Arteris(AIP) - 2022 Q4 - Annual Report

PART I Item 1. Business Arteris, Inc. provides semiconductor System IP for complex System-on-Chip (SoC) communications, reporting $50.4 million revenue and a $27.4 million net loss in 2022 - Arteris is a leading provider of semiconductor System IP, including interconnect and IP deployment technology, managing on-chip communications and IP block deployments in System-on-Chip (SoC) semiconductors[19] - The company's technology, including NoC IP, IP deployment software, and NoC interface IP, addresses the increasing complexity, performance, and cost requirements of SoCs, enabling faster, more efficient, and lower-cost solutions for customers[19][22] - Key Financial and Operational Highlights (2022 vs. 2021) | Metric | 2022 (in millions) | 2021 (in millions) | | :-------------------------------- | :--------- | :--------- | | Revenue | $50.4 | $37.9 | | Cash flows used in operating activities | $6.8 | $0.8 | | Net loss | $27.4 | $23.4 | | Annual Contract Value (ACV) | $49.2 | N/A | | ACV and trailing twelve months royalties and other revenue | $52.4 | N/A | | Unique SoC Design Starts (since inception) | >667 | N/A | | Net new Active Customers (in year) | 38 | N/A | Overview Arteris provides System IP technology for on-chip communications and IP block deployments in System-on-Chip (SoC) semiconductors - Arteris provides System IP technology, including interconnect and other intellectual property, to manage on-chip communications and IP block deployments in System-on-Chip (SoC) semiconductors[19] - The company's solutions connect client IP blocks (processors, memories, AI/ML accelerators, etc.) via multiple Network-on-Chips (NoCs) to achieve faster SoC targeting, and more efficient, lower-cost solutions[19] - Arteris's IP deployment capabilities were enhanced by the acquisitions of Magillem (2020) and Semifore (2022), automating customer configuration of NoC IPs and SoC integration[20] Industry Background The semiconductor industry faces increasing complexity and costs in SoC design, accelerating the shift to third-party System IP solutions - Semiconductor complexity is increasing, moving from Integrated Circuits (ICs) to System-on-Chips (SoCs) that make decisions, driven by advanced process geometries (e.g., 3nm) and machine learning architectures[26] - Rising chip design complexity leads to increased costs, with the number of IP blocks on an SoC projected to increase over 20% from 2021 to 2024, highlighting the importance of cost-efficient System IP solutions[27] - The shift to third-party IP is accelerating due to the difficulty, time, and expense of developing state-of-the-art SoC interconnect IP solutions internally, offering cost benefits, product differentiation, and accelerated time to market[32] System IP Market The System IP market, estimated at $1.3 billion in 2021, is projected to reach $3.2 billion by 2026, driven by demand across diverse applications - The System IP market, comprising interconnect IP, NoC interface IP, and IP deployment software, was estimated at $1.3 billion in 2021 and is projected to reach $3.2 billion by 2026[33] - Projected System IP Market Size (2026) | Market Segment | Projected Size (2026, in billions) | | :----------------------- | :-------------------- | | NoC Interconnect IP | ~$1.6 | | IP software deployment | ~$0.5 | | NoC Interface IP | ~$1.1 | - Arteris's market penetration spans automotive, computing, consumer, industrial, wireless, and wired communication segments, with differentiation in areas like safety certification (e.g., ASIL-D ISO 26262) and AI/ML designs[34] Automotive Applications The automotive market's disruption by automated driving and electrification is driving demand for reliable System IP, with ADAS growing at a 20.7% CAGR - The automotive market is undergoing disruption with automated driving, electrification, and vehicle connectivity, leading to an average of 23 complex SoCs per electronically enabled vehicle by 2026[35] - The ADAS segment, a key area for Arteris, is expected to grow with a 20.7% CAGR from 2022 to 2026, driving demand for reliable, configurable interconnect technologies[39] - New market entrants like electronic system companies and automotive OEMs are developing their own chips, increasing demand for System IP solutions[38] Enterprise Computing Applications Hyperscale computing companies are developing proprietary SoCs and AI/ML accelerators, creating significant opportunities for third-party System IP solutions - Large-scale cloud data centers and enterprise hyperscale computing companies are creating proprietary SoCs and accelerators, increasing market opportunities for third-party System IP solutions[41] - AI/ML SoCs, used for training and inference acceleration in cloud data centers and at the network edge, require sophisticated decision-making devices and specialized interconnect features[42][46] Communications Applications The transition to 5G wireless communications is accelerating System IP market growth due to stringent requirements for bandwidth, latency, and power consumption - The transition to 5G wireless communications is accelerating System IP market growth due to stringent requirements for bandwidth, latency, and power consumption in 5G chips[43][44] - Gartner estimates 5G infrastructure semiconductor revenue will exceed $1 billion by 2024, with 6G technology on the horizon[44] Other Applications and Technologies Consumer electronics and industrial markets demand complex chips with AI/ML, 5G, and safety features, where Arteris differentiates with functional safety certification - Consumer electronics and industrial markets require increasingly complex chips driven by AI/ML processing, 5G communications, and stringent safety/security requirements, emphasizing time-to-market pressures[45] - Functional safety, particularly ISO 26262 ASIL-B and ASIL-D certification, is a key differentiator for Arteris's NoC Interconnect IP and NoC Interface IP products in mission-critical designs[47] - Arteris supports standard processor architectures (x86, Arm, RISC-V) and optimizes System IP for specific semiconductor manufacturing technologies (TSMC, Samsung, Intel foundries)[48] Industry Challenges Developing interconnect IP is challenging, expensive, and requires deep expertise, with high quality and safety standards being critical for SoC project success - Interconnect IP development is challenging, time-consuming, and expensive, requiring deep technical expertise across hardware architecture, design, verification, EDA software, and networking architectures[49][50] - High quality and adherence to safety standards (e.g., ISO 26262 for automotive) are critical, with any failures leading to significant SoC project