVA, INC. Cash equivalents: Cash equivalents are short-term highly liquid investments that are readily convertible to cash with original maturities of three months or less from the date acquired. Short-term bank deposits: Short-term bank deposits are deposits with maturities of more than three months but less than one year from the balance sheet date. The deposits are presented at their cost, including accrued interest. The deposits bear interest annually at an average rate of 1.51%, 1.76% and 1.85% during 2015, 2016 and 2017, respectively. Marketable securities: Marketable securities consist mainly of corporate bonds. The Company determines the appropriate classification of marketable securities at the time of purchase and re-evaluates such designation at each balance sheet date. In accordance with FASB ASC No. 320 “Investments- Debt and Equity Securities,” the Company classifies marketable securities as available-for-sale. Available-for-sale securities are stated at fair value, with unrealized gains and losses reported in accumulated other comprehensive income (loss), a separate component of stockholders’ equity, net of taxes. Realized gains and losses on sales of marketable securities, as determined on a specific identification basis, are included in financial income, net. The amortized cost of marketable securities is adjusted for amortization of premium and accretion of discount to maturity, both of which, together with interest, are included in financial income, net. The Company has classified all marketable securities as short-term, even though the stated maturity date may be one year or more beyond the current balance sheet date, because it is probable that the Company will sell these securities prior to maturity to meet liquidity needs or as part of risk versus reward objectives. The Company recognizes an impairment charge when a decline in the fair value of its investments in debt securities below the cost basis of such securities is judged to be other-than-temporary. Factors considered in making such a determination include the duration and severity of the impairment, the reason for the decline in value and the potential recovery period. For securities that are deemed other-than-temporarily impaired (“OTTI”), the amount of impairment is recognized in the statement of income and is limited to the amount related to credit losses, while impairment related to other factors is recognized in other comprehensive income (loss). The Company did not recognize OTTI on its marketable securities in 2015, 2016 and 2017. Long-term bank deposits: Long-term bank deposits are deposits with maturities of more than one year as of the balance sheet date. The deposits presented at their cost, including accrued interest. The deposits bear interest annually at an average rate of 1.82%, 1.97% and 2.26% during 2015, 2016 and 2017, respectively. sf-3868279 F-11 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (in thousands, except share data) CEVA, INC. Property and equipment, net: Property and equipment are stated at cost, net of accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets, at the following annual rates: Computers, software and equipment Office furniture and equipment Leasehold improvements % 10-33 7-33 10-25 (the shorter of the expected lease term or useful economic life) The Company’s long-lived assets are reviewed for impairment in accordance with FASB ASC No. 360-10-35, “Impairment or Disposal of Long-Lived Assets,” whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of the carrying amount of an asset to be held and used is measured by a comparison of its carrying amount to the future undiscounted cash flows expected to be generated by such asset. If such asset is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of such asset exceeds its fair value. In determining the fair value of long-lived assets for purposes of measuring impairment, the Company's assumptions include those that market participants would consider in valuations of similar assets. An asset to be disposed is reported at the lower of its carrying amount or fair value less selling costs. No impairment was recorded in 2015, 2016 and 2017. Goodwill: Goodwill is carried at cost and is not amortized but rather is tested for impairment at least annually or between annual tests in certain circumstances. The Company conducts its annual test of impairment for goodwill on October 1st of each year. The Company operates in one operating segment and this segment comprises the only reporting unit. There is a two-phase process for impairment testing of goodwill. The first phase screens for potential impairment, while the second phase (if necessary) measures impairment. Goodwill impairment is deemed to exist if the net book value of a reporting unit exceeds its estimated fair value. In such case, the second phase is then performed, and the Company measures impairment by comparing the carrying amount of the reporting unit’s goodwill to the implied fair value of that goodwill. An impairment loss is recognized in an amount equal to the excess. For each of the three years in the period ended December 31, 2017, no impairment of goodwill has been identified. Intangible assets, net: Acquired intangible assets with definite lives are amortized over their estimated useful lives. The Company amortizes intangible assets on a straight-line basis with definite lives over periods ranging from one and a half to five and a half years. Intangible assets with definite lives are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of these assets is measured by comparison of their carrying amounts to future undiscounted cash flows the assets are expected to generate. If such assets are considered to be impaired, the impairment to be recognized equals the amount by which the carrying value of the assets exceeds its fair market value. The Company did not record any impairments during the years ended December 31, 2015, 2016 and 2017. sf-3868279 F-12 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (in thousands, except share data) CEVA, INC. Investments in other company: The Company’s investment in a private company, in which it holds minority equity interests, is presented at cost because the Company does not have significant influence over the underlying investee. The investment is reviewed periodically to determine if its value has been impaired and adjustments are recorded as necessary. During the years ended December 31, 2015, 2016 and 2017, no impairment loss was identified. Revenue recognition: The Company generates its revenues from (1) licensing intellectual property, which in certain circumstances is modified for customer-specific requirements, (2) royalty revenues, and (3) other revenues, which include revenues from support, training and sale of development systems. The Company accounts for its IP license revenues and related services in accordance with FASB ASC No. 985- 605, “Software Revenue Recognition.” Revenues are recognized when persuasive evidence of an arrangement exists and no further obligation exists, delivery has occurred, the license fee is fixed or determinable, and collection is reasonably assured. A license may be perpetual or time limited in its application. Revenue earned on licensing arrangements involving multiple elements are allocated to each element based on the “residual method” when vendor specific objective evidence (“VSOE”) of fair value exists for all undelivered elements and VSOE does not exist for one of the delivered elements. VSOE of fair value of the undelivered elements is determined based on the substantive renewal rate as stated in the agreement. Extended payment terms in a licensing arrangement may indicate that the license fees are not deemed to be fixed or determinable. If the fee is not fixed or determinable, revenue is recognized as payments become due from the customer unless collection is not considered reasonably assured, then revenue is recognized as payments are collected from the customer, provided all other revenue recognition criteria have been met. Revenues from license fees that involve significant customization of the Company’s IP to customer-specific specifications are recognized in accordance with the principles set out in FASB ASC No. 605-35-25, “Construction-Type and Production-Type Contracts Recognition ,” using contract accounting on a percentage of completion method. The amount of revenue recognized is based on the total license fees under the agreement and the percentage of completion achieved. The percentage of completion is measured by the actual time incurred to date on the project compared to the total estimated project requirements, which corresponds to the costs related to earned revenues. Provisions for estimated losses on uncompleted contracts are made during the period in which such losses are first determined, in the amount of the estimated loss on the entire contract. Revenues that are derived from the sale of a licensee’s products that incorporate the Company’s IP are classified as royalty revenues. Royalty revenues are recognized during the quarter in which the Company receives a report from the licensee detailing the shipment of products that incorporate the Company’s IP, which receipt is in the quarter following the licensee’s sale of such products to its customers. Royalties are calculated either as a percentage of the revenues received by the Company’s licensees on sales of products incorporating the Company’s IP or on a per unit basis, as specified in the agreements with the licensees. In addition to license fees, contracts with customers generally contain an agreement to provide for post contract support and training, which consists of telephone or e-mail support, correction of errors (bug fixing) and unspecified updates and upgrades. Fees for post contract support, which takes place after delivery to the customer, are specified in the contract and are generally mandatory for the first year. After the mandatory period, the customer may extend the support agreement on similar terms on an annual basis. The Company recognizes revenue for post contract support on a straight-line basis over the period for which technical support is contractually agreed to be provided to the licensee, typically 12 months. Revenues from training are recognized as the training is performed. sf-3868279 F-13 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (in thousands, except share data) CEVA, INC. Revenues from the sale of development systems are recognized when title to the product passes to the customer and all other revenue recognition criteria have been met. The Company usually does not provide rights of return. When rights of return are included in the license agreements, revenue is deferred until rights of return expire. Deferred revenues include unearned amounts received under license agreements, unearned technical support and amounts paid by customers not yet recognized as revenues. Cost of revenue: Cost of revenue includes the costs of products, services and royalty expense payments to the Israeli Innovation Authority of the Ministry of Economy and Industry in Israel (the “IIA“) (refer to Note 13c for further details). Cost of product revenue includes materials, subcontractors and the portion of development costs associated with product development arrangements. Cost of service revenue includes salary and related costs for personnel engaged in services, training and customer support, and travel, office expenses and other support costs. Income taxes: The Company recognizes income taxes under the liability method. It recognizes deferred income tax assets and liabilities for the expected future consequences of temporary differences between the financial reporting and tax bases of assets and liabilities. These differences are measured using the enacted statutory tax rates that are expected to apply to taxable income for the years in which differences are expected to reverse. The effect of a change in tax rates on deferred income taxes is recognized in the statements of income during the period that includes the enactment date. Valuation allowance is recorded to reduce the deferred tax assets to the net amount that the Company believes is more likely than not to be realized. The Company considers all available evidence, both positive and negative, including historical levels of income, expectations and risks associated with estimates of future taxable income and ongoing tax planning strategies, in assessing the need for a valuation allowance. The Company accounts for uncertain tax positions in accordance with ASC 740. ASC 740-10 contains a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position taken or expected to be taken in a tax return by determining if the weight of available evidence indicates that it is more likely than not that, on an evaluation of the technical merits, the tax position will be sustained on audit, including resolution of