Arteris Inc

Previous wording

As of June 30, 2024, we had 252 full-time employees and offices in eight locations in the United States, France, China, South Korea, and Japan. As of June 30, 2024, we are taking steps to establish anoffice in Poland. For the three months ended June 30, 2024, we generated revenue of $14.6 million, net loss of $8.3 million, and net loss per share, basic and diluted of $0.22. As of June 30, 2024, we had Annual Contract Value (as defined below) of $56.1 million. During the three months ended June 30, 2024, we had 21 Confirmed Design Starts (as defined below).

Current wording

As of September 30, 2024, we had 258 full-time employees and offices in nine locations in the United States, France, China, South Korea, Japan and Taiwan. As of September 30, 2024, we are taking steps to establish anoffice in Poland. For the three months ended September 30, 2024, we generated revenue of $14.7 million, net loss of $7.7 million, and net loss per share, basic and diluted of $0.20. As of September 30, 2024, we had Annual Contract Value (as defined below) of $56.4 million. During the three months ended September 30, 2024, we had 14 Confirmed Design Starts (as defined below).

Previous wording

Our revenue from period to period can be impacted by the terms of the agreements we enter into with our customers. For example, in 2023, we made certain changes to SIA agreements that result in the ratable recognition of the related license revenue over the contract term. As a result of how these contracts are structured and the revenue is recognized, our revenue in thethree and six months ended June 30, 2024 may not be comparable to future periods if we do not enter into similar contractual agreements. Further, a meaningful percentage of our revenue is generated through royalty payments. Because the time between a new license agreement win and the customer’s end product being sold can be substantial, with sales of the end product being subject to a number of factors outside our control, our revenue from royalties is difficult to predict. As a result of the foregoing, revenue may fluctuate significantly from period to period and any increase or decrease in such revenue may not be indicative of future period-to-period increases or decreases.

Current wording

Our revenue from period to period can be impacted by the terms of the agreements we enter into with our customers. For example, in 2023, we made certain changes to SIA agreements that result in the ratable recognition of the related license revenue over the contract term. As a result of how these contracts are structured and the revenue is recognized, our revenue in thethree and nine months ended September 30, 2024 may not be comparable to future periods if we do not enter into similar contractual agreements. Further, a meaningful percentage of our revenue is generated through royalty payments. Because the time between a new license agreement win and the customer’s end product being sold can be substantial, with sales of the end product being subject to a number of factors outside our control, our revenue from royalties is difficult to predict. As a result of the foregoing, revenue may fluctuate significantly from period to period and any increase or decrease in such revenue may not be indicative of future period-to-period increases or decreases.

Previous wording

We believe our products’ global footprint provides us with the opportunity to enter new markets and accelerate our growth. For thesix months ended June 30, 2024, 64.7% of our revenue was derived from sales to customers outside of the United States and 30.1% of our revenue was derived from customers located in China, respectively. For 2023, 65.4% of our revenue was derived from sales to customers outside of the United States and 31.1% of our revenue was derived from customers located in China. While we believe operating internationally has beneficially impacted our results of operations, we are subject to inherent risks attributed to operating in a global economy. Further, our international operations have been, and may in the future continue to be, subject to restrictive government regulations. For example, U.S. export regulations, including regulations announced October 7, 2022 and further amended effective November 17, 2023, that impose broad end-use and other restrictions on doing business with certain customers and facilities in China that develop or produce semiconductor chips or manufacturing equipment, may limit or adversely impact our ability to license or support our products to entities in or doing business with certain advanced AI or “supercomputer” design companies, foundries and manufacturers of assemblies and components in China. As a result of these restrictions, our customers may experience changes to or delays in their design projects, and we may face challenges to maintain our revenue and/or our revenue may decrease.

