SEC Filing | Arteris, Inc.

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aip-20220930

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


x			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2022


o			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 001-40960

Arteris, Inc.

(Exact name of registrant as specified in its charter)


Delaware						27-0117058
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification No.)


595 Millich Dr. Suite 200
Campbell, CA 95008
(408) 470-7300
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common stock, $0.001 par value	AIP	The Nasdaq Stock Market LLC

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 o

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 o

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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.:


Large accelerated filer	o	Accelerated filer	o
Non-accelerated filer	x	Smaller reporting company	x
		Emerging growth company	x

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. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x

As of November 1, 2022, there were 33,425,197 shares of the registrant’s common stock outstanding.

Table of Contents


TABLE OF CONTENTS


		Page
Part I. Financial Information		3
Item 1.	Financial Statements (unaudited)	3
	Condensed Consolidated Balance Sheets as of September 30, 2022 and December 31, 2021	3
	Condensed Consolidated Statements of Loss for the Three and Nine Months Ended September 30, 2022 and 2021	4
	Condensed Consolidated Statements of Comprehensive Loss for the Three and Nine Months Ended September 30, 2022 and 2021	5
	Condensed Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders' Equity (Deficit) for the Three and Nine Months Ended September 30, 2022 and 2021	6
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2022 and 2021	8
	Notes to Condensed Consolidated Financial Statements	9
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	23
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	35
Item 4.	Controls and Procedures	36
Part II. Other Information		37
Item 1.	Legal Proceedings	37
Item 1A.	Risk Factors	37
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	71
Item 3.	Defaults Upon Senior Securities	72
Item 4.	Mine Safety Disclosures	72
Item 5.	Other Information	72
Item 6.	Exhibits	73
Signatures		74

Table of Contents

Part I - Financial Information

Item 1. Financial Statements

Arteris, Inc.

Condensed Consolidated Balance Sheets

(In thousands, except share and per share data)

(Unaudited)


	As of
	September 30, 2022		December 31, 2021

ASSETS
Current assets:
Cash and cash equivalents	$	68,200	$	85,825
Short-term investments	4,400		—
Accounts receivable, net	9,638		13,873
Prepaid expenses and other current assets	8,427		6,949
Total current assets	90,665		106,647
Property and equipment, net	3,502		2,438
Long-term investments	1,983		—
Equity method investment	12,181		—
Operating lease right-of-use assets	2,124		2,765
Intangibles, net	2,575		2,959
Goodwill	2,677		2,677
Other assets	3,115		2,957
TOTAL ASSETS	$	118,822	$	120,443
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	1,984	$	1,722
Accrued expenses and other current liabilities	11,520		10,573
Operating lease liabilities, current	1,033		961
Deferred revenue, current	27,646		28,403
Vendor financing arrangements, current	1,502		833
Total current liabilities	43,685		42,492
Deferred revenue, noncurrent	22,046		20,773
Operating lease liabilities, noncurrent	1,134		1,851
Vendor financing arrangements, noncurrent	433		266
Deferred income, noncurrent	10,290		—
Other liabilities	877		2,157
Total liabilities	78,465		67,539
Commitments and contingencies (Note 10)
Stockholders' equity:
Preferred stock, par value of $0.001 - 10,000,000 shares authorized and no shares issued and outstanding as of September 30, 2022 and December 31, 2021	—		—
Common stock, par value of $0.001 - 300,000,000 shares authorized as of September 30, 2022 and December 31, 2021; 33,320,891 and 31,530,682 shares issued and outstanding as of September 30, 2022 and December 31, 2021, respectively	33		31
Additional paid-in capital	99,589		91,945
Accumulated other comprehensive loss	(102)		(81)
Accumulated deficit	(59,163)		(38,991)
Total stockholders' equity	40,357		52,904
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	118,822	$	120,443

See accompanying notes to condensed consolidated financial statements.

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Arteris, Inc.