any related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount that is more than 50% (cumulative probability) likely to be realized upon ultimate settlement. The Company accrues interest and penalties related to unrecognized tax benefits under taxes on income. Research and development: Research and development costs are charged to the consolidated statements of income as incurred. Government grants and tax credits: Government grants received by the Company relating to categories of operating expenditures are credited to the consolidated statements of income during the period in which the expenditure to which they relate is charged. Royalty and non-royalty-bearing grants from the IIA for funding certain approved research and development projects are recognized at the time when the Company is entitled to such grants, on the basis of the related costs incurred, and included as a deduction from research and development expenses. The Company recorded grants in the amounts of $4,997, $6,410 and $4,417 for the years ended December 31, 2015, 2016 and 2017, respectively. The Company’s Israeli subsidiary is obligated to pay royalties amounting to 3%-3.5% of the sf-3868279 F-14 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (in thousands, except share data) CEVA, INC. sales of certain products the development of which received grants from the IIA in previous years. The obligation to pay these royalties is contingent on actual sales of the products. Grants received from the IIA may become repayable if certain criteria under the grants are not met. The French Research Tax Credit, Crédit d’Impôt Recherche (“CIR”), is a French tax incentive to stimulate research and development (“R&D”) which is relevant for the Company's French subsidiaries (RivieraWaves and CEVA France). Generally, the CIR offsets the income tax to be paid and the remaining portion (if any) can be refunded. The CIR is calculated based on the claimed volume of eligible R&D expenditures by the Company. As a result, the CIR is presented as a deduction to “Research and development expenses” in the consolidated statements of income. During the year ended December 31, 2015, 2016 and 2017, the Company recorded CIR benefits in the amount of $1,414, $1,485 and $1,555, respectively. Employee benefit plan: Certain of the Company’s employees are eligible to participate in a defined contribution pension plan (the “Plan”). Participants in the Plan may elect to defer a portion of their pre-tax earnings into the Plan, which is run by an independent party. The Company makes pension contributions at rates varying up to 10% of the participant’s pensionable salary. Contributions to the Plan are recorded as an expense in the consolidated statements of income. The Company’s U.S. operations maintain a retirement plan (the “U.S. Plan”) that qualifies as a deferred salary arrangement under Section 401(k) of the Internal Revenue Code. Participants in the U.S. Plan may elect to defer a portion of their pre-tax earnings, up to the Internal Revenue Service annual contribution limit. The Company matches 100% of each participant’s contributions up to a maximum of 6% of the participant’s base pay. Each participant may contribute up to 15% of base remuneration. Contributions to the U.S. Plan are recorded during the year contributed as an expense in the consolidated statements of income. Total contributions for the years ended December 31, 2015, 2016 and 2017 were $733, $1,020 and $988, respectively. Accrued severance pay: The liability of CEVA’s Israeli subsidiary for severance pay for employees hired prior to August 1, 2016 is calculated pursuant to Israeli severance pay law based on the most recent salary of each employee multiplied by the number of years of employment for that employee as of the balance sheet date. The Israeli subsidiary’s liability is fully provided for by monthly deposits with severance pay funds, insurance policies and an accrual. The deposited funds include profits and losses accumulated up to the balance sheet date. The deposited funds may be withdrawn only upon the fulfillment of the obligation pursuant to Israeli severance pay law or labor agreements. The value of these policies is recorded as an asset on the Company’s consolidated balance sheets. Effective August 1, 2016, the Israeli subsidiary’s agreements with new employees in Israel are under Section 14 of the Severance Pay Law, 1963. The Israeli subsidiary’s contributions for severance pay have extinguished its severance obligation. Upon contribution of the full amount based on the employee’s monthly salary for each year of service, no additional obligation exists regarding the matter of severance pay, and no additional payments is made by the Israeli subsidiary to the employee. Furthermore, the related obligation and amounts deposited on behalf of the employee for such obligation are not stated on the balance sheet, as the Israeli subsidiary is legally released from any obligation to employees once the required deposit amounts have been paid. Severance pay expenses, net of related income, for the years ended December 31, 2015, 2016 and 2017, were $1,285, $1,348 and $1,413, respectively. sf-3868279 F-15 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (in thousands, except share data) CEVA, INC. Equity-based compensation: The Company accounts for equity-based compensation in accordance with FASB ASC No. 718, “Stock Compensation” which requires the recognition of compensation expenses based on estimated fair values for all equity-based awards made to employees and non-employee directors. In March 2016, the FASB issued ASU 2016-09, “Compensation - Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting” (“ASU 2016-09”). ASU 2016-09 simplifies several aspects of the accounting for share-based payment transaction, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. For public companies, ASU 2016-09 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. The Company adopted ASU 2016-09 during the first quarter of 2017, at which time it changed its accounting policy to account for forfeitures as they occur. There was no material impact of the adoption of this standard on the Company’s financial statements. In addition, historically, excess tax benefits or deficiencies from the Company’s equity awards were recorded as additional paid-in capital in its consolidated balance sheets and were classified as a financing activity in its consolidated statements of cash flows. As a result of adoption, the Company prospectively records any excess tax benefits or deficiencies from its equity awards as part of its provision for income taxes in its consolidated statements of operations during the reporting periods during which equity vesting occurs. Excess tax benefits for share-based payments are presented as an operating activity in the statements of cash flows rather than financing activity. The Company elected to apply the cash flow classification requirements related to excess tax benefits prospectively in accordance with ASU 2016-09 and prior periods have not been adjusted. The Company estimates the fair value of options and stock appreciation right (“SAR”) awards on the date of grant using an option-pricing model. The value of the portion of an award that is ultimately expected to vest is recognized as an expense over the requisite service period in the Company’s consolidated statements of income. The Company recognizes compensation expenses for the value of its options and SARs, which have graded vesting based on the accelerated attribution method over the requisite service period of each of the awards. Prior to January 1, 2017, the Company recognized compensation expenses for the value of its options and SARs, net of estimated forfeitures. Estimated forfeitures were based on actual historical pre-vesting forfeitures and the rate was adjusted to reflect changes in facts and circumstances, if any. The Company recognizes compensation expenses for the value of its restricted stock unit (“RSU”) awards, based on the straight-line method over the requisite service period of each of the awards. The fair value of each RSU is the market value as determined by the closing price of the common stock on the day of grant. The Company uses the Monte-Carlo simulation model for options and SARs granted. The Monte-Carlo simulation model uses the assumptions noted below. Expected volatility was calculated based upon actual historical stock price movements over the most recent periods ending on the grant date, equal to the expected option and SAR term. The Company has historically not paid dividends and has no foreseeable plans to pay dividends. The risk-free interest rate is based on the yield from U.S. Treasury zero-coupon bonds with an equivalent term. The Monte-Carlo model also considers the suboptimal exercise multiple which is based on the average exercise behavior of the Company's employees over the past years, the contractual term of the options and SARs, and the probability of termination or retirement of the holder of the options and SARs in computing the value of the options and SARs. sf-3868279 F-16 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (in thousands, except share data) CEVA, INC. The fair value for the Company’s stock options and SARs (other than share issuances in connection with the employee stock purchase plan, as detailed below) granted to employees and non-employees directors was estimated using the following assumptions (neither options nor SARs were granted during 2017): Expected dividend yield Expected volatility Risk-free interest rate Expected forfeiture (employees) Expected forfeiture (executives) Contractual term of up to Suboptimal exercise multiple (employees) Suboptimal exercise multiple (executives) 2015 2016 (* 0% 0% 38%-49% 33%-49% 0.2%-2.4% 0.5%-2.4% 10% 5% 10 years 2.1 2.4 — 5% 10 years — 2.4 (* During 2016, the Company granted stock options only to its non-employee directors. The fair value for rights to purchase shares of common stock under the Company’s employee stock purchase plan was estimated on the date of grant using the following assumptions: Expected dividend yield Expected volatility Risk-free interest rate Expected forfeiture Contractual term of up to 2015 2016 2017 0% 0% 29%-57% 35%-36% 0.1%-0.3% 0.3%-0.5% 0% 24 months 0% 24 months 0% 28%-46% 0.5%-1.1% 0% 24 months During the years ended December 31, 2015, 2016 and 2017, the Company recognized equity-based compensation expense related to stock options, SARs, RSUs and employee stock purchase plan as follows: Year ended December 31, 2016 2017 2015 Cost of revenue Research and development, net Sales and marketing General and administrative Total equity-based compensation expense $ 155 1,838 568 1,454 $ 4,015 246 $ 2,860 922 2,208 $ 6,236 459 $ 3,839 1,428 2,967 $ 8,693 As of December 31, 2017, there was $620 of unrecognized compensation expense related to unvested stock options, SARs and employee stock purchase plan . This amount is expected to be recognized over a weighted-average period of 1.3 years. As of December 31, 2017, there was $10,894 of unrecognized compensation expense related to unvested RSUs. This amount is expected to be recognized over a weighted-average period of 1.4 years. sf-3868279 F-17 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (in thousands, except share data) CEVA, INC. Fair value of financial instruments: The carrying amount of cash, cash equivalents, short term bank deposits, trade receivables, other accounts receivable, trade payables and other accounts payable approximates fair value due to the short-term maturities of these instruments. Marketable securities and derivative instruments are carried at fair value. See Note 3 for more information. Comprehensive income (loss): The Company accounts for comprehensive income (loss) in accordance with FASB ASC No. 220, “Comprehensive Income.” This statement establishes standards for the reporting and display of comprehensive income (loss) and its components in a full set of general purpose financial statements. Comprehensive income (loss) generally represents all changes in stockholders’ equity during the period except those resulting from investments by, or distributions to, stockholders. The Company determined that its items of other comprehensive income (loss) relate to unrealized gains and losses, net of tax, on hedging derivative instruments and marketable securities. Concentration of credit risk: Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash, cash equivalents, bank deposits, marketable securities, foreign exchange contracts and trade receivables. The Company invests its surplus cash in cash deposits and marketable securities in financial institutions and has established guidelines relating to diversification and maturities to maintain safety and liquidity of the investments. The majority of the Company’s cash and cash equivalents are invested in high grade certificates of deposits