Current wording

We believe our products’ global footprint provides us with the opportunity to enter new markets and accelerate our growth. For thenine months ended September 30, 2024, 63.4% of our revenue was derived from sales to customers outside of the United States and 30.0% of our revenue was derived from customers located in China, respectively. For 2023, 65.4% of our revenue was derived from sales to customers outside of the United States and 31.1% of our revenue was derived from customers located in China. While we believe operating internationally has beneficially impacted our results of operations, we are subject to inherent risks attributed to operating in a global economy. Further, our international operations have been, and may in the future continue to be, subject to restrictive government regulations. For example, U.S. export regulations, including regulations announced October 7, 2022 and further amended effective November 17, 2023, that impose broad end-use and other restrictions on doing business with certain customers and facilities in China that develop or produce semiconductor chips or manufacturing equipment, may limit or adversely impact our ability to license or support our products to entities in or doing business with certain advanced AI or “supercomputer” design companies, foundries and manufacturers of assemblies and components in China. As a result of these restrictions, our customers may experience changes to or delays in their design projects, and we may face challenges to maintain our revenue and/or our revenue may decrease.

Previous wording

We define Annual Contract Value (ACV) for an individual customer agreement as the total fixed fees under the agreement divided by the number of years in the agreement term. Our total ACV is the aggregate ACVs for all our customers as measured at a given point in time. Total fixed fees include licensing, support and maintenance and other fixed fees under IP licensing or software licensing agreements but exclude variable revenue derived from licensing agreements with customers, particularly royalties. ACV was $56.1 million and $53.6 million as of June 30, 2024 and 2023, respectively. In addition, total ACV and trailing-twelve-months variable royalties and other revenue was $60.1 million and $58.2 million as of June 30, 2024 and 2023, respectively. We monitor ACV to measure our success and believe the increase in the number shows our progress in expanding our customers’ adoption of our platform. We believe ACV provides investors with useful information to assess the strength and trajectory of our business as growth demonstrates the expansion of customer adoption of our platform. ACV fluctuates due to a number of factors, including the timing, duration and dollar amount of customer contracts.

Current wording

We define Annual Contract Value (ACV) for an individual customer agreement as the total fixed fees under the agreement divided by the number of years in the agreement term. Our total ACV is the aggregate ACVs for all our customers as measured at a given point in time. Total fixed fees include licensing, support and maintenance and other fixed fees under IP licensing or software licensing agreements but exclude variable revenue derived from licensing agreements with customers, particularly royalties. ACV was $56.4 million and $52.3 million as of September 30, 2024 and 2023, respectively. In addition, total ACV plus royalties was $60.5 million and $57.3 million as of September 30, 2024 and 2023, respectively. ACV plus royalties is calculated based on ACV and the trailing-twelve-months variable royalties and other revenue. We monitor ACV to measure our success and believe the increase in the number shows our progress in expanding our customers’ adoption of our platform. We believe ACV provides investors with useful information to assess the strength and trajectory of our business as growth demonstrates the expansion of customer adoption of our platform. ACV fluctuates due to a number of factors, including the timing, duration and dollar amount of customer contracts.

Previous wording

We define Active Customers as customers who have entered into a license agreement with us that remains in effect. The retention and expansion of our relationships with existing customers are key indicators of our revenue potential. We added six and 12 net new Active Customers during the three months ended June 30, 2024 and 2023, respectively.

Current wording

We define Active Customers as customers who have entered into a license agreement with us that remains in effect. The retention and expansion of our relationships with existing customers are key indicators of our revenue potential. During the three months ended September 30, 2024, our net new Active Customers was negative one. We added one net new Active Customer during the three months ended September 30, 2023.

Previous wording

We define Confirmed Design Starts as when customers confirm their commencement of new semiconductor designs using our interconnect IP and notify us. Confirmed Design Starts is a metric management uses to assess the activity level of our customers in terms of the number of new semiconductor designs that are started using our interconnect IP in a given period. Our interconnect IP and NoC interface IP customer base contributed to a total of 21 and 22 design starts during the three months ended June 30, 2024 and 2023, respectively. We believe that the number of Confirmed Design Starts is an important indicator of the growth of our business and future royalty revenue trends.

Current wording

We define Confirmed Design Starts as when customers confirm their commencement of new semiconductor designs using our interconnect IP and notify us. Confirmed Design Starts is a metric management uses to assess the activity level of our customers in terms of the number of new semiconductor designs that are started using our interconnect IP in a given period. Our interconnect IP and NoC interface IP customer base contributed to a total of 14 and 22 design starts during the three months ended September 30, 2024 and 2023, respectively. We believe that the number of Confirmed Design Starts is an important indicator of the growth of our business and future royalty revenue trends.