delays or economic losses[50] - Developing commercial interconnect IP and software tools requires large engineering teams, significant time, and substantial financial investment, creating high barriers to entry[51] Our Solutions and Competitive Strengths Arteris's System IP solutions accelerate time to market, improve SoC performance, and reduce costs through design exploration, automated tools, and robust R&D - Arteris's System IP solutions accelerate customers' time to market through design exploration, automated test bench generation, physical awareness, and pre-verified interfaces to IP block protocols and EDA tools[52] - Products improve SoC performance with features like low-power management (three levels of clock gating, power domains) and enable lower customer R&D and SoC unit costs through area-efficient interconnect IP[52] - The company has a robust R&D program, delivering at least one new Interconnect IP or IP deployment product annually since 2013, supported by 145 development engineers as of December 31, 2022[54] - Arteris is a leader in interconnect for ADAS SoCs, with over 117 automotive SoC design wins, and its IP is designed to meet ASIL D of the ISO 26262 functional safety standard[54] Our Growth Strategy Arteris aims to leverage its System IP leadership, R&D, and competitive advantages to expand its customer base in high-growth markets and through strategic acquisitions - Arteris aims to leverage its System IP technology leadership and focused R&D to provide solutions for SoC builders, maintaining neutrality regarding IP block connections and integrations[57] - The company benefits from competitive advantages due to years of experience, proprietary solutions, significant technical expertise, and high switching costs for customers, leading to a high customer retention rate[58] - Growth is targeted in high-growth segments like automotive (over 117 design wins), enterprise computing, consumer electronics, communications, and industrial markets, with a focus on AI/ML-enabled applications (100 customers, 24 Design Starts)[60] - Arteris plans to expand its customer base through ongoing System IP innovation, aiming for at least one new interconnect IP or IP deployment product annually, and through increased investment in global sales and marketing[60] - The company continues to pursue selective acquisitions and strategic transactions, such as the Magillem (2020) and Semifore (2022) acquisitions, and the Transchip joint venture in China (2022), to acquire complementary solutions and accelerate growth[61] NoC Interface IP Growth Opportunity Arteris plans to expand its product portfolio and Total Addressable Market (TAM) by developing additional data and control plane capabilities for its interconnect IPs - Arteris sees an opportunity to expand its product portfolio and Total Addressable Market (TAM) by developing additional data plane and control plane capabilities that attach directly to its interconnect IPs[62] - Current NoC interface IP products include memory schedulers, last-level caches, SoC data visibility, and SoC debug IPs, with future expansion into clocking, register management, interrupt networks, power management, security, and performance monitoring[62] Our Solutions Arteris provides semiconductor interconnect IP and IP deployment solutions through its Network-on-Chip IP and IP Deployment product platforms - Arteris provides semiconductor interconnect IP and IP deployment solutions through two core product platforms: Network-on-Chip IP Products and IP Deployment Products[63] - Network-on-Chip IP Products include FlexNoC and FlexWay (non-coherent NoC IP), Ncore (cache-coherent NoC IP), and CodaCache (last-level cache)[64][67] - IP Deployment Products, enhanced by Magillem and Semifore acquisitions, include Magillem Connectivity, Magillem Registers and CSRCompiler, and Harmony Trace, which automate SoC integration and hardware-software interface[63][67][71] Customers Arteris licenses products to a global and diverse customer base, including Intel and Samsung, and added 38 net new active customers in 2022 - Arteris licenses products to a global and diverse customer base, including semiconductor manufacturers, OEMs, and hyperscale system houses, aiming for long-term relationships[68] - In 2022, Arteris added 38 net new Active Customers, with Intel and Samsung identified as key customers[68][69] - 2022 Revenue by Geographic Area | Geographic Area | Revenue Percentage (2022) | | :---------------- | :-------------------------- | | Americas | 41.1% | | Europe and the Middle East | 13.0% | | Asia Pacific | 45.9% | Sales and Marketing Arteris engages customers early in the SoC design lifecycle with global support, emphasizing thought leadership, and has shipped approximately 3.0 billion SoCs - Arteris engages customers early in the SoC design lifecycle, with sales cycles ranging from two to nine months, and shorter for repeat customers[70][71] - The company maintains a global support organization of 33 corporate and field application engineers, providing expert advice and gathering insights for new product features[73] - Marketing emphasizes thought leadership and educates potential customers through technical papers and events, with over 341 production SoCs designed with Arteris technology and approximately 3.0 billion SoCs shipped[74][60] Research and Development Arteris dedicates significant operating expenses to R&D, employing 145 engineers and investing $41.2 million in 2022 to deliver annual product enhancements and new solutions - Arteris dedicates most of its operating expenses to R&D for interconnect IP and IP deployment solutions, employing 145 engineers (91 for interconnect IP, 54 for IP deployment software) as of December 31, 2022[75][78] - R&D strategy includes offering several product enhancement releases annually and introducing at least one new interconnect IP or IP deployment product each year[77] - In 2022, R&D spending was $41.2 million, representing 82% of revenue, reflecting significant investment in technology development[78] Competition Arteris competes with internal customer solutions and third-party providers based on die area reduction, power consumption, performance, and time to market - Arteris primarily competes with internal interconnect solutions developed by SoC customers and potential customers, as well as third-party providers like Arm and smaller companies[79] - The company competes based on die area reduction, lower idle power consumption, improved data movement performance (frequency, latency, bandwidth), and faster time to market[79] - Extensive R&D investment over many years creates a significant barrier to entry for new competitors in the interconnect IP