with major U.S., European and Israeli banks. Generally, cash and cash equivalents and bank deposits may be redeemed on demand and therefore minimal credit risk exists with respect to them. Nonetheless, deposits with these banks exceed the Federal Deposit Insurance Corporation (“FDIC”) insurance limits or similar limits in foreign jurisdictions, to the extent such deposits are even insured in such foreign jurisdictions. While the Company monitors on a systematic basis the cash and cash equivalent balances in the operating accounts and adjust the balances as appropriate, these balances could be impacted if one or more of the financial institutions with which the Company deposit its funds fails or is subject to other adverse conditions in the financial or credit markets. To date the Company has experienced no loss of principal or lack of access to its invested cash or cash equivalents; however, the Company can provide no assurance that access to its invested cash and cash equivalents will not be affected if the financial institutions in which the Company holds its cash and cash equivalents fail. Furthermore, the Company holds an investment portfolio consisting principally of corporate bonds. The Company has the ability to hold such investments until recovery of temporary declines in market value or maturity; accordingly, as of December 31, 2017, the Company believes the losses associated with its investments are temporary and no impairment loss was recognized during 2017. However, the Company can provide no assurance that it will recover declines in the market value of its investments. The Company is exposed primarily to fluctuations in the level of U.S. interest rates. To the extent that interest rates rise, fixed interest investments may be adversely impacted, whereas a decline in interest rates may decrease the anticipated interest income for variable rate investments. The Company is exposed to financial market risks, including changes in interest rates. The Company typically does not attempt to reduce or eliminate its market exposures on its investment securities because the majority of its investments are short-term. The Company’s trade receivables are geographically diverse, mainly in the Asia Pacific, and also in the United States and Europe. Concentration of credit risk with respect to trade receivables is limited by credit limits, ongoing credit evaluation and account monitoring procedures. The Company performs ongoing credit evaluations of its customers and to date has not experienced any material losses. The Company makes judgments on its ability to collect outstanding receivables and provides allowances for the portion of receivables for which collection becomes doubtful. Provisions are sf-3868279 F-18 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (in thousands, except share data) CEVA, INC. made based upon a specific review of all significant outstanding receivables. In determining the provision, the Company considers the expected collectability of receivables. The Company has no off-balance-sheet concentration of credit risk. Derivative and hedging activities: The Company follows the requirements of FASB ASC No. 815,” Derivatives and Hedging” which requires companies to recognize all of their derivative instruments as either assets or liabilities in the statement of financial position at fair value. The accounting for changes in fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging transaction and further, on the type of hedging transaction. For those derivative instruments that are designated and qualify as hedging instruments, a company must designate the hedging instrument, based upon the exposure being hedged, as a fair value hedge, cash flow hedge, or a hedge of a net investment in a foreign operation. Due to the Company’s global operations, it is exposed to foreign currency exchange rate fluctuations in the normal course of its business. The Company’s treasury policy allows it to offset the risks associated with the effects of certain foreign currency exposures through the purchase of foreign exchange forward or option contracts (“Hedging Contracts”). The policy, however, prohibits the Company from speculating on such Hedging Contracts for profit. To protect against the increase in value of forecasted foreign currency cash flow resulting from salaries paid in currencies other than the U.S. dollar during the year, the Company instituted a foreign currency cash flow hedging program. The Company hedges portions of the anticipated payroll of its non-U.S. employees denominated in the currencies other than the U.S. dollar for a period of one to twelve months with Hedging Contracts. Accordingly, when the dollar strengthens against the foreign currencies, the decline in present value of future foreign currency expenses is offset by losses in the fair value of the Hedging Contracts. Conversely, when the dollar weakens, the increase in the present value of future foreign currency expenses is offset by gains in the fair value of the Hedging Contracts. These Hedging Contracts are designated as cash flow hedges. For derivative instruments that are designated and qualify as a cash flow hedge (i.e., hedging the exposure to variability in expected future cash flows that is attributable to a particular risk), the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income (loss) and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Any gain or loss on a derivative instrument in excess of the cumulative change in the present value of future cash flows of the hedged item is recognized in current earnings during the period of change. As of December 31, 2016 and 2017, the notional principal amount of the Hedging Contracts to sell U.S. dollars held by the Company was $3,300 and $0, respectively. Advertising expenses: Advertising expenses are charged to consolidated statements of income as incurred. Advertising expenses for the years ended December 31, 2015, 2016 and 2017 were $928, $1,033 and $1,118, respectively. Treasury stock: The Company repurchases its common stock from time to time pursuant to a board-authorized share repurchase program through open market purchases and repurchase plans. The repurchases of common stock are accounted for as treasury stock, and result in a reduction of stockholders’ equity. When treasury shares are reissued, the Company accounts for the reissuance in accordance with FASB ASC No. 505-30, “Treasury Stock” and charges the excess of the repurchase cost over issuance price using the weighted average method to retained earnings . The purchase cost is calculated based on the specific identified method. In the case where the repurchase cost over issuance price using the weighted average method is lower than the issuance price, the Company credits the difference to additional paid-in capital. sf-3868279 F-19 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (in thousands, except share data) CEVA, INC. Net income (loss) per share of common stock: Basic net income per share is computed based on the weighted average number of shares of common stock outstanding during each year. Diluted net income per share is computed based on the weighted average number of shares of common stock outstanding during each year, plus dilutive potential shares of common stock considered outstanding during the year, in accordance with FASB ASC No. 260, “Earnings Per Share.” Year ended December 31, 2016 2015 2017 Numerator: Net income Denominator (in thousands): Basic weighted-average common stock outstanding Effect of stock options, stock appreciation rights and restricted stock units Diluted weighted-average common stock outstanding $ 6,267 $ 13,100 $ 17,028 20,480 20,850 21,771 509 790 20,989 21,565 22,561 715 Basic net income per share Diluted net income per share $ $ 0.31 $ 0.30 $ 0.63 $ 0.61 $ 0.78 0.75 The weighted-average number of shares related to outstanding options, SARs and RSUs excluded from the calculation of diluted net income per share, since their effect was anti-dilutive, were 820,631, 282,696 and 29,892 shares for the years ended December 31, 2015, 2016 and 2017, respectively. Recently Issued Accounting Pronouncement: (a) Revenue recognition In May 2014, the FASB issued new guidance related to revenue recognition, which outlines a comprehensive revenue recognition model and supersedes most current revenue recognition guidance. The new guidance requires a company to recognize revenue as control of goods or services transfers to a customer at an amount that reflects the expected consideration to be received in exchange for those goods or services. It defines a five-step approach for recognizing revenue, which may require a company to use more judgment and make more estimates than under the current guidance. The Company adopted the new guidance during the first quarter of 2018 and applies the standard using modified retrospective approach, with the cumulative effect of applying the new guidance recognized as an adjustment to the opening retained earnings balance. Given the scope of work required to implement the new revenue recognition rules and disclosure requirements under the new guidance, the Company has made progress in the identification of changes to policy, processes and controls, and the Company continues to assess data availability and presentation necessary to meet the additional disclosure requirements of the guidance in the notes to the consolidated financial statements for the adoption period and onwards. The Company finished analyzing the potential impact of the new guidance. The Company currently expects the adoption of this new guidance to most significantly impact its royalty business. Specifically, the Company expects a change in the timing of revenues recognized from sales-based royalties. The Company currently recognizes sales-based royalties as revenues during the quarter during which such royalties are reported by licensees, which is after the conclusion of the quarter in which the licensees’ sales occur and when all other revenue recognition criteria are met. Under the new guidance, the Company will be required to estimate and recognize sales-based royalties during the period during which the associated sales occur, resulting in an acceleration of revenue recognition compared to the current method. In addition, the Company expects an increase in trade receivables, due to royalty revenues now being recorded as accrued revenues in the statement of financial position, along with the Company's current trade receivables. sf-3868279 F-20 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (in thousands, except share data) CEVA, INC. Furthermore, based on its current analysis, another effect on the Company's revenue recognition relates to certain deliverables that may be considered as distinct performance obligations separate from other performance obligations, and are measured using the relative standalone selling price basis. Under the new standard, an entity recognizes revenue when or as it satisfies a performance obligation by transferring IP license or services to the customer, either at a point in time or over time. The Company expects to continue to recognize most of its revenues at a point in time upon delivery of its products. The Company expects to recognize revenue over time on significant license customization contracts that are covered by contract accounting standards using cost inputs to measure progress toward completion of its performance obligations, which is similar to the current method. In addition, incremental costs that are related to sales from contracts signed during the period will require capitalization. If the amortization period of those costs are one year or less, the costs are expensed as incurred, which is a practical expedient manner permitted under the new guidance. The Company currently does not expect that this change will have a material impact on its consolidated financial statements. The Company currently estimates the cumulative adjustment to increase the Company’s retained earnings by $8,055, while increasing the Company's assets by $9,117. The most significant impact of the standard on the Company’s financial statements relates to the timing of revenues recognized from sales-based royalties (amounted to $8,765). The Company will also record a provision for income taxes, which will increase the Company's current liabilities, in an amount currently estimated at $1,062. Other than specified above, the Company does not otherwise expect the adoption of the new guidance will have a material impact on its businesses. (b) Other accounting standards In January 2016, the FASB issued ASU No. 2016-01, “Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities,” which requires that equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) are to be measured at fair value with changes in fair value recognized in net income. However, an entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. The