Previous wording

The RPO amount is intended to provide visibility into future revenue streams. We expect RPO to fluctuate up or down from period to period for several reasons, including amounts, timing, and duration of customer contracts, as well as the timing of billing cycles for each contract. Our RPO was $77.5 million and $65.1 million as of June 30, 2024 and 2023, respectively.

Current wording

The RPO amount is intended to provide visibility into future revenue streams. We expect RPO to fluctuate up or down from period to period for several reasons, including amounts, timing, and duration of customer contracts, as well as the timing of billing cycles for each contract. Our RPO was $78.4 million and $62.5 million as of September 30, 2024 and 2023, respectively.

Previous wording

Revenue: Our revenue is primarily derived from licensing intellectual property, licensing software, support and maintenance services, professional services, training services, and royalties. Our agreements often include other service elements including training and professional services which were immaterial for thethree and six months ended June 30, 2024 and 2023, respectively.

Current wording

Revenue: Our revenue is primarily derived from licensing intellectual property, licensing software, support and maintenance services, professional services, training services, and royalties. Our agreements often include other service elements including training and professional services which were immaterial for thethree and nine months ended September 30, 2024 and 2023, respectively.

Previous wording

Our SIA solutions product and CSRCompiler product arrangements provide customers the right to software licenses, software updates and technical support. The software licenses are time-based licenses with terms generally ranging from one to three years. These arrangements generally have two distinct performance obligations that consist of transferring the licensed software and the support and maintenance service. Support and maintenance services consist of a stand-ready obligation to provide technical support and software updates over the support term. For the majority of these contracts, there are no termination rights and the transaction price is non-refundable. Revenue allocated to the software license is generally recognized at a point in time upon the later of the delivery date or the beginning of the license period, and revenue allocated to support services is recognized ratably over the support term. Certain SIA solutions contracts include termination rights that allow the customer to cancel and receive a pro-rata refund on support and maintenance services at the end of each month of the contract period, which results in a ratable recognition of the related license revenue over the contract term.

Current wording

Our SIA products and CSRCompiler product arrangements provide customers the right to software licenses, software updates and technical support. The software licenses are time-based licenses with terms generally ranging from one to three years. These arrangements generally have two distinct performance obligations that consist of transferring the licensed software and the support and maintenance service. Support and maintenance services consist of a stand-ready obligation to provide technical support and software updates over the support term. Revenue allocated to the software license is generally recognized at a point in time upon the later of the delivery date or the beginning of the license period, and revenue allocated to support services is recognized ratably over the support term. Certain SIA solutions contracts include termination rights that allow the customer to cancel and receive a pro-rata refund on support and maintenance services at the end of each month of the contract period, which results in a ratable recognition of the related license revenue over the contract term.

Previous wording

Provision for income taxes: Our income tax provision consists primarily of income taxes in certain foreign jurisdictions in which we conduct business and includes foreign non-recoverable withholding taxes. We have a full valuation allowance against our U.S. federal and state deferred tax assets as the realization of the full amount of these deferred tax assets is uncertain, including net operating loss carryforwards and tax credits related primarily to research and development. We expect to maintain this full valuation allowance until it becomes more likely than not that the deferred tax assets will be realized.

Current wording

Provision for (benefit from) income taxes: Our income tax provision consists primarily of income taxes in certain foreign jurisdictions in which we conduct business and includes foreign non-recoverable withholding taxes. We have a full valuation allowance against our U.S. federal and state deferred tax assets as the realization of the full amount of these deferred tax assets is uncertain, including net operating loss carryforwards and tax credits related primarily to research and development. We expect to maintain this full valuation allowance until it becomes more likely than not that the deferred tax assets will be realized.

Previous wording

Revenue from licensing, support and maintenance increased $0.6 million for the three months ended June 30, 2024 when compared to the three months ended June 30, 2023. The increase was primarily due to new license arrangements with existing customers. The change in variable royalty revenue was due to fixed and up-front royalties from certain customers in the second quarter of 2023.

Current wording

Revenue from licensing, support and maintenance increased $1.4 million for the three months ended September 30, 2024 when compared to the three months ended September 30, 2023. The increase was primarily due to new license arrangements with existing customers. Growth in our variable royalty revenue was primarily due to an increase in production from existing customers.