market[79][81] Intellectual Property and Proprietary Rights Arteris protects its core technology through patents, trade secrets, copyrights, and trademarks, with 54 allowed or issued patents as of December 31, 2022 - Arteris protects its core technology through a combination of patents, trade secrets, copyrights, trademarks, and contractual protections[82][83] - Patent Portfolio as of December 31, 2022 | Category | Number | | :-------------------------------- | :----- | | Total allowed or issued patents | 54 | | U.S. allowed or issued patents | 48 | | China allowed or issued patents | 3 | | U.K. issued patent | 1 | | Japan issued patent | 1 | | South Korea issued patent | 1 | | Pending non-provisional and provisional patent applications | 75 | | U.S. pending applications | 37 | | Europe pending applications | 18 | | China pending applications | 16 | | South Korea pending applications | 3 | | Japan pending applications | 1 | - Patents generally expire between July 2035 and December 2041, and the company uses non-disclosure agreements and license keys to prevent misuse of its IP[82][83] Material Agreements Arteris has a significant agreement with Qualcomm Technologies, Inc. from a 2013 asset purchase, granting non-exclusive, perpetual rights to FlexNoC products - Arteris has a significant agreement with Qualcomm Technologies, Inc. and Qualcomm France SARL, stemming from an asset purchase in 2013[86] - Under this agreement, Arteris retained non-exclusive, worldwide, perpetual rights to manufacture, license, and distribute certain FlexNoC products and modifications, and obtained a license for FlexNoC-related works of authorship and technology[86] - Qualcomm can terminate these rights under specific conditions, including material breach or a change of control of Arteris, which could impact the FlexNoC business, though Arteris believes the importance of this development environment will decrease over time with new product launches[87] Governmental Regulation Arteris is subject to various U.S. and foreign governmental regulations, including export controls and anti-corruption laws, with potential for fines and reputational harm from violations - Arteris is subject to various governmental regulations in the U.S. and other jurisdictions, including import/export and economic sanctions laws (EAR, OFAC), anti-trust, consumer protection, and anti-corruption laws (FCPA)[89][90] - In March 2021, Arteris submitted a voluntary self-disclosure to BIS regarding potential EAR violations, which was closed with a warning letter in April 2022, and has implemented compliance enhancements[90][92][214] - Compliance with these laws can be time-consuming and costly, and violations could lead to substantial fines, penalties, reputational harm, or restrictions on export capabilities[91] Human Capital Resources Arteris employs 245 individuals globally, with a focus on recruiting, retaining, and incentivizing employees through equity incentive plans - Employee Distribution as of December 31, 2022 | Function | Number | | :------------------- | :----- | | Research and development | 151 | | Sales and marketing | 52 | | Administration | 42 | | Total | 245 | | Geographic Distribution | | | United States | 111 | | France | 113 | | China | 9 | | South Korea | 5 | | Japan | 5 | | Elsewhere | 2 | - The company's human capital objectives include identifying, recruiting, retaining, incentivizing, and integrating employees, with equity incentive plans used to attract and motivate personnel[95] Corporation Information Arteris, Inc. was incorporated in Delaware in April 2004, with its principal executive offices in Campbell, CA, and its common stock trades on Nasdaq under 'AIP' - Arteris, Inc. was incorporated in Delaware in April 2004, with its principal executive offices in Campbell, CA[96] - The company's common stock is traded on the Nasdaq Stock Market under the symbol 'AIP'[96] Available Information Arteris makes its annual, quarterly, and current reports, along with amendments, available electronically on its website free of charge - Arteris makes its annual, quarterly, and current reports, along with amendments, available electronically on its website (www.arteris.com) free of charge[97] Item 1A. Risk Factors Arteris faces significant risks from intense competition, a history of net losses, dependence on market acceptance, international operations, and regulatory compliance - Arteris faces significant competition from larger companies and third-party providers, as well as customers developing IP solutions internally, in a rapidly changing semiconductor industry[100][102] - The company has a history of net losses, reporting $27.4 million in 2022 and $23.4 million in 2021, and may not achieve or maintain profitability in the future[106] - Arteris's business depends on its customers incorporating its IP solutions into their end products and those products achieving market acceptance, with long and unpredictable design cycles[108][109] - International operations, particularly in China (28.8% of 2022 revenue), expose the company to regulatory, operational, financial, and political risks, including U.S. export controls and potential retaliatory actions[134][215][219] - The company is subject to increasing cybersecurity threats and a rapidly evolving global data protection landscape (e.g., GDPR, CCPA), with potential for significant costs, liabilities, and reputational harm from non-compliance or breaches[192][195][198] Risks Related to Our Business and Industry Arteris faces intense competition, a history of net losses, dependence on end-product market acceptance, and risks from revenue concentration and international operations - Arteris faces intense competition from larger companies and internal IP development by customers, with competitive factors including technology, product quality, pricing, and customer support[100][102] - The company has a history of net losses ($27.4 million in 2022, $23.4 million in 2021) and may not achieve or maintain profitability due to significant investments in R&D and operational expenses[106] - Success depends on customers incorporating Arteris's IP into their end products and market acceptance, with long design cycles (1-5 years for royalties) and high switching costs for customers[108][109][294] - Revenue is concentrated, with Intel Corporation accounting for 24% of revenue in 2022, making the company vulnerable to the loss of key customers or design wins[142][143] - International operations (59.3% of 2022 revenue from outside U.S., 28.8% from China) expose Arteris to political, regulatory, economic, and currency risks, including U.S. export controls impacting business with Chinese entities[134][300] Risks Related to Intellectual