Company adopted this ASU during the first quarter of 2018, and it does not expect the adoption to have a material impact on its financial statements. In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842),” which will replace the existing guidance in ASC 840, "Leases." The updated standard aims to increase transparency and comparability among organizations by requiring lessees to recognize lease assets and lease liabilities on the balance sheet and requiring disclosure of key information about leasing arrangements. This ASU is effective for annual periods beginning after December 15, 2018, and interim periods within those annual periods; early adoption is permitted and modified retrospective application is required. The Company is in the process of evaluating this guidance to determine the impact it will have on its financial statements and related disclosures. The FASB issued ASU 2016-13 “Measurement of Credit Losses on Financial Instruments” requiring an allowance to be recorded for all expected credit losses for financial assets. The allowance for credit losses is based on historical information, current conditions and reasonable and supportable forecasts. The new standard also makes revisions to the other than temporary impairment model for available-for-sale debt securities. Disclosures of credit quality indicators in relation to the amortized cost of financing receivables are further disaggregated by year of origination. The new accounting guidance is effective for interim and annual periods beginning after December 15, 2019 with early adoption permitted for interim and annual periods beginning after December 15, 2018. The amendments will be applied through a cumulative- effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. sf-3868279 F-21 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (in thousands, except share data) CEVA, INC. The Company is analyzing the impact of this new standard and, at this time, cannot estimate the impact of adoption on its net income. The Company plans to adopt ASU 2016-13 effective January 1, 2020. In January 2017, the FASB issued ASU No. 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business.” The amendments in this update provide a more robust framework to use in determining when a set of assets and activities is a business. Because the current definition of a business is interpreted broadly and can be difficult to apply, analyzing transactions is inefficient and costly and that the definition does not permit the use of reasonable judgment. The amendments provide more consistency in applying the guidance, reduce the costs of application, and make the definition of a business more operable. The amendments in this update become effective for annual periods and interim periods within those annual periods beginning after December 15, 2017. The Company is currently evaluating the impact of adopting this new guidance on its consolidated financial statements, but the adoption is not expected to have a material impact on the Company’s financial statements. In January 2017, the FASB issued ASU No. 2017-04, “Intangibles: Goodwill and Other: Simplifying the Test for Goodwill Impairment.” To simplify the subsequent measurement of goodwill, the amendments eliminate Step 2 from the goodwill impairment test. The annual, or interim, goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. In addition, the income tax effects of tax deductible goodwill on the carrying amount of the reporting unit should be considered when measuring the goodwill impairment loss, if applicable. The amendments also eliminate the requirements for any reporting unit with a zero or negative carrying amount to perform Step 2 of the goodwill impairment test. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the qualitative impairment test is necessary. The amendments should be applied on a prospective basis. The nature of and reason for the change in accounting principle should be disclosed upon transition. The amendments in this update should be adopted for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted on testing dates after January 1, 2017. The Company is currently evaluating the impact of adopting this new guidance on its consolidated financial statements, but the adoption is not expected to have a material impact on the Company’s financial statements. sf-3868279 F-22 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (in thousands, except share data) CEVA, INC. NOTE 2: MARKETABLE SECURITIES The following is a summary of available-for-sale marketable securities at December 31, 2016 and 2017: As at December 31, 2017 Gross unrealized gains Gross unrealized losses Fair value Amortized cost Available-for-sale - matures within one year: Corporate bonds Available-for-sale - matures after one year through five years: Certificate of deposits Government bonds Corporate bonds $ 11,803 11,803 $ 747 501 70,291 71,539 Total $ 83,342 $ 3 3 — — 14 14 17 $ (12) (12) $ 11,794 11,794 — (6) (677) (683) 747 495 69,628 70,870 $ (695) $ 82,664 As at December 31, 2016 Gross unrealized gains Gross unrealized losses Fair value Amortized cost Available-for-sale - matures within one year: Corporate bonds Available-for-sale - matures after one year through five years: Government bonds Corporate bonds $ 9,456 9,456 $ 501 52,490 52,991 4 4 — 3 3 $ (15) (15) $ 9,445 9,445 (4) (567) (571) 497 51,926 52,423 Total $ 62,447 $ 7 $ (586) $ 61,868 The following table presents gross unrealized losses and fair values for those investments that were in an unrealized loss position as of December 31, 2016 and 2017, and the length of time that those investments have been in a continuous loss position: sf-3868279 F-23 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (in thousands, except share data) CEVA, INC. As of December 31, 2017 As of December 31, 2016 Fair Value $ 49,921 $ 48,663 unrealized loss (411) (557) $ $ Less than 12 months Gross 12 months or greater Gross unrealized loss Fair Value $ 22,960 $ 4,875 $ $ (284) (29) As of December 31, 2016 and 2017, management believes the impairments are not other than temporary and therefore the impairment losses were recorded in accumulated other comprehensive income (loss). The following table presents gross realized gains and losses from sale of available-for-sale marketable securities: Year ended December 31, 2016 2015 2017 Gross realized gains from sale of available-for-sale marketable securities Gross realized losses from sale of available-for-sale marketable securities $ $ 4 $ (82) $ 24 $ (33) $ 47 (47) sf-3868279 F-24 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (in thousands, except share data) CEVA, INC. NOTE 3: FAIR VALUE MEASUREMENT FASB ASC No. 820, “Fair Value Measurements and Disclosures” defines fair value, establishes a framework for measuring fair value. Fair value is an exit price, representing the amount that would be received for selling an asset or paid for the transfer of a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability. A three-tier fair value hierarchy is established as a basis for considering such assumptions and for inputs used in the valuation methodologies in measuring fair value: Level I Level II Level III Unadjusted quoted prices in active markets that are accessible on the measurement date for identical, unrestricted assets or liabilities; Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability; and Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported by little or no market activity). The Company measures its marketable securities and foreign currency derivative contracts at fair value. Marketable securities and foreign currency derivative contracts are classified within Level II as the valuation inputs are based on quoted prices and market observable data of similar instruments. The table below sets forth the Company’s assets and liabilities measured at fair value by level within the fair value hierarchy. Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Description Assets: Marketable securities: Certificate of deposits Government bonds Corporate bonds Description Assets: Marketable securities: Government bonds Corporate bonds Foreign exchange contracts December 31, 2017 Level I Level II Level III $ 747 495 81,422 — — — $ 747 495 81,422 — — — December 31, 2016 Level I Level II Level III $ 497 61,371 6 — — — $ 497 61,371 6 — — — sf-3868279 F-25 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (in thousands, except share data) CEVA, INC. NOTE 4: PROPERTY AND EQUIPMENT, NET Composition of assets, grouped by major classifications, is as follows: Cost: Computers, software and equipment Office furniture and equipment Leasehold improvements Less – Accumulated depreciation Property and equipment, net As at December 31, 2016 2017 $ 10,031 $ 13,570 797 766 2,756 2,204 13,001 17,123 (8,196) (10,197) $ 4,805 $ 6,926 The Company recorded depreciation expenses in the amount of $1,399 and $2,014 for the years ended December 31, 2016 and 2017, respectively. NOTE 5: INTANGIBLE ASSETS, NET Year ended December 31, 2016 Year ended December 31, 2017 Weighted Average Amortization Period (Years) Gross Carrying Amount Accumulated Amortization Net Gross Carrying Amount Accumulated Amortization Net Intangible assets –amortizable: Customer relationships Customer backlog Core technologies Total intangible assets 4.5 1.5 5.1 $ 272 $ 93 5,796 121 — 2,857 $ 6,161 $ 3,183 $ 2,978 151 $ 93 2,939 Future estimated annual amortization charges are as follows: 2018 2019 901 841 $ 1,742 NOTE 6: ACCRUED EXPENSES AND OTHER PAYABLES Engineering accruals Professional fees Government grants Income taxes payable, net Facility related accruals Other sf-3868279 F-26 $ 272 $ 93 5,796 61 — 1,681 $ 6,161 $ 4,419 $ 1,742 211 $ 93 4,115 As at December 31, 2016 2017 $ $ 466 583 263 1,489 140 1,074 977 792 791 45 290 1,032 $ 4,015 $ 3,927 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (in thousands, except share data) CEVA, INC. NOTE 7: STOCKHOLDERS’ EQUITY a. Common stock: Holders of common stock are entitled to one vote per share on all matters to be voted upon by the Company’s stockholders. In the event of a liquidation, dissolution or winding up of the Company, holders of common stock are entitled to share ratably in all of the Company’s assets. The Board of Directors may declare a dividend out of funds legally available therefore and the holders of common stock are entitled to receive ratably any such dividends. Holders of common stock have no preemptive rights or other subscription rights to convert their shares into any other securities. b. Preferred stock: The Company is authorized to issue up to 5,000,000 shares of “blank check” preferred stock, par value $0.001 per share. Such preferred stock may be issued by the Board of Directors from time to time in one or more series. These series may have designations, preferences and relative, participating, optional or other special rights and any qualifications, limitations or restrictions thereof, including dividend rights, conversion rights, exchange rights, voting rights, redemption rights (including sinking and purchase fund provisions), and dissolution preferences as may be determined by the Company’s Board of Directors. c. Share repurchase program: In August 2008, the Company announced that its Board of Directors approved a share repurchase program for up to one million shares of common stock which was further extended by an additional four million shares in 2010 and 2013. In October 2014, the Company’s Board of Directors authorized the repurchase by the Company of an additional one million shares of common stock pursuant to Rule 10b-18 of the Exchange Act. As of December 31, 2017, 311,056 shares of common stock remained authorized for repurchase under to the Company’s share repurchase program. In 2015, the Company repurchased 508,931 shares of common stock at an average purchase price of $19.80 per share for an aggregate purchase price of $10,078. In 2016, the Company repurchased 180,013 shares of common stock at an average purchase price of $18.98 per share for an aggregate purchase price of $3,417. In 2017, the Company did not repurchase any shares of its common stock. d. Employee and non-employee stock plans: The Company grants a mix of stock options, SARs capped with a ceiling and RSUs to employees and non-employee directors of the Company and its subsidiaries under the Company’s equity plans and provides the right to purchase common stock pursuant to the Company’s 2002 employee stock purchase plan to employees of the Company and its subsidiaries. The SAR unit confers the holder the right to stock appreciation over a preset price of the Company’s common stock during a specified period of time. When the unit is exercised, the appreciation amount is paid through the issuance of shares of the Company’s common stock. The ceiling limits the maximum income for each SAR unit. SARs are considered an equity instrument as it is a net share settled