Previous wording

Cost of revenue increased $0.2 million or 19%, to $1.5 million for the three months ended June 30, 2024 from $1.2 million for the three months ended June 30, 2023. The increase in cost of revenue during the three months ended June 30, 2024 was primarily due to higher FAE employee-related expenses.

Current wording

Cost of revenue increased $0.2 million or 14%, to $1.5 million for the three months ended September 30, 2024 from $1.3 million for the three months ended September 30, 2023. The increase in cost of revenue during the three months ended September 30, 2024 was primarily due to higher FAE employee-related expenses.

Previous wording

R&D expenses decreased, $1.9 million, or 8%, to $21.6 million for the six months ended June 30, 2024 from $23.5 million for the six months ended June 30, 2023. The decrease in R&D expenses was primarily due to $0.8 million of grants received by our subsidiary in France for R&D projects. We also incurred lower employee-related costs of $0.8 million, lower stock-based compensation expense of $0.5 million primarily related to the modification of certain performance stock unit awards in 2023 and a decrease of software expense of $0.2 million.

Current wording

R&D expenses increased, $0.9 million, or 8%, to $11.9 million for the three months ended September 30, 2024 from $11.0 million for the three months ended September 30, 2023. The increase in R&D expenses was due to higher employee-related costs of $0.4 million primarily attributable to increased engineering headcount to support our continued growth and investment in our interconnect technology and SIA solutions. We also incurred higher stock-based compensation expense of $0.4 million primarily related to new grants in 2024.

Previous wording

S&M expenses remained relatively flat for the six months ended June 30, 2024 compared to the six months ended June 30, 2023.

Current wording

S&M expenses remained relatively flat for the three months ended September 30, 2024 when compared to the three months ended September 30, 2023.

Previous wording

G&A expenses remained relatively flat for the six months ended June 30, 2024 compared to the six months ended June 30, 2023.

Current wording

G&A expenses remained relatively flat for the three months ended September 30, 2024 when compared to the three months ended September 30, 2023.

Previous wording

The provision for income taxes was $1.0 million for the three months ended June 30, 2024 compared to $0.6 million for the three months ended June 30, 2023. The increase in our income tax expense was due to a change in the forecasted geographic mix of worldwide earnings which are taxed at different statutory tax rates, the impact of losses in jurisdictions which have full valuation allowances, and changes in current year foreign withholding taxes. Foreign withholding taxes are generally assessed on gross revenue generated, rather than pre-tax income, in certain countries in which the Company does not file an income tax return.

Current wording

The provision for (benefit from) income taxes was a benefit of $0.1 million for the three months ended September 30, 2024 compared to a benefit of $0.4 million for the three months ended September 30, 2023. The increase in our income tax expense was due to a change in the forecasted geographic mix of worldwide earnings which are taxed at different statutory tax rates, the impact of losses in jurisdictions which have full valuation allowances, and changes in current year foreign withholding taxes. Foreign withholding taxes are generally assessed on gross revenue generated, rather than pre-tax income, in certain countries in which the Company does not file an income tax return.

Previous wording

Revenue from licensing, support and maintenance remained relatively flat for the six months ended June 30, 2024 when compared to the six months ended June 30, 2023. The change in variable royalty revenue was due to a temporary decrease in volume from a certain large customer in the first quarter of 2024 as well as fixed and up-front royalties from certain customers in the second quarter of 2023. Other revenue increased due to timing of completion of professional services.

Current wording

Revenue from licensing, support and maintenance increased $1.9 million during the nine months ended September 30, 2024 when compared to the nine months ended September 30, 2023. The increase was primarily due to new license arrangements with existing customers. The change in variable royalty revenue was primarily due to revenue from royalty audit findings and other one-time up-front royalties from certain customers in 2023. Other revenue increased due to timing of completion of professional services.

Previous wording

Cost of revenue increased, $0.6 million, or 25%, to $2.9 million for the six months ended June 30, 2024 from $2.3 million for the six months ended June 30, 2023. The increase in cost of revenue was primarily due to higher FAE employee-related expenses.

Current wording

Cost of revenue increased, $0.8 million, or 21%, to $4.4 million for the nine months ended September 30, 2024 from $3.6 million for the nine months ended September 30, 2023. The increase in cost of revenue was primarily due to higher FAE employee-related expenses.