Property, Information Technology and Data Security and Privacy Arteris relies on intellectual property protection but faces risks from infringement, costly litigation, increasing cybersecurity threats, and evolving data privacy laws - Arteris relies on patents, trade secrets, copyrights, and trademarks to protect its technology, but these may be challenged, invalidated, or infringed upon, leading to costly litigation and competitive harm[179][180][181] - The semiconductor industry is prone to IP litigation; claims of infringement against Arteris could result in significant damages, injunctions, product redesigns, or licensing costs[183][184] - Cybersecurity threats are increasing in frequency and sophistication, posing risks of system disruptions, data loss, reputational harm, and significant costs from breaches, especially with remote work[192] - Arteris is subject to evolving global data protection and privacy laws (e.g., CCPA, GDPR), with non-compliance potentially leading to enforcement actions, fines (up to €20 million or 4% of global turnover under GDPR), litigation, and reputational damage[195][196][198] Risks Related to Legal, Regulatory, Accounting and Tax Matters Arteris faces extensive U.S. and foreign regulatory compliance risks, including export controls impacting China business, and increased costs as a public company - Arteris is subject to a wide range of U.S. and foreign laws and regulations, including employment, anti-trust, consumer protection, and anti-corruption (FCPA) laws, with non-compliance potentially leading to investigations, sanctions, and fines[204][206][207] - U.S. export controls (EAR, OFAC) significantly impact Arteris's ability to license and support products, particularly to entities in China, with new restrictions potentially reducing revenue and escalating geopolitical tensions[210][211][212][219] - Doing business in China (28.8% of 2022 revenue) involves risks from government influence, currency restrictions, IP enforcement uncertainties, and geopolitical tensions, which could harm operations and joint ventures[215][218][220][222] - As a public company, Arteris incurs significant legal, accounting, and compliance expenses, requiring substantial management attention and resources, and faces risks if it fails to maintain effective disclosure controls and internal control over financial reporting[232][234][236] - As an 'emerging growth company' under the JOBS Act, Arteris benefits from reduced disclosure requirements but this may make its common stock less attractive to some investors[238][239] Risks Related to Ownership of Our Common Stock Arteris common stock may experience price volatility, dilution from future sales, and significant influence from executive officers and principal shareholders, with no anticipated cash dividends - The trading market for Arteris common stock may not be sustained as active or liquid, and its price could be volatile due to various factors, including operating results, market conditions, and analyst recommendations[241][242] - Sales of a substantial number of shares by existing stockholders, including those from equity incentive plans, could cause the stock price to decline[247][248] - Executive officers, directors, and principal shareholders (e.g., K. Charles Janac with 30.4% voting power) beneficially own a significant percentage of stock, allowing them to exert substantial influence over corporate matters[250][251] - Arteris does not expect to pay cash dividends in the foreseeable future, requiring investors to rely on stock price appreciation for gains[253] General Risk Factors Stockholder actions and litigation can lead to substantial costs, divert management attention, and negatively affect business and financial performance - Stockholder actions, including proposals to influence corporate policies or management changes, could lead to substantial costs, divert management's attention, and negatively affect business[263] - Litigation, including securities class action and IP infringement claims, can impair reputation, incur significant costs, divert management resources, and potentially lead to damage awards or injunctions[264][265] Item 1B. Unresolved Staff Comments As of the reporting date, there are no unresolved staff comments from the SEC - There are no unresolved staff comments[267] Item 2. Properties Arteris's principal executive office is in Campbell, California, and it leases additional offices in California, Texas, France, China, Japan, and South Korea - Arteris's principal executive office is in Campbell, California, and it leases offices in the United States (Campbell, CA and Austin, TX), France, China, Japan, and South Korea[268] - All facilities are leased, and the company believes its existing facilities are adequate for current needs, with additional space available on commercially reasonable terms if needed[269] Item 3. Legal Proceedings Arteris refers to Note 12 of its consolidated financial statements for information on legal proceedings, indicating ongoing or potential legal matters - Information regarding legal proceedings is incorporated by reference to Note 12 of the consolidated financial statements[270] Item 4. Mine Safety Disclosures This item is not applicable to Arteris, Inc - This item is not applicable[271] PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Arteris common stock (AIP) began trading on Nasdaq in October 2021, with 34.8 million shares outstanding and no anticipated cash dividends, while IPO proceeds fund general corporate purposes - Arteris common stock (AIP) began trading on the Nasdaq Stock Market on October 27, 2021[274] - As of February 21, 2023, there were 345 stockholders of record and 34,792,535 shares of common stock outstanding[5][275] - The company has never declared or paid cash dividends and intends to retain all available funds and future earnings for business development, not anticipating dividends in the foreseeable future[276] - In December 2022, Arteris issued 663,143 shares of common stock for approximately $2.5 million in connection with the Semifore, Inc. acquisition[278] - The company received net proceeds of approximately $71.1 million from its October 2021 IPO, which are being used for general corporate purposes, with no material change in the planned use of proceeds[280][282] Market Price of Our Common Stock Arteris common stock is listed on the Nasdaq Stock Market under the symbol 'AIP' and commenced trading on October 27, 2021 - Arteris common stock is listed on the Nasdaq Stock Market under the symbol 'AIP' and commenced trading on October 27, 2021[274] Holders of Record As of February 21, 2023, there were 345 stockholders of record of Arteris common stock - As of February 21, 2023, there