award capped with a ceiling (400% for all SAR grants made in previous years. No SARs were granted in 2016 and 2017). The options and SARs granted under the Company’s stock incentive plans have been granted at the fair market value of the Company’s common stock on the grant date. Options and SARs granted to employees under stock incentive plans vest at a rate of 25% of the shares underlying the option after one year and the remaining shares vest in equal portions over the following 36 months, such that all shares are vested after four years. Options granted to non-employee directors vest 25% of the shares underlying the option on each anniversary of the option grant. RSUs granted to employees under stock incentive plans vest as to 1/3 on each anniversary of the grant date. RSUs granted to non-employee directors under stock incentive plans vest fully one year after the grant date. sf-3868279 F-27 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (in thousands, except share data) CEVA, INC. In connection with the Company’s acquisition of RivieraWaves, on July 7, 2014, the Company issued an aggregate of 113,000 SARs to 27 employees of RivieraWaves who joined the Company in connection with the acquisition. The value of these grants was not included in the acquisition price of RivieraWaves. The SARs were granted outside of the Company’s existing equity plans and were granted as a material inducement to such individuals entering into employment with the Company, in accordance with NASDAQ Listing Rule 5635(c)(4). All of the SARs were priced at $15.17, the fair market value on the grant date, and will vest over four years, with 25% of the SARs vesting after one year and the remaining vest in equal portions over the following 36 months, such that all SARs will vest after four years, subject to the employee's continuous service through each vesting date. The SARs have a ceiling limit for maximum income capped at 400%, expire seven years from the grant date and are subject to the terms and condition of the individual SAR agreements. The SAR grants were approved by the compensation committee of the Board of Directors of the Company. A summary of the Company’s stock option and SARs activities and related information for the year ended December 31, 2017, is as follows: Outstanding at the beginning of the year Granted Exercised Forfeited or expired Outstanding at the end of the year (2) Exercisable at the end of the year (3) Weighted average remaining contractual term Weighted average exercise price $ 19.76 — 19.80 17.51 Aggregate intrinsic-value $ 19.77 $ 19.07 5.2 4.7 $ 19,229 $ 13,906 Number of options and SAR units (1) 1,455,908 — (711,208) (15,683) 729,017 513,464 (1) The SAR units are convertible for a maximum number of shares of the Company’s common stock equal to 75% of the SAR units subject to the grant. (2) Due to the ceiling imposed on the SAR grants, the outstanding amount equals a maximum of 662,075 shares of the Company's common stock issuable upon exercise. (3) Due to the ceiling imposed on the SAR grants, the exercisable amount equals a maximum of 465,223 shares of the Company's common stock issuable upon exercise. The weighted average fair value of options and SARs granted during the year ended December 2015 was $7.8 per share. The weighted average fair value of options granted during the year ended December 2016 was $12.9 per share. In 2017, the Company did not grant options and/or SARs. The total intrinsic value of options and SARs exercised during the years ended December 31, 2015, 2016 and 2017 was $8,960, $12,282 and $15,188, respectively. sf-3868279 F-28 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (in thousands, except share data) CEVA, INC. The options and SARs granted to employees of the Company and its subsidiaries and the options granted to non- employee directors of the Company which were outstanding as of December 31, 2017 have been classified into a range of exercise prices as follows: Exercise price (range) 14.16-18.62 19.36-24.86 27.17-31.51 Outstanding Weighted average remaining contractual life (years) 4.2 5.9 6.9 5.2 Number of options and SARs 365,793 204,724 158,500 729,017 Weighted average exercise price $ 15.64 $ 19.91 $ 29.13 $ 19.77 Exercisable Number of options and SARs 290,193 142,771 80,500 513,464 Weighted average remaining contractual life (years) 4.0 5.8 5.2 4.7 Weighted average exercise price $ 15.80 $ 19.65 $ 29.81 $ 19.07 A RSU award is an agreement to issue shares of the Company’s common stock at the time the award or a portion thereof vests. RSUs granted to employees generally vest in three equal annual installments starting on the first anniversary of the grant date. RSUs granted to non-employee directors generally vest in full on the first anniversary of the grant date. A summary of the Company’s RSU activities and related information for the year ended December 31, 2017, is as follows: Number of RSUs 505,142 288,197 (203,016) (29,707) 560,616 Weighted average Grant-Date fair value $ 21.59 37.25 21.85 26.07 $ 29.31 Unvested as at the beginning of the year Granted Vested Forfeited Unvested at the end of the year Stock Plans As of December 31, 2017, the Company maintains the Company’s 2003 Director Stock Option Plan (the “Director Plan”) and the 2011 Stock Incentive Plan (the “2011 Plan” and together with the Director Plan, the “Stock Plans”). As of December 31, 2017, options, SARs and RSUs to purchase 1,309,038 shares of common stock were available for grant under the Stock Plans. 2011 Stock Incentive Plan The 2011 Plan was adopted by the Company’s Board of Directors in February 2011 and stockholders on May 17, 2011. Up to 2,350,000 shares of common stock (subject to adjustment in the event of future stock splits, future stock dividends or other similar changes in the common stock or the Company’s capital structure), plus the number of shares that remain available for grant of awards under the Company’s 2002 Stock Incentive Plan (the “2002 Plan), plus any shares that would otherwise return to the 2002 Plan as a result of forfeiture, termination or expiration of awards previously granted under the 2002 plan (subject to adjustment in the event of stock splits and other similar events), are reserved for issuance sf-3868279 F-29 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (in thousands, except share data) CEVA, INC. under the 2011 Plan. The 2002 Plan was automatically terminated and replaced and superseded by the 2011 Plan, except that any awards previously granted under the 2002 Plan shall remain in effect pursuant to their term. The 2011 Plan provides for the grant of incentive stock options intended to qualify under Section 422 of the Internal Revenue Code, nonqualified stock options, restricted stock, RSUs, dividend equivalent rights and stock appreciation rights. Officers, employees, directors, outside consultants and advisors of the Company and those of the Company’s present and future parent and subsidiary corporations are eligible to receive awards under the 2011 Plan. Under current U.S. tax laws, incentive stock options may only be granted to employees. The 2011 Plan permits the Company's Board of Directors or a committee thereof to determine how grantees may pay the exercise or purchase price of their awards. Unless sooner terminated, the 2011 Plan is effective until February 2021. The Company’s Board of Directors or a committee thereof has authority to administer the 2011 Plan. The Company’s Board of Directors has the authority to adopt, amend and repeal the administrative rules, guidelines and practices relating to the 2011 Plan and to interpret its provisions. 2003 Director Stock Option Plan Under the Director Plan, 1,350,000 shares of common stock (subject to adjustment in the event of future stock splits, future stock dividends or other similar changes in the common stock or the Company’s capital structure) are authorized for issuance. The Director Plan provides for the grant of nonqualified stock options to non-employee directors. Options must be granted at an exercise price equal to the fair market value of the common stock on the date of grant. Options may not be granted for a term in excess of ten years. Under the original terms of the Director Plan, (a) any person who becomes a non-employee director of the Company was automatically granted an option to purchase 38,000 shares of common stock, (b) on June 30 of each year, beginning in 2004, each non-employee director who had served on the Company’s Board of Directors for at least six (6) months as of such date was automatically granted an option with the exercise price being the fair market value of the Company’s common stock as of July 1st of each year to purchase 13,000 shares of common stock, and each non-employee director would receive an option with the exercise price being the fair market value of the Company’s common stock as of July 1st of each year to purchase 13,000 shares of common stock for each committee on which he or she had served as chairperson for at least six months prior to such date, and (c) the Chairman of the Board was granted an additional option with the exercise price being the fair market value of the Company’s common stock as of July 1st of each year to purchase 15,000 shares of common stock on an annual basis. In February 2015, the Board suspended the automatic grant of stock options to each non-employee director and the Chairman of the Board under the Director Plan. In lieu of the automatic stock option grants under the Director Plan, the Board approved an equity award to all directors of the Company consisting solely of RSUs granted under the 2011 Plan. In August 2017, the directors of the Company received a grant of RSUs in the aggregate amount of 30,897 RSUs. The Company’s Board of Directors or a committee thereof may grant additional options to purchase common stock with a vesting schedule to be determined by the Board of Directors in recognition of services provided by a non-employee director in his or her capacity as a director. The Company’s Board of Directors or a committee thereof has authority to administer the Director Plan. The Company’s Board of Directors or a committee thereof has the authority to adopt, amend and repeal the administrative rules, guidelines and practices relating to the Director Plan and to interpret its provisions. sf-3868279 F-30 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (in thousands, except share data) CEVA, INC. 2002 Employee Stock Purchase Plan (“ESPP”) The ESPP was adopted by the Company’s Board of Directors and stockholder in July 2002. The ESPP is intended to qualify as an “Employee Stock Purchase Plan” under Section 423 of the U.S. Internal Revenue Code and is intended to provide the Company’s employees with an opportunity to purchase shares of common stock through payroll deductions. An aggregate of 2,700,000 shares of common stock (subject to adjustment in the event of future stock splits, future stock dividends or other similar changes in the common stock or the Company’s capital structure) are reserved for issuance. As of December 31, 2017, 298,604 shares of common stock were available for future issuance under the ESPP. All of the Company’s employees who are regularly employed for more than five months in any calendar year and work 20 hours or more per week are eligible to participate in the ESPP. Non-employee directors, consultants, and employees subject to the rules or laws of a foreign jurisdiction that prohibit or make impractical their participation in an employee stock purchase plan are not eligible to participate in the ESPP. The ESPP designates offer periods, purchase periods and exercise dates. Offer periods generally will be overlapping periods of 24 months. Purchase periods generally will be six-month periods. Exercise dates are the last day of each purchase period. In the event the Company merges with or into another corporation, sells all or substantially all of the Company’s assets, or enters into other transactions in which all of the Company’s stockholders before the transaction own less than 50% of the total combined voting power of the Company’s outstanding securities following the transaction, the Company’s Board of Directors or a committee designated by the Board may elect to shorten the offer period then in progress. The price per share at which shares of common stock may be purchased under the ESPP during any purchase period is the lesser of: • 85% of the fair market value of common stock on the date of grant of the purchase right, which is the commencement of an offer period; or • 85% of the fair market value of common stock on the exercise date, which is the last day of a purchase period. The participant’s purchase right is exercised in the above noted manner on each exercise date arising during the offer period unless, on the first day of any purchase period, the fair market value of common stock is lower than the fair market value of