Previous wording

R&D expenses decreased, $1.4 million, or 11%, to $10.7 million for the three months ended June 30, 2024 from $12.1 million for the three months ended June 30, 2023. The decrease in R&D expenses was primarily due to lower stock-based compensation expense of $0.7 million, predominantly related to the modification of certain performance stock unit awards in 2023 and $0.4 million of grants received by our subsidiary in France for R&D projects.

Current wording

R&D expenses decreased, $1.0 million, or 3%, to $33.5 million for the nine months ended September 30, 2024 from $34.5 million for the nine months ended September 30, 2023. The decrease in R&D expenses was primarily due to $0.9 million of grants received by our subsidiary in France for R&D projects.

Previous wording

Interest expense remained relatively flat for the six months ended June 30, 2024 when compared to the six months ended June 30, 2023.

Current wording

Interest expense remained relatively flat for the nine months ended September 30, 2024 when compared to the nine months ended September 30, 2023.

Previous wording

Other income (expense), net remained relatively flat for the six months ended June 30, 2024 when compared to the six months ended June 30, 2023.

Current wording

Other income (expense), net remained relatively flat for the nine months ended September 30, 2024 when compared to the nine months ended September 30, 2023.

Previous wording

Loss from equity method investment remained relatively flat for the three months ended June 30, 2024 when compared to the three months ended June 30, 2023. Such losses are expected to continue in the near future.

Current wording

Loss from equity method investment was $2.1 million for the nine months ended September 30, 2024, compared to $2.5 million for the nine months ended September 30, 2023, representing our proportionate share of Transchip’s net loss during the trailing nine months ended June 30, 2024. The decrease in loss from equity method investment was primarily due to Transchip recognizing higher revenue during the trailing nine months ended June 30, 2024, compared to the trailing nine months ended June 30, 2023. Such losses are expected to continue in the near future.

Previous wording

Provision for income taxes for the six months ended June 30, 2024 was $1.3 million, compared to $0.9 million for the six months ended June 30, 2023. The increase in our income tax expense was due to a change in the forecasted geographic mix of worldwide earnings which are taxed at different statutory tax rates, the impact of losses in jurisdictions which have full valuation allowances, and changes in current year foreign withholding taxes. Foreign withholding taxes are generally assessed on gross revenue generated, rather than pre-tax income, in certain countries in which the Company does not file an income tax return.

Current wording

Provision for income taxes for the nine months ended September 30, 2024 was $1.3 million, compared to $0.5 million for the nine months ended September 30, 2023. The increase in our income tax expense was due to a change in the forecasted geographic mix of worldwide earnings which are taxed at different statutory tax rates, the impact of losses in jurisdictions which have full valuation allowances, and changes in current year foreign withholding taxes. Foreign withholding taxes are generally assessed on gross revenue generated, rather than pre-tax income, in certain countries in which the Company does not file an income tax return.

Previous wording

Since inception, we have financed operations primarily from payments received from our customers, the net proceeds from the sale of our common stock in the IPO as well as the net proceeds from the private issuance of our convertible preferred stock and common stock. As of June 30, 2024, we had$45.8 million in cash and cash equivalents and short-term investments of which $1.5 million was held by our foreign subsidiaries. In addition, as of June 30, 2024, we also had$8.1 million in long-term investments.

Current wording

Since inception, we have financed operations primarily from payments received from our customers, the net proceeds from the sale of our common stock in the IPO as well as the net proceeds from the private issuance of our convertible preferred stock and common stock. As of September 30, 2024, we had$48.7 million in cash and cash equivalents and short-term investments of which $1.8 million was held by our foreign subsidiaries. In addition, as of September 30, 2024, we also had$5.8 million in long-term investments.

Previous wording

For the six months ended June 30, 2023, net cash used in operating activities was $9.9 million primarily due to our net loss of $18.2 million, adjusted for non-cash charges of $9.0 million and $0.8 million changes in operating assets and liabilities. Non-cash charges primarily consisted of stock-based compensation of $7.3 million, loss from our equity method investment of $1.6 million and depreciation and amortization of $1.3 million, partially offset by amortization of deferred income of $0.6 million and net accretion of discounts on available-for-sale securities of $0.5 million. The drivers of the changes in operating assets and liabilities were a $2.7 million increase in deferred revenue, partially offset by a $2.4 million increase in accounts receivable, a $0.7 million increase in prepaid expense and other current assets and a $0.4 million decrease in accounts payable.