Condensed Consolidated Statements of Loss

(In thousands, except share and per share data)

(Unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021

Revenue
Licensing, support and maintenance	$	11,135	$	8,136	$	35,743	$	24,353
Variable royalties and other	1,463		823		3,432		2,077
Total revenue	12,598		8,959		39,175		26,430
Cost of revenue	928		883		3,196		2,618
Gross profit	11,670		8,076		35,979		23,812
Operating expenses:
Research and development	11,022		7,609		30,849		20,572
Sales and marketing	4,411		3,242		12,788		7,971
General and administrative	3,991		1,742		12,138		9,754
Total operating expenses	19,424		12,593		55,775		38,297
Loss from operations	(7,754)		(4,517)		(19,796)		(14,485)
Interest and other income (expense), net	318		(183)		346		(497)
Loss before provision for income taxes	(7,436)		(4,700)		(19,450)		(14,982)
Provision for income taxes	248		268		722		612
Net loss	$	(7,684)	$	(4,968)	$	(20,172)	$	(15,594)

Net loss per share attributable to common stockholders, basic and diluted	$	(0.23)	$	(0.24)	$	(0.63)	$	(0.79)
Weighted average shares used in computing per share amounts, basic and diluted	32,836,014		20,578,386		32,228,429		19,768,574

See accompanying notes to condensed consolidated financial statements.

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Arteris, Inc.

Condensed Consolidated Statements of Comprehensive Loss

(In thousands)

(Unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021

Net loss	$	(7,684)	$	(4,968)	$	(20,172)	$	(15,594)
Other comprehensive loss:
Unrealized loss on available-for-sale securities, net of tax	(21)		—		(21)		—
Comprehensive loss	$	(7,705)	$	(4,968)	$	(20,193)	$	(15,594)

See accompanying notes to condensed consolidated financial statements.

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Arteris, Inc.

Condensed Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders' Equity (Deficit)

(In thousands, except share data)

(Unaudited)


	Three Months Ended September 30, 2022
	Redeemable Convertible Preferred Stock			Stockholders’ Equity
							Additional		Accumulated Other
				Common Stock			Paid-In		Comprehensive		Accumulated
	Shares	Amount		Shares	Amount		Capital		Loss		Deficit		Total

BALANCE—June 30, 2022	—	$	—	32,622,817	$	33	$	97,237	$	(81)	$	(51,479)	$	45,710
Issuance of common stock for cash upon exercise of stock options	—	—		255,108	—		173		—		—		173
Issuance of common stock for settlement of restricted stock units	—	—		614,184	—		—		—		—		—
Tax withholding on RSUs settlement	—	—		(171,218)	—		(1,210)		—		—		(1,210)
Stock-based compensation expense	—	—		—	—		3,389		—		—		3,389
Unrealized loss on available-for-sale securities, net of tax	—	—		—	—		—		(21)		—		(21)
Net loss	—	—		—	—		—		—		(7,684)		(7,684)
BALANCE—September 30, 2022	—	$	—	33,320,891	$	33	$	99,589	$	(102)	$	(59,163)	$	40,357


	Three Months Ended September 30, 2021
	Redeemable Convertible Preferred Stock			Stockholders’ Deficit
							Additional		Accumulated Other
				Common Stock			Paid-In		Comprehensive		Accumulated
	Shares	Amount		Shares	Amount		Capital		Loss		Deficit		Total

BALANCE—June 30, 2021	4,471,316	$	5,712	20,525,254	$	21	$	10,054	$	(31)	$	(26,233)	$	(16,189)
Issuance of common stock for cash upon exercise of stock options	—	—		60,395	—		31		—		—		31
Issuance of common stock for settlement of restricted stock units	—	—		22,202	—		—		—		—		—
Stock-based compensation expense	—	—		—	—		433		—		—		433
Net loss	—	—		—	—		—		—		(4,968)		(4,968)
BALANCE—September 30, 2021	4,471,316	$	5,712	20,607,851	$	21	$	10,518	$	(31)	$	(31,201)	$	(20,693)

See accompanying notes to condensed consolidated financial statements.

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Arteris, Inc.