common stock on the first day of the offer period. If so, the participant’s participation in the original offer period will be terminated, and the participant will automatically be enrolled in the new offer period effective the same date. The ESPP is administered by the Board of Directors or a committee designated by the Board, which will have the authority to terminate or amend the plan, subject to specified restrictions, and otherwise to administer and resolve all questions relating to the administration of the plan. e. Dividend policy: The Company has never declared or paid any cash dividends on its capital stock and does not anticipate paying any cash dividends in the foreseeable future. NOTE 8: DERIVATIVES AND HEDGING ACTIVITIES The fair value of the Company’s outstanding derivative instruments is as follows: As at December 31, 2016 2017 Derivative assets: Derivatives designated as cash flow hedging instruments: sf-3868279 F-31 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (in thousands, except share data) CEVA, INC. Foreign exchange forward contracts Total As at December 31, 2016 2017 $ $ 6 $ 6 $ — — The Company recorded the fair value of derivative assets in “prepaid expenses and other accounts receivable” on the Company’s consolidated balance sheets. The increase in unrealized gains recognized in “accumulated other comprehensive income (loss)” on derivatives, before tax effect, is as follows: Derivatives designated as cash flow hedging instruments: Foreign exchange option contracts Foreign exchange forward contracts $ $ 83 $ 94 177 $ 67 $ 91 158 $ 90 93 183 The net gains reclassified from “accumulated other comprehensive income (loss)” into income, are as follows: Year ended December 31, 2016 2015 2017 Year ended December 31, 2016 2015 2017 Derivatives designated as cash flow hedging instruments: Foreign exchange option contracts Foreign exchange forward contracts $ $ (31) $ (73) (104) $ (67) $ (94) (161) $ (90) (99) (189) The Company recorded in cost of revenues and operating expenses, a net gain of $104, $161 and 189 during the years ended December 31, 2015, 2016 and 2017, respectively, related to its Hedging Contracts. NOTE 9: ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) The following table summarizes the changes in accumulated balances of other comprehensive income (loss), net of taxes: sf-3868279 F-32 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (in thousands, except share data) CEVA, INC. Year ended December 31, 2016 Year ended December 31, 2017 Unrealized gains (losses) on available- for-sale marketable securities Unrealized gains (losses) on cash flow hedges Total Unrealized gains (losses) on available-for- sale marketable securities Unrealized gains (losses) on cash flow hedges Total Beginning balance $ (427) $ 8 $ (419) $ (502) $ 5 $ (497) Other comprehensive income (loss) before reclassifications Amounts reclassified from accumulated other comprehensive income (loss) Net current period other comprehensive income (loss) Ending balance (83) 140 57 (83) 163 80 8 (143) (135) (1) (168) (169) (75) (502) $ $ (3) 5 $ (78) (497) $ (84) (586) $ (5) 0 $ (89) (586) The following table provides details about reclassifications out of accumulated other comprehensive income (loss): Details about Accumulated Other Comprehensive Income (Loss) Components Amount Reclassified from Accumulated Other Comprehensive Income (Loss) Affected Line Item in the Statements of Operations Unrealized gains on cash flow hedges $ Unrealized gains (losses) on available-for-sale marketable securities Year ended December 31, 2015 2016 2017 — 91 5 8 104 11 93 (78) (8) (70) $ 4 132 12 13 161 18 143 (9) (1) (8) $ 4 162 10 13 189 21 168 — (1) 1 Cost of revenues Research and development Sales and marketing General and administrative Total, before income taxes Income tax expense Total, net of income taxes Financial income, net Income tax benefit Total, net of income taxes $ 23 $ 135 $ 169 Total, net of income taxes sf-3868279 F-33 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (in thousands, except share data) CEVA, INC. NOTE 10: GEOGRAPHIC INFORMATION AND MAJOR CUSTOMER AND PRODUCT DATA a. Summary information about geographic areas: FASB ASC No. 280, “Segment Reporting,” establishes standards for reporting information about operating segments. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company manages its business on a basis of one reportable segment: the licensing of intellectual property to semiconductor companies and electronic equipment manufacturers (see Note 1 for a brief description of the Company’s business). The following is a summary of revenues within geographic areas: Year ended December 31, 2016 2017 2015 Revenues based on customer location: United States Europe, Middle East Asia Pacific (1) (2) $ 9,737 $ 7,064 42,698 7,188 11,007 69,312 $ 59,499 $ 72,653 $ 87,507 9,134 $ 10,901 52,618 (1) China (2) S. Korea $ 29,982 $ 30,030 $ 41,059 6,173 $ 15,512 $ 17,842 $ Long-lived assets by geographic region: Israel France United States Other 2016 2017 4,026 365 240 174 4,805 $ 6,196 383 185 162 6,926 $ b. Major customer data as a percentage of total revenues: The following table sets forth the customers that represented 10% or more of the Company’s total revenues in each of the periods set forth below: Customer A Customer B *) Less than 10% Year ended December 31, 2017 2016 2015 31% *) 27% 19% 23% 17% sf-3868279 F-34 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (in thousands, except share data) CEVA, INC. c. Information about Products and Services: The following table sets forth the products and services as percentages of the Company’s total revenues in each of the periods set forth below: DSP products (DSP Cores and Platforms) Connectivity products (Bluetooth, WiFi and SATA/SAS) 82% 18% 84% 16% 86% 14% Year ended December 31, 2017 2016 2015 sf-3868279 F-35 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (in thousands, except share data) CEVA, INC. NOTE 11: SELECTED STATEMENTS OF INCOME DATA Financial income, net: Year ended December 31, 2016 2017 2015 Interest income Loss on available-for-sale marketable securities, net Amortization of premium on available-for-sale marketable securities, net Foreign exchange loss, net Accretion of Contingent Consideration $ 2,845 $ (78) 3,300 $ (9) 4,233 — (1,111) (490) (97) 1,069 $ (1,064) (188) — 2,039 $ (1,179) (28) — 3,026 $ NOTE 12: TAXES ON INCOME a. U.S. tax reform On December 22, 2017, the U.S. government enacted the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act includes significant changes to the U.S. corporate income tax system including: a federal corporate rate reduction from 35% to 21%; creation of the base erosion anti-abuse tax (“BEAT”), a new minimum tax such as Global Intangible Low Taxed Income (“GILTI”); and the transition of U.S. international taxation from a worldwide tax system to a modified territorial tax system. The change to a modified territorial tax system resulted in a one- time U.S. tax liability on those earnings which have not previously been repatriated to the U.S. (the “Transition Tax”), with future distributions not subject to U.S. federal income tax when repatriated. A majority of the provisions in the Tax Act are effective January 1, 2018. In response to the Tax Act, the SEC staff issued guidance on accounting for the tax effects of the Tax Act. The guidance provides a one-year measurement period for companies to complete the accounting. The Company reflected the income tax effects of those aspects of the Tax Act for which the accounting is complete. To the extent the Company’s accounting for certain income tax effects of the Tax Act is incomplete but the Company is able to determine a reasonable estimate, the Company recorded a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act. In connection with its initial analysis of the impact of the Tax Act, the Company had an estimated $5,635 of Transition Tax for the year ended December 31, 2017. After the utilization of existing tax loss carryforwards, the Company does not expect to pay additional U.S. federal cash taxes. The Company has not completed its accounting for the income tax effects of certain elements of the Tax Act. The Tax Act creates a new requirement that certain income such as GILTI earned by a controlled foreign corporation (“CFC”) must be included in the gross income of the CFC U.S. shareholder. Because of the complexity of the new GILTI tax rules, the Company is continuing to evaluate this provision of the Tax Act and whether taxes due on future U.S. inclusions related to GILTI should be recorded as a current-period expense when incurred, or sf-3868279 F-36 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (in thousands, except share data) CEVA, INC. factored into the Company’s measurement of its deferred taxes. As a result, the Company has not included an estimate of the tax expense or benefit related to GILTI for the period ended December 31, 2017. The BEAT provisions in the Tax Reform Act eliminates the deduction of certain base-erosion payments made to related foreign corporations, and impose a minimum tax if greater than regular tax. The Company does not expect it will be subject to this tax and therefore has not included any tax impacts of BEAT in its consolidated financial statements for the year ended December 31, 2017. b. A number of the Company’s operating subsidiaries are taxed at rates lower than U.S. rates. 1. Irish Subsidiaries The Irish operating subsidiary qualified for a 12.5% tax rate on its trade. Interest income earned by the Irish subsidiary is taxed at a rate of 25%. As of December 31, 2017, the open tax years, subject to review by the applicable taxing authorities for the Irish subsidiary, are 2012 and subsequent years. 2. Israeli Subsidiary The Israeli subsidiary has been granted “Approved Enterprise” and “Benefited Enterprise” status under the Israeli Law for the Encouragement of Capital Investments. For such Approved Enterprises and Benefited Enterprises, the Israeli subsidiary elected to apply for alternative tax benefits—the waiver of government grants in return for tax exemptions on undistributed income. Upon distribution of such exempt income, the Israeli subsidiary will be subject to corporate tax at the rate ordinarily applicable to the Approved Enterprise’s or Benefited Enterprise’s income. Such tax exemption on undistributed income applies for a limited period of between two to ten years, depending upon the location of the enterprise. During the remainder of the benefits period (generally until the expiration of ten years), a corporate tax rate not exceeding 24% will apply. The Israeli subsidiary is a foreign investor company, or FIC, as defined by the Investment Law. FICs are entitled to further reductions in the tax rate normally applicable to Approved Enterprises and Benefited Enterprises. Depending on the foreign ownership in each tax year, the tax rate can range between 10% (when foreign ownership exceeds 90%) to 20% (when foreign ownership exceeds 49%). There can be no assurance that the subsidiary will continue to qualify as an FIC in the future or that the benefits described herein will be granted in the future. The Company’s Israeli subsidiary’s tax-exempt profit from Approved Enterprises and Benefited Enterprises is permanently reinvested as the Company’s management has determined that the Company does not currently intend to distribute dividends. Therefore, deferred taxes have not been provided for such tax-exempt income. The Company intends to continue to reinvest these profits and does not currently foresee a need to distribute dividends out of such tax-exempt income. Income not eligible for Approved Enterprise benefits or Benefited Enterprise benefits is taxed at a regular rate, which was 24% in 2017, 25% in 2016 and 26.5% in 2015. In December 2016, the Israeli Parliament approved the Economic Efficiency Law (Legislative Amendments for Applying the Economic Policy for the 2017 and 2018 Budget Years), 2016 which reduces the corporate income tax rate to 24% (instead of 25%) effective on January 1, 2017 and to 23% effective on January 1, 2018. 