Current wording

For the nine months ended September 30, 2024, net cash provided by operating activities was $1.9 million, primarily due to our net loss of $25.4 million, adjusted for non-cash charges of $15.1 million and $12.3 million changes in operating assets and liabilities. Non-cash charges primarily consisted of stock-based compensation of $11.8 million, depreciation and amortization of $2.5 million and loss from our equity method investment of $2.1 million, partially offset by amortization of deferred income of $0.9 million and net accretion of discounts on available-for-sale securities of $0.5 million. The drivers of the changes in operating assets and liabilities were a $8.8 million increase in deferred revenue, a $3.3 million decrease in accounts receivable and a $1.5 million increase in accrued expenses and other liabilities, partially offset by a $1.2 million increase in prepaid expense and other assets.

Previous wording

For the six months ended June 30, 2024, net cash provided by operating activities was $0.8 million, primarily due to our net loss of $17.7 million, adjusted for non-cash charges of $9.6 million and $8.9 million changes in operating assets and liabilities. Non-cash charges primarily consisted of stock-based compensation of $7.4 million, depreciation and amortization of $1.6 million and loss from our equity method investment of $1.5 million, partially offset by amortization of deferred income of $0.6 million and net accretion of discounts on available-for-sale securities of $0.3 million. The drivers of the changes in operating assets and liabilities were a $4.7 million increase in deferred revenue, a $3.1 million decrease in accounts receivable, a $0.9 million decrease in prepaid expense and other assets, a $0.2 million increase in accounts payable and a $0.1 million increase in accrued expenses and other liabilities.

Current wording

For the nine months ended September 30, 2023, net cash used in operating activities was $12.8 million primarily due to our net loss of $26.3 million, adjusted for non-cash charges of $14.1 million and $0.5 million changes in operating assets and liabilities. Non-cash charges primarily consisted of stock-based compensation of $11.0 million, loss from our equity method investment of $2.5 million and depreciation and amortization of $2.2 million, partially offset by amortization of deferred income of $0.9 million and net accretion of discounts on available-for-sale securities of $0.7 million. The drivers of the changes in operating assets and liabilities were a $3.2 million increase in accounts receivable, a $0.5 million increase in prepaid expense and other current assets and a $0.2 million decrease in accounts payable, offset by a $1.9 million increase in deferred revenue and a $1.5 million increase in accrued expenses and other liabilities.

Previous wording

Net cash provided by investing activities for the six months ended June 30, 2024 was $7.5 million, primarily attributable to proceeds from maturities of available-for-sale securities and certificate of deposit, partially offset by purchases of available-for-sale securities and property and equipment.

Current wording

Net cash provided by investing activities for the nine months ended September 30, 2024 was $2.9 million, primarily attributable to proceeds from maturities of available-for-sale securities and certificate of deposit, partially offset by purchases of available-for-sale securities and property and equipment.

Previous wording

Net cash provided by investing activities for the six months ended June 30, 2023 was $0.4 million, primarily attributable to proceeds from maturities of available-for-sale securities, partially offset by purchases of property and equipment and available-for-sale securities.

Current wording

Net cash used in investing activities for the nine months ended September 30, 2023 was $3.3 million, primarily attributable to purchases of property and equipment, available-for-sale securities and certificate of deposit, partially offset by proceeds from maturities of available-for-sale securities.

Previous wording

Net cash provided by financing activities for the six months ended June 30, 2024 was $0.1 million, primarily attributable proceeds from exercise of stock options, primarily offset by principal payments under vendor financing arrangements.

Current wording

Net cash used in financing activities for the nine months ended September 30, 2024 was $0.7 million, primarily attributable to principal payments under vendor financing arrangements, partially offset by proceeds from exercise of stock options.

Previous wording

Net cash used in financing activities for the six months ended June 30, 2023 was $1.1 million, primarily attributable to payments of contingent consideration for business combination of $1.0 million.

Current wording

Net cash used in financing activities for the nine months ended September 30, 2023 was $2.3 million, primarily attributable to payments of contingent consideration for business combination of $1.3 million and principal payments under vendor financing arrangements of $1.0 million.