were 345 stockholders of record of Arteris common stock[275] Dividend Policy Arteris has never declared or paid cash dividends and does not intend to do so in the foreseeable future, planning to retain funds for business development - Arteris has never declared or paid cash dividends on its capital stock and does not intend to do so in the foreseeable future, planning to retain funds for business development[276] Securities Authorized for Issuance under Equity Compensation Plans Information on securities authorized for issuance under equity compensation plans is incorporated by reference to the 2023 Annual Meeting of Stockholders Proxy Statement - Information on securities authorized for issuance under equity compensation plans is incorporated by reference to the 2023 Annual Meeting of Stockholders Proxy Statement[277] Recent Sales of Unregistered Equity Securities In December 2022, Arteris issued 663,143 shares of common stock for approximately $2.5 million in connection with the Semifore acquisition, exempt from registration - On December 27, 2022, Arteris issued 663,143 shares of common stock to eight accredited investors at $3.77 per share, totaling approximately $2.5 million, in connection with the Semifore acquisition[278] - These issuances were exempt from registration under Section 4(a)(2) of the Securities Act, with investors intending to acquire for investment only[279] Use of Proceeds Arteris completed its IPO in October 2021, generating net proceeds of $71.1 million, which are being used for general corporate purposes with no material change in planned use - Arteris completed its IPO on October 29, 2021, issuing 5,750,000 shares at $14.00 per share and receiving net proceeds of approximately $71.1 million[280] - The net proceeds are intended for general corporate purposes, with no material change from the planned use described in the IPO prospectus[282] Issuer Purchases of Equity Securities There were no issuer purchases of equity securities during the reported period - There were no issuer purchases of equity securities during the reported period[283] Item 6. [Reserved] This item is reserved and contains no information Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations This section reviews Arteris's financial condition and operations, reporting $50.4 million revenue and a $27.4 million net loss in 2022, driven by R&D and strategic acquisitions, with liquidity supported by cash and investments - Arteris is a leading provider of System IP technology, including interconnect and IP deployment solutions, enabling customers to create complex System-on-Chips (SoCs) faster, better, and at lower cost[286] - Financial Highlights (Year Ended December 31, 2022) | Metric | Amount | | :-------------------------------- | :------------ | | Total Revenue (in thousands) | $50,378 | | Net Loss (in thousands) | $27,387 | | Net Loss per Share (Basic & Diluted, in dollars) | $0.84 | | Annual Contract Value (ACV, in millions) | $49.2 | | ACV and trailing twelve months royalties and other revenue (in millions) | $52.4 | | Net new Active Customers | 38 | | Confirmed Design Starts | 82 | - The company's growth is driven by increasing SoC complexity, requiring more sophisticated on-chip processing in automotive, enterprise computing, communications, consumer electronics, and industrial markets[297] - Arteris's international operations, with 59.3% of 2022 revenue from outside the U.S. (28.8% from China), are subject to global economic risks and restrictive government regulations, including U.S. export controls[300] - Liquidity is primarily financed by customer payments, IPO proceeds, and convertible preferred stock sales, with $68.2 million in cash and cash equivalents and short-term investments as of December 31, 2022[339] Overview Arteris provides System IP technology, including interconnect and IP deployment solutions, to enable faster, better, and lower-cost creation of complex System-on-Chips (SoCs) - Arteris provides System IP technology, including interconnect and IP deployment solutions, to enable faster, better, and lower-cost creation of complex System-on-Chips (SoCs)[286] - The company's IP deployment solutions were enhanced by the acquisitions of Magillem (2020) and Semifore (2022), automating customer configuration and integration of IP blocks into SoCs[287] - 2022 Financial and Operational Summary | Metric | Value | | :-------------------------------- | :------------ | | Revenue (in millions) | $50.4 | | Net Loss (in millions) | $27.4 | | Net Loss per Share (Basic & Diluted, in dollars) | $0.84 | | Full-time employees | 245 | | Annual Contract Value (ACV, in millions) | $49.2 | | Net new Active Customers | 38 | | Confirmed Design Starts | 82 | Initial Public Offering Arteris completed its IPO in October 2021, issuing 5,750,000 shares at $14.00 per share, generating net proceeds of $71.1 million, and converting all preferred stock to common stock - Arteris completed its IPO in October 2021, issuing 5,750,000 shares of common stock at $14.00 per share, generating net proceeds of $71.1 million[289] - All outstanding redeemable convertible preferred stock converted into 4,471,316 shares of common stock in connection with the IPO[289] Acquisitions Arteris acquired Semifore, Inc. in December 2022 for $3.1 million and Magillem Design Services S.A. in November 2020 for $7.8 million, enhancing its IP deployment and SoC integration capabilities - On December 27, 2022, Arteris acquired Semifore, Inc. for $3.1 million, enhancing its hardware-software interface (HSI) technology and IP deployment automation[291] - On November 30, 2020, Arteris acquired Magillem Design Services S.A. for $7.8 million, integrating design flow and content management software solutions to accelerate SoC assembly[292] Factors Affecting Our Business Arteris's business is influenced by lengthy development cycles, market conditions in end markets, technological advancements, global regulations, and the cyclical nature of the semiconductor industry - Revenue generation from new license agreements is subject to lengthy development and customer acquisition cycles (1-3 years for development, 6-9 months for acquisition), with royalties typically starting 1-5 years after design completion[294] - Demand for Arteris's solutions and royalty revenue is highly dependent on market conditions in end markets like automotive, enterprise computing, and communications, which are influenced by end-product sales and competitive pressures[295] - Technological developments, such as the need for smaller die size and lower power consumption in complex SoCs, drive increased demand for commercial semiconductor design IP, positively impacting revenue[297] - Operating globally (59.3% of 