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 during April 2017. sf-3868279 F-37 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (in thousands, except share data) CEVA, INC. The new tax track under the Amendment, which is applicable to the Company, 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 law, which is located in the center of Israel (where our Israeli subsidiary is currently located), will be subject to tax at a rate of 12% on profits deriving from intellectual property (in development area A - a tax rate of 7.5%). Any dividends distributed to "foreign companies", as defined in the law, deriving from income from the technological enterprises will be subject to tax at a rate of 4%. As of December 31, 2017 the Company has yet to elect to apply the aforementioned tax track. Accordingly, the above changes in the tax rates relating to Technological Preferred Enterprises were not taken into account in the computation of deferred taxes as of December 31, 2017. The Company expects to apply the Technological Preferred Enterprise tax track from tax year 2020 and onwards. The Israeli subsidiary elected to compute taxable income in accordance with Income Tax Regulations (Rules for Accounting for Foreign Investors Companies and Certain Partnerships and Setting their Taxable Income), 1986. Accordingly, the taxable income or loss is calculated in U.S. dollars. Applying these regulations reduces the effect of the foreign exchange rate (of NIS against the U.S. dollar) on the Company’s Israeli taxable income. As of December 31, 2017, the open tax years, subject to review by the applicable taxing authorities for the Israeli subsidiary, are 2014 and subsequent years. 3. French Subsidiaries The French operating subsidiaries qualified for a 33.33% tax rate on its profits. In 2017, the French government passed a series of tax reforms allowing for the phased reduction in the corporate tax rate. In 2018, a 28% rate of corporate income tax will apply for amounts of taxable profit up to €500,000 and the standard rate of corporate income tax of 33.33% will apply for amounts of taxable profit above €500,000. In 2019, the standard rate of corporate income tax will be reduced to 31%, with the first €500,000 of taxable profit being still subject to the 28% rate. In 2020, the 28% rate of corporate income tax will become the new standard rate for all taxable profits. In 2021, the standard rate of corporate income tax will be reduced to 26.5%. In 2022, the standard rate of corporate income tax will be reduced to 25%. As of December 31, 2017, the open tax years, subject to review by the applicable taxing authorities for the French subsidiaries, are 2015 and subsequent years. c. Taxes on income comprised of: Year ended December 31, 2016 2017 2015 Domestic taxes: Current Deferred Foreign taxes: Current Deferred Income (loss) before taxes on income: Domestic sf-3868279 F-38 $ 115 $ — 6 $ — (227) — 2,212 (1,213) 1,114 $ 3,932 (613) 3,325 $ 3,473 (1,375) 1,871 $ $ (3,360) $ (3,488) $ (5,946) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (in thousands, except share data) CEVA, INC. Foreign Year ended December 31, 2015 2016 2017 24,845 19,913 10,741 7,381 $ 16,425 $ 18,899 $ d. Reconciliation between the Company’s effective tax rate and the U.S. statutory rate: Income before taxes on income Theoretical tax at U.S. statutory rate Foreign income taxes at rates other than U.S. rate Approved and benefited enterprises benefits (*) Subpart F Non-deductible items Non-taxable items Changes in uncertain tax position Stock-based compensation expense Deemed mandatory repatriation Changes in valuation allowance Other, net Taxes on income 2017 2015 Year ended December 31, 2016 $ 7,381 $ 16,425 $ 18,899 6,426 (2,304) (2,698) 737 294 (529) (1,757) (1,503) 1,916 2,076 (787) $ 1,114 $ 3,325 $ 1,871 2,510 (958) (1,653) 434 349 (481) — — — 839 74 5,585 (1,831) (2,767) 538 682 (505) 505 — — 1,212 (94) (*) Basic and diluted earnings per share amounts of the benefit resulting from the “Approved Enterprise” and “Benefited Enterprise” status $ 0.08 $ 0.13 $ 0.12 sf-3868279 F-39 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (in thousands, except share data) CEVA, INC. e. Deferred taxes on income: Significant components of the Company’s deferred tax assets are as follows: As at December 31, 2016 2017 Deferred tax assets Operating loss carryforward Accrued expenses and deferred revenues Temporary differences related to R&D expenses Equity-based compensation Tax credit carry forward Other Total gross deferred tax assets Valuation allowance Net deferred tax assets Deferred tax liabilities Intangible assets Other Total deferred tax liabilities Net deferred tax assets (*) $ 9,638 $ 13,069 1,057 2,118 1,956 1,866 476 20,542 (16,590) $ 2,905 $ 3,952 1,128 1,435 2,685 1,237 562 16,685 (13,780) $ $ 621 32 653 $ $ 275 34 309 $ 2,252 $ 3,643 (*) Net deferred taxes for the years ended December 31, 2016 and 2017 are all from foreign jurisdictions. Changes in valuation allowances on deferred tax assets result from management's assessment of the Company's ability to utilize certain future tax deductions, operating losses and tax credit carryforwards prior to expiration. Valuation allowances were recorded to reduce deferred tax assets to an amount that will, more likely than not, be realized in the future. The net change in the valuation allowance primarily reflects an increase in deferred tax assets on operating loss carryforward. The Company is currently analyzing the potential tax liability attributable to any additional repatriation of foreign earnings, but the Company has yet to determine whether it plans to change its prior assertion that such earnings are indefinitely reinvested and repatriate any additional earnings. Accordingly, the Company has not recorded any deferred taxes attributable to other investments in its foreign subsidiaries. The Company will record the tax effects of any change in its prior assertion in the period that it completes its analysis and is able to make a reasonable estimate, and disclose any unrecognized deferred tax liability for temporary differences related to its foreign investments, if practicable. f. Uncertain tax positions A reconciliation of the beginning and ending amount of gross unrecognized tax benefits based on the provisions of FASB ASC No. 740 is as follows: Beginning of year Additions for current year tax positions Additions for prior year’s tax positions sf-3868279 F-40 Year ended December 31, 2016 $ 3,076 232 476 2017 $ 3,784 1,188 255 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (in thousands, except share data) CEVA, INC. Decrease as a result of the completion of a tax audit for prior years Balance at December 31 Year ended December 31, 2016 — $ 3,784 2017 (3,003) $ 2,224 As of December 31, 2016 and 2017, there were $3,784 and $2,224, respectively, of unrecognized tax benefits that if recognized would affect the annual effective tax rate. As of December 31, 2016 and 2017, the Company had accrued interest related to unrecognized tax benefits of $130 and $0, respectively. The Company did not accrue penalties during the years ended December 31, 2016 and 2017. During the year ended December 31, 2017, the Company recorded a tax benefit of $1,805 as a result of the completion of a tax audit for prior years in a certain foreign tax jurisdiction. This amount included a release of $130 in accrued interest related to unrecognized tax benefits. The reduction in the unrecognized tax benefits balance for prior years as a result of the completion of the tax audit for the year ended December 31, 2017 was $3,003. The Company believes that an adequate provision has been made for any adjustments that may result from tax examinations. However, the outcome of tax audits cannot be predicted with certainty. If any issues addressed in the Company's tax audits are resolved in a manner not consistent with management's expectations, the Company could be required to adjust its provision for income taxes in the period such resolution occurs. The Company does not expect uncertain tax positions to change significantly over the next 12 months, except in the case of settlements with tax authorities, the likelihood and timing of which are difficult to estimate. g. Tax loss carryforwards: As of December 31, 2017, CEVA and its subsidiaries had net operating loss carryforwards for federal income tax purposes of approximately $12,541, which are available to offset future federal taxable income. Such loss carryforwards begin to expire in 2030. As of December 31, 2017, CEVA and its subsidiaries had net operating loss carryforwards for California income tax purposes of approximately $8,279, which are available to offset future California taxable income. Such loss carryforwards begin to expire in 2030. As of December 31, 2017, CEVA’s Irish subsidiary had foreign operating losses of approximately $61,608, which are available to offset future taxable income indefinitely. As of December 31, 2017, CEVA’s French subsidiaries had foreign operating losses of approximately $6,807, which are available to offset future taxable income indefinitely . h. Tax returns: CEVA files income tax returns in the U.S. federal jurisdiction and various state and local jurisdictions. With few exceptions, CEVA is no longer subject to U.S. federal income tax examinations by tax authorities, and state and local income tax examinations, for the years prior to 2010. NOTE 13: COMMITMENTS AND CONTINGENCIES a. The Company is not a party to any litigation or other legal proceedings that the Company believes could reasonably be expected to have a material adverse effect on the Company’s business, results of operations and financial condition. b. As of December 31, 2017, the Company and its subsidiaries had several non-cancelable operating leases, primarily for facilities and equipment. These leases generally contain renewal options and require the Company and its sf-3868279 F-41 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (in thousands, except share data) CEVA, INC. subsidiaries to pay all executory costs such as maintenance and insurance. In addition, the Company has several fixed service agreements with sub-contractors. Rent expenses for the years ended December 31, 2015, 2016 and 2017, were $1,094, $1,259 and $1,417, respectively. As of December 31, 2017, future purchase obligations and minimum rental commitments for leasehold properties and operating leases with non-cancelable terms are as follows: $ Minimum rental commitments for leasehold properties 1,226 436 372 40 2,074 $ $ Commitments for other lease obligations 3,168 1,323 — — 4,491 $ $ Other purchase obligations 2,237 — — — 2,237 $ Total 6,631 1,759 372 40 8,802 $ $ 2018 2019 2020 2021 c. Royalties: The Company participated in programs sponsored by the Israeli government for the support of research and development activities. Through December 31, 2017, the Company had obtained grants from the IIA for certain of the Company’s research and development projects. The Company is obligated to pay royalties to the IIA, amounting to 3%- 3.5% of the sales of the products and other related revenues (based on the dollar) generated from such projects, up to 100% of the grants received. Royalty payment obligations also bear interest at the LIBOR rate. The obligation to pay these royalties is contingent on actual sales of the products and in the absence of such sales, no payment is required. Royalty expenses relating to the IIA grants included in cost of revenues for the years ended December 31, 2015, 2016 and 2017 amounted to $482, $539 and $1,016, respectively. As of December 31, 2017, the aggregate contingent liability to the IIA (including interest) amounted to $22,254. sf-3868279 F-42 Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized. SIGNATURES CEVA, INC. By: /S/ Gideon Wertheizer Gideon Wertheizer Chief Executive Officer March 1, 2018 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Gideon Wertheizer and Yaniv Arieli or either of them, his true and lawful attorneys-in-fact and agents, with full power of substitution and re-substitution, for him and in his name, place and stead, in any and all capacities to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto and other documents in connection therewith, with the SEC, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or either of them, or their or his substitutes or substitute, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report on Form 10-K has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signature /S/ GIDEON WERTHEIZER Gideon Wertheizer /S/ YANIV ARIELI Yaniv Arieli Title Chief Executive Officer and Director (Principal Executive Officer & Director) Date March 1, 2018 Chief Financial Officer and Treasurer (Principal Financial Officer and Principal Accounting Officer) March 1, 2018 /S/ PETER MCMANAMON Director and Chairman March 1, 2018 Peter McManamon /S/ ELIYAHU AYALON Director Eliyahu Ayalon /S/ ZVI LIMON Zvi Limon Director /S/ BRUCE MANN Director Bruce Mann /S/ MARIA MARCED Director Maria Marced /S/ SVEN-CHRISTER-NILSSON Director Sven-Christer Nilsson /S/ LOUIS SILVER Director Louis Silver sf-3868279 March 1, 2018 March 1, 2018 March 1, 2018 March 1, 2018 March 1, 2018 March 1, 2018 CEVA, INC. SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS Year ended December 31, 2017 Allowance for doubtful accounts Year ended December 31, 2016 Allowance for doubtful accounts Year ended December 31, 2015 Allowance for doubtful accounts Balance at beginning of period Additions Deduction Balance at end of period $ — $ — $ — $ — $ 25 $ — $ 25 $ — $ 25 $ — $ — $ 25 sf-3868279 Exhibit Number 3.1(1) 3.2(2) 3.3(3) 3.4(4) 4.1(5) 10.1†(6) 10.2(6)† 10.3†(13) 10.4†(6) EXHIBIT INDEX Description Amended