2022 revenue from outside U.S.) exposes the company to risks from restrictive government regulations, including U.S. export controls on semiconductor technology to China[300] - The cyclical nature of the semiconductor industry can lead to fluctuations in sales, with periods of rapid growth followed by downturns, impacting customer design starts and product sales[301] Key Performance Indicators Arteris's key performance indicators show an increase in Annual Contract Value (ACV) to $49.2 million in 2022 and 38 net new active customers - Key Performance Indicators (2022 vs. 2021) | Indicator | 2022 (in millions) | 2021 (in millions) | | :------------------------------------------------ | :--------- | :--------- | | Annual Contract Value (ACV) | $49.2 | $47.4 | | Total ACV and trailing twelve months royalties and other revenue | $52.4 | $50.0 | | Net new Active Customers | 38 | 29 | | Annual average customer retention rate | 98% | N/A | | Confirmed Design Starts | 82 | 86 | | Remaining Performance Obligations (RPO) | $57.7 | $60.5 | - ACV measures total fixed fees under customer agreements, excluding variable revenue, and increased to $49.2 million in 2022, indicating progress in customer platform adoption[305] - Confirmed Design Starts, a metric for new semiconductor designs using Arteris IP, totaled 82 in 2022, serving as an important indicator of business growth and future royalty revenue[308] Components of Our Results of Operations Arteris's revenue is primarily from IP and software licensing, support, and royalties, with operating expenses expected to increase in absolute terms - Revenue is primarily derived from licensing IP and software, support and maintenance, professional services, training, and royalties[311] - Interconnect solutions product arrangements typically involve a design license and stand-ready support services (application engineer support, RTL), which are integral to the customer's ability to commercialize their design[312][313][314][315] - Royalty revenues are recognized when the licensee's product incorporating Arteris IP is sold, calculated as a percentage of revenue or on a per-unit basis[316] - Operating expenses include Research and Development (R&D), Sales and Marketing (S&M), and General and Administrative (G&A) expenses, which are expected to increase in absolute terms but potentially decrease as a percentage of revenue over time[319][320][321][322] Results of Operations Arteris reported total revenue of $50.4 million in 2022, with a gross profit of $46.1 million and a net loss of $27.4 million, reflecting significant operating expenses - Consolidated Statements of Loss (in thousands) | Metric | 2022 | 2021 | | :------------------------------------------------ | :--------- | :--------- | | Total revenue | $50,378 | $37,864 | | Cost of revenue | $4,281 | $3,731 | | Gross profit | $46,097 | $34,133 | | Research and development expenses | $41,167 | $30,812 | | Sales and marketing expenses | $17,419 | $11,726 | | General and administrative expenses | $16,367 | $13,360 | | Total operating expenses | $74,953 | $55,898 | | Loss from operations | $(28,856) | $(21,765) | | Net loss | $(27,387) | $(23,384) | | Total stock-based compensation expense | $11,692 | $5,510 | - Results of Operations as a Percentage of Total Revenue | Metric | 2022 (%) | 2021 (%) | | :------------------------------------------------ | :------- | :------- | | Total revenue | 100 | 100 | | Cost of revenue | 8 | 10 | | Gross profit | 92 | 90 | | Research and development | 82 | 81 | | Sales and marketing | 35 | 31 | | General and administrative | 32 | 36 | | Total operating expenses | 149 | 148 | | Loss from operations | (57) | (58) | | Net loss | (54) | (62) | Comparison of the Years Ended December 31, 2022 and 2021 Total revenue increased by $12.5 million (33%) to $50.4 million in 2022, driven by growth in licensing, support, and variable royalties - Revenue Comparison (in thousands) | Category | 2022 | 2021 | Change ($) | Change (%) | | :-------------------------- | :--------- | :--------- | :--------- | :--------- | | Licensing, support and maintenance | $46,012 | $34,731 | $11,281 | 32% | | Variable royalties | $3,140 | $2,647 | $493 | 19% | | Other | $1,226 | $486 | $740 | 152% | | Total Revenue | $50,378 | $37,864 | $12,514 | 33% | - Cost of revenue increased by $0.55 million (15%) to $4.28 million in 2022, primarily due to higher FAE employee-related stock-based compensation[330] - Operating Expenses Comparison (in thousands) | Category | 2022 | 2021 | Change ($) | Change (%) | | :-------------------------- | :--------- | :--------- | :--------- | :--------- | | Research and development | $41,167 | $30,812 | $10,355 | 34% | | Sales and marketing | $17,419 | $11,726 | $5,693 | 49% | | General and administrative | $16,367 | $13,360 | $3,007 | 23% | | Total Operating Expenses | $74,953 | $55,898 | $19,055 | 34% | - Interest and other income (expense), net, shifted from an expense of $0.5 million in 2021 to an income of $1.4 million in 2022, driven by foreign currency exchange, gain on deconsolidation of a subsidiary, and interest income from higher cash balances[336] - The provision for income taxes changed from an expense of $1.0 million in 2021 to a benefit of $0.4 million in 2022, mainly due to increases in pre-tax worldwide book losses and the release of a portion of the U.S. valuation allowance from the Semifore acquisition[338] Liquidity and Capital Resources Arteris finances operations through customer payments, IPO proceeds, and stock sales, holding $68.2 million in cash and investments as of December 31, 2022 - Arteris finances operations primarily through customer payments, IPO proceeds, and convertible preferred/common stock sales[339] - As of December 31, 2022, the company had $68.2 million in cash and cash equivalents and short-term investments, with $4.2 million held by foreign subsidiaries[339] - Management believes existing resources will be sufficient for liquidity requirements for at least the next 12 months, but may seek additional financing if needed, which could dilute stockholders or impose restrictive covenants[340] Cash Flows Net cash used in operating activities increased to $6.8 million in 2022, while investing activities used $37.5 million, and financing activities used $4.2 million - Cash Flow Summary (in thousands) | Cash Flow Activity | 2022 | 2021 | | :-------------------------------- | :--------- | :--------- | | Net cash used in operating activities | $(6,767) | $(814) | | Net cash used in investing activities | $(37,481) | $(1,359) | | Net cash (used in) provided by financing activities | $(4,154) | $76,254 | - Net cash used in operating activities increased to $6.8 million in 2022 (from $0.8 