and Restated Certificate of Incorporation of the Registrant https://www.sec.gov/Archives/edgar/data/1173489/000089843002002552/dex31.htm Certificate of Ownership and Merger (merging CEVA, Inc. into ParthusCeva, Inc.) https://www.sec.gov/Archives/edgar/data/1173489/000119312503090855/dex31.htm Amended and Restated Bylaws of the Registrant https://www.sec.gov/Archives/edgar/data/1173489/000119312516790729/d289261dex31.htm Amendment to the Amended and Restated Certificate of Incorporation of the Registrant https://www.sec.gov/Archives/edgar/data/1173489/000114420405022345/v022227_ex3-1.htm Specimen of Common Stock Certificate https://www.sec.gov/Archives/edgar/data/1173489/000092701602003793/dex41.htm CEVA, Inc. 2000 Stock Incentive Plan https://www.sec.gov/Archives/edgar/data/1173489/000136231008001431/c72693exv10w6.htm CEVA, Inc. 2002 Stock Incentive Plan https://www.sec.gov/Archives/edgar/data/1173489/000136231008001431/c72693exv10w7.htm CEVA, Inc. 2003 Director Stock Option Plan https://www.sec.gov/Archives/edgar/data/1173489/000119312512117311/d280748dex108.htm Parthus 2000 Share Option Plan https://www.sec.gov/Archives/edgar/data/1173489/000136231008001431/c72693exv10w10.htm 10.5†* CEVA, Inc. 2002 Employee Stock Purchase Plan (filed with this Annual Report on Form 10-K) Form of Indemnification Agreement https://www.sec.gov/Archives/edgar/data/1173489/000089843002002552/dex1013.htm Employment Agreement between the Registrant and Gideon Wertheizer dated as of November 1, 2002 https://www.sec.gov/Archives/edgar/data/1173489/000092701603001458/dex1016.txt Employment Agreement between the Registrant and Issachar Ohana dated as of November 1, 2002 https://www.sec.gov/Archives/edgar/data/1173489/000092701603001458/dex1018.txt Personal and Special Employment Agreement between the Registrant and Yaniv Arieli dated as of August 18, 2005 https://www.sec.gov/Archives/edgar/data/1173489/000114420405034579/v028299_ex10-1.htm Form of Nonstatutory Stock Option Agreement under the CEVA, Inc. 2002 Stock Incentive Plan https://www.sec.gov/Archives/edgar/data/1173489/000114420406031683/v048775_ex10-22.htm Form of Israeli Stock Option Agreement under the CEVA, Inc. 2002 Stock Incentive Plan https://www.sec.gov/Archives/edgar/data/1173489/000114420406031683/v048775_ex10-23.htm Form of Nonstatutory Stock Option Agreement under the CEVA, Inc. 2000 Stock Incentive Plan https://www.sec.gov/Archives/edgar/data/1173489/000114420406031683/v048775_ex10-24.htm Form of Israeli Stock Option Agreement under the CEVA, Inc. 2000 Stock Incentive Plan https://www.sec.gov/Archives/edgar/data/1173489/000114420406031683/v048775_ex10-25.htm Form of Nonstatutory Stock Option Agreement under the CEVA, Inc. 2003 Director Stock Option Plan https://www.sec.gov/Archives/edgar/data/1173489/000114420406031683/v048775_ex10-26.htm Form of Nonstatutory Stock Option Agreement for Directors under the CEVA, Inc. 2000 Stock Incentive Plan https://www.sec.gov/Archives/edgar/data/1173489/000095013407017526/f32667exv10w24.htm 10.6(1) 10.7†(7) 10.8†(7) 10.9†(8) 10.10†(9) 10.11†(9) 10.12†(9) 10.13†(9) 10.14†(9) 10.15†(10) sf-3868279 10.16†(10) 10.17†(11) 10.18†(12) Yaniv Arieli’s Amended and Restated Nonstatutory Stock Option Agreement under the CEVA, Inc. 2002 Stock Incentive Plan, dated as of August 3, 2007 https://www.sec.gov/Archives/edgar/data/1173489/000095013407017526/f32667exv10w25.htm Amendment, dated July 22, 2003, to the Employment Agreement by and between Issachar Ohana and CEVA, Inc., dated November 1, 2002 https://www.sec.gov/Archives/edgar/data/1173489/000095013407023511/f35285exv10w27.htm Amendment, effective as of November 1, 2007, to the Employment Agreement by and between Issachar Ohana and CEVA, Inc., dated November 1, 2002 and as amended on July 22, 2003 https://www.sec.gov/Archives/edgar/data/1173489/000095013407023138/f35270exv99w1.htm 10.19†* CEVA, Inc. 2011 Stock Incentive Plan (filed with this Annual Report on Form 10-K) 10.20†(14) 10.21†(14) 10.22†(15) 10.23†(15) 10.24†(15) 10.25†(15) 10.26†(15) 10.27†(15) 10.28†(15) 10.29†(16) 10.30†(16) 2017 Executive Bonus Plan for Gideon Wertheizer and Yaniv Arieli, effective as of January 1, 2018 (portions of the description of the 2017 Executive Bonus Plan are redacted). https://www.sec.gov/Archives/edgar/data/1173489/000119312518030716/d482048d8k.htm 2017 Incentive Plan for Issachar Ohana, EVP Worldwide Sales, effective as of January 1, 2017 (portions of this exhibit is redacted). https://www.sec.gov/Archives/edgar/data/1173489/000119312517030687/d340652dex101.htm Form of Stock Appreciation Right Agreement under the CEVA, Inc. 2011 Stock Incentive Plan https://www.sec.gov/Archives/edgar/data/1173489/000119312516501526/d127989dex1026.htm Form of Israeli Stock Appreciation Right Agreement under the CEVA, Inc. 2011 Stock Incentive Plan https://www.sec.gov/Archives/edgar/data/1173489/000119312516501526/d127989dex1027.htm Form of Israeli Restricted Stock Unit Agreement for employees under the CEVA, Inc. 2011 Stock Incentive Plan https://www.sec.gov/Archives/edgar/data/1173489/000119312516501526/d127989dex1028.htm Form of Restricted Stock Unit Agreement for employees under the CEVA, Inc. 2011 Stock Incentive Plan https://www.sec.gov/Archives/edgar/data/1173489/000119312516501526/d127989dex1029.htm Form of Restricted Stock Unit Agreement for non-employee directors under the CEVA, Inc. 2011 Stock Incentive Plan https://www.sec.gov/Archives/edgar/data/1173489/000119312516501526/d127989dex1030.htm Form of Restricted Stock Unit Agreement for Israeli non-employee directors under the CEVA, Inc. 2011 Stock Incentive Plan https://www.sec.gov/Archives/edgar/data/1173489/000119312516501526/d127989dex1031.htm Israeli Sub-plan under the CEVA, Inc. 2011 Stock Incentive Plan https://www.sec.gov/Archives/edgar/data/1173489/000119312516501526/d127989dex1032.htm 2018 Incentive Plan for Issachar Ohana, EVP Worldwide Sales, effective as of January 1, 2018 (portions of this exhibit is redacted). https://www.sec.gov/Archives/edgar/data/1173489/000119312518030716/d482048dex101.htm 2018 Executive Bonus Plan for Gideon Wertheizer and Yaniv Arieli, effective as of January 1, 2018 (portions of the description of the 2018 Executive Bonus Plan are redacted). https://www.sec.gov/Archives/edgar/data/1173489/000119312518030716/d482048d8k.htm Ex21.1* Subsidiaries of the Registrant 23.1* 24.1* 31.1* Consent of Kost Forer Gabbay & Kasierer, a member of Ernst & Young Global Power of Attorney (See signature page of this Annual Report on Form 10-K) Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer 31.2* Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer sf-3868279 32* Section 1350 Certification of Chief Executive Officer and Chief Financial Officer 101.INS XBRL Instance Document 101.SCH XBRL Taxonomy Extension Schema Document 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF XBRL Taxonomy Extension Definition Linkbase Document 101.LAB XBRL Taxonomy Extension Labels Linkbase Document 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document (1) Filed as an exhibit to CEVA’s registration statement on Form 10, as amended, initially filed with the Commission on June 3, 2002 (registration number 000-49842), and incorporated herein by reference. (2) Filed as an exhibit to CEVA’s Report on Form 8-K, filed with the Commission on December 8, 2003, and incorporated hereby by reference. (3) Filed as an exhibit to CEVA’s Current Report on Form 8-K, filed with the Commission on December 12, 2016, and incorporated hereby by reference. (4) Filed as an exhibit to CEVA’s Report on Form 8-K, filed with the Commission on July 22, 2005, and incorporated hereby by reference. (5) Filed as an exhibit to CEVA’s registration statement on Form S-1, as amended, initially filed with the Commission on July 30, 2002 (registration number 333-97353), and incorporated herein by reference. (6) Filed as an exhibit to CEVA’s 2007 Annual Report on Form 10-K, filed with the Commission on March 14, 2008, and incorporated hereby by reference. (7) Filed as an exhibit to CEVA’s 2002 Annual Report on Form 10-K, filed with the Commission on March 28, 2003, and incorporated hereby by reference. (8) Filed as an exhibit to CEVA’s Quarterly Report on Form 10-Q, filed with the Commission on November 9, 2005, and incorporated hereby by reference. (9) Filed as an exhibit to CEVA’s Quarterly Report on Form 10-Q, filed with the Commission on August 9, 2006, and incorporated hereby by reference. (10)Filed as an exhibit of the same number to CEVA’s Quarterly Report on Form 10-Q, filed with the Securities and Exchange Commission on August 9, 2007, and incorporated hereby by reference. (11)Filed as Exhibit 10.27 to CEVA’s Quarterly Report on Form 10-Q, filed with the Securities and Exchange Commission on November 9, 2007, and incorporated hereby by reference. (12) Filed as Exhibit 99.1 to CEVA’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on November 7, 2007, and incorporated hereby by reference. (13)Filed as Exhibit 10.8 to CEVA’s Annual Report on Form 10-K filed with the Commission on March 15, 2012, and incorporated hereby by reference.. (14) Filed as an exhibit to CEVA’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on February 3, 2017, and incorporated hereby by reference.. (15) Filed as an exhibit to CEVA’s Annual Report on Form 10-K filed with the Commission on March 11, 2016, and incorporated hereby by reference. (16) Filed as an exhibit to CEVA’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on February 2, 2018, and incorporated hereby by reference. † Management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 15(c) of Form 10-K. * Filed herewith. sf-3868279 The following are the subsidiaries of CEVA, Inc. CEVA, INC. Subsidiaries Exhibit 21.1 Name CEVA Limited CEVA Development, Inc. CEVA Inc. CEVA Ireland Limited CEVA DSP Limited CEVA Services Limited CEVA Systems LLC Nihon CEVA K.K. CEVA Technologies Limited CEVA Technologies, Inc. CEVA Germany GmbH. CEVA France RivieraWaves SAS Jurisdiction of Incorporation Northern Ireland California Cayman Islands Republic of Ireland Israel Republic of Ireland Delaware Japan Republic of Ireland Delaware Germany France France sf-3868279 Exhibit 23.1 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We consent to the incorporation by reference in the Registration Statements (Form S-8 Nos. 333-219868, 333-206274, 333-176207, 333-101553, 333-107443, 333-115506, 333-141355 and 333-160866) pertaining to the 2011 Stock Incentive Plan, 2002 Stock Incentive Plan, 2002 Employee Stock Purchase Plan, 2000 Stock Incentive Plan, Parthus Technologies 2000 Share Incentive Plan, Chicory Systems, Inc. 1999 Employee Stock Option /Stock Issuance Plan, and Amended and Restated 2003 Director Stock Option Plan of CEVA, Inc. (formerly ParthusCeva, Inc.) of our reports dated March 1, 2018, with respect to the consolidated financial statements and financial statement schedule of CEVA, Inc., and the effectiveness of internal control over financial reporting of CEVA, Inc. included in this Annual Report on Form 10-K for the year ended December 31, 2017. / s / KOST FORER GABBAY & KASIERER A Member of Ernst & Young Global Tel-Aviv, Israel March 1, 2018 sf-3868279 EXHIBIT 31.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302(a) OF THE SARBANES-OXLEY ACT OF 2002 I, Gideon Wertheizer, certify that: 1. I have reviewed this Annual Report on Form 10-K of CEVA, Inc. (the “Company”); 2. 3. 4. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and 5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. Date: March 1, 2018 By: /s/ Gideon Wertheizer Gideon Wertheizer Chief Executive Officer sf-3868279 EXHIBIT 31.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302(a) OF THE SARBANES-OXLEY ACT OF 2002 I, Yaniv Arieli, certify that: 1. I have reviewed this Annual Report on Form 10-K of CEVA, Inc. (the “Company”); 2. 3. 4. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and 5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. Date: March 1, 2018 By: /s/ Yaniv Arieli Yaniv Arieli Chief Financial Officer sf-3868279 EXHIBIT 32 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report on Form 10-K of CEVA, Inc. (the “Company”) for the year ended December 31, 2017, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, Gideon Wertheizer, Chief Executive Officer of the Company, and Yaniv Arieli, Chief Financial Officer of the Company, each hereby certifies, that, to the best of his knowledge: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company at the dates and for the periods indicated. This certification will not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section. This certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that the Company specifically incorporates it by reference. Date: March 1, 2018 /s/ Gideon Wertheizer Gideon Wertheizer Chief Executive Officer /s/ Yaniv Arieli Yaniv Arieli Chief Financial Officer sf-3868279 

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