million in 2021), primarily due to net loss, partially offset by non-cash charges like stock-based compensation and changes in operating assets and liabilities[343][344] - Net cash used in investing activities significantly increased to $37.5 million in 2022, mainly due to $35.0 million in purchases of available-for-sale securities and payments for business combinations[345] - Net cash used in financing activities was $4.2 million in 2022, compared to $76.3 million provided in 2021 (due to IPO proceeds), reflecting tax payments for shares withheld and contingent consideration payments[346][347] Contractual Obligations Principal commitments include obligations under operating leases for office and data center space, and vendor finance arrangements - Principal commitments include obligations under operating leases for office and data center space, and vendor finance arrangements[348] Critical Accounting Estimates Critical accounting estimates include revenue recognition, income taxes, stock-based compensation, and business combinations, involving significant judgment and assumptions - Critical accounting estimates include revenue recognition (identifying performance obligations, determining transaction price, allocating price, and recognizing revenue), income taxes (deferred taxes, valuation allowances), and stock-based compensation (fair value of awards, Black-Scholes assumptions)[351][372][373] - Revenue from interconnect solutions IP licensing agreements is recognized over the license term, as the IP, proprietary software tool (RTL), and application engineer support services are considered a single, combined performance obligation[358] - For income taxes, Arteris maintains a full valuation allowance against its U.S. federal, state, and certain foreign deferred tax assets due to uncertainty of realization, given cumulative losses[372][571] - Business combinations involve significant estimates in allocating purchase price to acquired tangible and intangible assets (e.g., customer relationships, developed technology), with any excess recorded as goodwill[381] Recently Issued and Adopted Accounting Pronouncements Arteris early adopted ASU 2021-08 and adopted ASU 2021-10 in 2022, with no material impact, and anticipates no material impact from upcoming guidance - Arteris early adopted ASU 2021-08 (Business Combinations) and adopted ASU 2021-10 (Government Assistance) for the year ended December 31, 2022, neither of which had a material impact on financial statements[486][487] - Upcoming guidance includes Topic 326 (Credit Losses) and ASU 2022-04 (Supplier Finance Programs), expected to be effective for fiscal years beginning after December 15, 2022, and 2023 respectively, with no material impact anticipated[488][489] JOBS Act Arteris is an 'emerging growth company' under the JOBS Act, electing an extended transition period for new accounting standards, which may affect comparability - Arteris is an 'emerging growth company' under the JOBS Act and has elected to use the extended transition period for complying with new or revised accounting standards, which may affect comparability with other public companies[390] Item 7A. Quantitative and Qualitative Disclosures About Market Risk Arteris is exposed to market risks primarily from fluctuations in interest rates and foreign currency exchange rates, though most transactions are in U.S. dollars - Arteris's market risk exposure primarily stems from fluctuations in interest rates and foreign currency exchange rates[391][392] - A majority of the company's revenue, expenses, assets, and liabilities are denominated in U.S. dollars, reducing exposure to currency fluctuations[393] - The impact from foreign currency remeasurement was approximately $0.1 million in 2022 and $0.6 million in 2021, and a 10% increase or decrease in foreign exchange rates is not expected to materially impact operating results[394] Foreign Currency Exchange Risk Operating in international markets exposes Arteris to volatile currency exchange rates, though most transactions are in U.S. dollars, with immaterial impact in recent years - Operating in international markets exposes Arteris to volatile movements in currency exchange rates, though most transactions are in U.S. dollars[393] - The impact from foreign currency remeasurement was approximately $0.1 million in 2022 and $0.6 million in 2021, and a 10% change in foreign exchange rates is not expected to materially impact operating results[394] Item 8. Financial Statements and Supplementary Data This section presents Arteris, Inc.'s audited consolidated financial statements for 2022 and 2021, prepared in accordance with GAAP, including balance sheets, statements of loss, and cash flows, with detailed notes on accounting policies and financial components - The consolidated financial statements for Arteris, Inc. and subsidiaries as of and for the years ended December 31, 2022 and 2021, are presented in accordance with GAAP[400][422] - The financial statements include the Report of Independent Registered Public Accounting Firm, Consolidated Balance Sheets, Statements of Loss, Comprehensive Loss, Redeemable Convertible Preferred Stock and Stockholders' Equity (Deficit), and Cash Flows[397] - Key financial figures for 2022 include total assets of $115.5 million, total liabilities of $78.0 million, and total stockholders' equity of $37.5 million[407] - The notes to the consolidated financial statements provide detailed information on significant accounting policies, revenue recognition, net loss per share, investments, fair value measurements, intangible assets, goodwill, acquisitions, leases, borrowings, and income taxes[416] Report of Independent Registered Public Accounting Firm Moss Adams LLP provided an unqualified opinion on Arteris, Inc.'s consolidated financial statements for 2022 and 2021, affirming fair presentation in all material respects - Moss Adams LLP, San Francisco, CA, provided an unqualified opinion on Arteris, Inc.'s consolidated financial statements for the years ended December 31, 2022 and 2021, stating they present fairly in all material respects[400] - The audit was conducted in accordance with PCAOB standards, assessing risks of material misstatement but not expressing an opinion on the effectiveness of internal control over financial reporting[402] Consolidated Balance Sheets The consolidated balance sheet shows total assets of $115.5 million and total liabilities of $78.0 million as of December 31, 2022 - Consolidated Balance Sheet Highlights (in thousands) | Category | December 31, 2022 | December 31, 2021 | | :-------------------------------- | :------------------ | :------------------ | | ASSETS: | | | | Cash and cash equivalents | $37,423 | $85,825 | | Short-term investments | $30,728 | $— | | Accounts receivable, net | $7,143 | $13,873 | | Total current assets | $81,112 | $106,647 | | Property and equipment, net | $3,617 | $2,438 | | Long-term investments | $4,427 | $— | | Equity method investment | $11,897 | $— | | Intangibles, net | $4,575 | $2,959 | | Goodwill | $4,218 | $2,677 | | TOTAL ASSETS | $115,516 | $120,443 | | LIABILITIES: | | | | Accounts payable | $572 | $1,722 | | Accrued expenses and other current liabilities | $12,095 | $10,573 | | Deferred revenue, current | $28,839 | $28,403 | | Total current liabilities | $43,669 | $42,492 | | Deferred revenue, noncurrent | $21,840 | $20,773 | | Total liabilities | $77,981 | $67,539 | | STOCKHOLDERS' EQUITY: | | | | Common stock | $34 | $31 | | Additional paid-in capital | $103,778 | $91,945 | | Accumulated deficit | $(66,378) | $(38,991) | | Total stockholders' equity | $37,535 | $52,904 | | TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $115,516 | $120,443 | Consolidated Statements of Loss Arteris reported a net loss of $27.4 million in 2022, with total revenue of $50.4 million and total operating expenses of $75.0 million - Consolidated Statements of Loss (in thousands, except per share data) | Metric | 2022 | 2021 | | :------------------------------------------------ | :--------- | :--------- | | Licensing, support and maintenance revenue | $46,012 | $34,731 | | Variable royalties and other revenue | $4,366 | $3,133 | | Total revenue | $50,378 | $37,864 | | Cost of revenue | $4,281 | $3,731 | | Gross profit | $46,097 | $34,133 | | Research and development expenses | $41,167 | $30,812 | | Sales and marketing expenses | $17,419 | $11,726 | | General and administrative expenses | $16,367 | $13,360 | | Total operating expenses | $74,953 | $55,898 | | Loss from operations | $(28,856) | $(21,765) | | Interest expense | $(89) | $(105) | | Interest and other income (expense), net | $1,425 | $(474) | | Loss from equity method investment, net of tax | $(284) | $— | | Provision for (benefit from) income taxes | $(417) | $1,040 | | Net loss | $(27,387) | $(23,384) | | Net loss per share, basic and diluted (in dollars) | $(0.84) | $(1.06) | | Weighted average shares outstanding, basic and diluted | 32,578,776 | 21,972,101 | Consolidated Statements of Comprehensive Loss Arteris reported a comprehensive loss of $27.2 million in 2022, primarily driven by its net loss, with minor impacts from unrealized gains/losses - Consolidated Statements of Comprehensive Loss (in thousands) | Metric | 2022 | 2021 | | :-------------------------------- | :--------- | :--------- | | Net loss | $(27,387) | $(23,384) | | Other comprehensive loss: | | | | Unrealized loss on available-for-sale securities, net of tax | $(53) | $— | | Unrealized pension actuarial gain (loss) | $235 | $(50) | | Comprehensive loss | $(27,205) | $(23,434) | Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders' Equity (Deficit) Total stockholders' equity decreased to $37.5 million in 2022 from $52.9 million in 2021, primarily due to the net loss - As of December 31, 2022, total stockholders' equity was $37.5 million, down from $52.9 million in 2021, primarily due to the net loss of $27.4 million[413] - Additional paid-in capital increased to $103.8 million in 2022 from $91.9 million in 2021, reflecting stock-based compensation expense and proceeds from stock option exercises[413] - Accumulated deficit increased to $66.4 million in 2022 from $39.0 million in 2021 due to the net loss[413] Consolidated Statements of Cash Flows Net cash used in operating activities increased to $6.8 million in 2022, while investing activities used $37.5 million, and financing activities used $4.2 million - Consolidated Statements of Cash Flows (in thousands) | Cash Flow Activity | 2022 | 2021 | | :-------------------------------- | :--------- | :--------- | | Net cash used in operating activities | $(6,767) | $(814) | | Net cash used in investing activities | $(37,481) | $(1,359) | | Net cash (used in) provided by financing activities | $(4,154) | $76,254 | | Net (decrease) increase in cash and cash equivalents | $(48,402) | $74,081 | | Cash and cash equivalents, end of period | $37,423 | $85,825 | - Operating activities used $6.8 million in cash in 2022, primarily due to net loss offset by non-cash items like stock-based compensation ($11.7 million)[415] - Investing activities used $37.5 million in cash in 2022, mainly for purchases of available-for-sale securities ($35.0 million) and business combinations[415] - Financing activities used $4.2 million in cash in 2022, contrasting with $76.3 million provided in 2021 from the IPO[415] Notes to Consolidated Financial Statements The notes provide detailed disclosures on Arteris's business, accounting policies, revenue recognition, investments, acquisitions, leases, and income taxes 1. DESCRIPTION OF BUSINESS Arteris, Inc. develops and licenses on-chip interconnect fabric technology for System-on-Chip (SoC) designs and provides software and services for Network-on-Chip (NoC) IP deployment - Arteris, Inc. develops, licenses, and supports on-chip interconnect fabric technology for System-on-Chip (SoC) designs and provides software and services for Network-on-Chip (NoC) IP deployment[417] - The company completed its IPO in October 2021, raising $71.1 million in net proceeds, and converted all outstanding redeemable convertible preferred stock to common stock[420] - The COVID-19 pandemic has caused changes in business practices but did not materially adversely impact results of operations, cash flows, and financial condition for the year ended December 31, 2022[418][302] 2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The consolidated financial statements are prepared in accordance with GAAP, operating as a single segment, with key policies covering revenue recognition, income taxes, and stock-based compensation - The consolidated financial statements are prepared in accordance with GAAP and include Arteris, Inc. and its wholly-owned subsidiaries, operating as a single segment[422][423][424] - Key accounting policies include revenue recognition (five-step approach, distinct performance obligations, transaction price allocation), income taxes (asset and liability method, valuation allowance), and stock-based compensation (fair value measurement, Black-Scholes model)[446][474][471][472] - Arteris early adopted ASU 2021-08 (Business Combinations) and ASU 2021-10 (Government Assistance) in 2022, with no material impact on financial statements[486][487] - The company uses the equity method for investments where it has significant influence but not control, such as Transchip Technology (Nanjing) Co., Ltd[482] 3. REVENUE Art