Condensed Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders' Equity (Deficit)

(In thousands, except share data)

(Unaudited)


	Nine Months Ended September 30, 2022
	Redeemable Convertible Preferred Stock			Stockholders’ Equity
							Additional		Accumulated Other
				Common Stock			Paid-In		Comprehensive		Accumulated
	Shares	Amount		Shares	Amount		Capital		Loss		Deficit		Total

BALANCE—December 31, 2021	—	$	—	31,530,682	$	31	$	91,945	$	(81)	$	(38,991)	$	52,904
Issuance of common stock for cash upon exercise of stock options	—	—		1,022,050	2		615		—		—		617
Issuance of common stock for settlement of restricted stock units	—	—		1,008,620	—		—		—		—		—
Tax withholding on RSUs settlement	—	—		(240,461)	—		(2,053)		—		—		(2,053)
Stock-based compensation expense	—	—		—	—		9,082		—		—		9,082
Unrealized loss on available-for-sale securities, net of tax	—	—		—	—		—		(21)		—		(21)
Net loss	—	—		—	—		—		—		(20,172)		(20,172)
BALANCE—September 30, 2022	—	$	—	33,320,891	$	33	$	99,589	$	(102)	$	(59,163)	$	40,357


	Nine Months Ended September 30, 2021
	Redeemable Convertible Preferred Stock			Stockholders’ Deficit
							Additional		Accumulated Other
				Common Stock			Paid-In		Comprehensive		Accumulated
	Shares	Amount		Shares	Amount		Capital		Loss		Deficit		Total

BALANCE—December 31, 2020	4,471,316	$	5,712	18,486,989	$	18	$	3,612	$	(31)	$	(15,607)	$	(12,008)
Issuance of common stock	—	—		1,250,000	2		5,435		—		—		5,437
Issuance of common stock for cash upon exercise of stock options	—	—		832,329	1		327		—		—		328
Issuance of common stock for settlement of restricted stock units	—	—		38,533	—		—		—		—		—
Stock-based compensation expense	—	—		—	—		1,144		—		—		1,144
Net loss	—	—		—	—		—		—		(15,594)		(15,594)
BALANCE—September 30, 2021	4,471,316	$	5,712	20,607,851	$	21	$	10,518	$	(31)	$	(31,201)	$	(20,693)

See accompanying notes to condensed consolidated financial statements.

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Arteris, Inc.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)


	Nine Months Ended September 30,
	2022		2021
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(20,172)	$	(15,594)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	1,568		1,107
Stock-based compensation	9,082		1,144
Operating non-cash lease expense	(4)		(32)
Amortization of deferred income	(94)		—
Gain on deconsolidation of subsidiary (Note 13)	(149)		—
Other, net	10		(8)
Changes in operating assets and liabilities:
Accounts receivable, net	4,234		6,226
Prepaid expenses and other assets	(1,799)		(3,932)
Accounts payable	408		415
Accrued expenses and other liabilities	23		1,328
Deferred revenue	517		5,340
Net cash used in operating activities	(6,376)		(4,006)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment	(655)		(488)
Payments relating to investment in equity method investment (Note 13)	(520)		—
Purchases of available-for-sale securities	(6,399)		—
Proceeds from principal portion of related party loan	241		—
Net cash used in investing activities	(7,333)		(488)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of contingent consideration for business acquisition	(1,573)		—
Proceeds from issuance of common stock	—		5,435
Principal payments under vendor financing arrangements	(635)		(418)
Proceeds from exercise of stock options	601		330
Payments to tax authorities for shares withheld from employees	(2,053)		—
Payments of deferred offering costs	(256)		(906)
Payments of principal portion of term loan	—		(450)
Net cash (used in) provided by financing activities	(3,916)		3,991
NET DECREASE IN CASH AND CASH EQUIVALENTS	(17,625)		(503)
CASH AND CASH EQUIVALENTS, beginning of period	85,825		11,744
CASH AND CASH EQUIVALENTS, end of period	$	68,200	$	11,241

Noncash investing and financing activities:
Equity obtained in equity method investment in exchange for contribution of license agreement (Note 13)	$	11,563	$	—
Purchase of property and equipment through vendor financing and accrued expenses and other current liabilities	$	1,809	$	186
Operating lease right-of-use assets exchanged for lease liabilities	$	63	$	718
Unpaid deferred offering costs	$	—	$	1,749

See accompanying notes to condensed consolidated financial statements.

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ARTERIS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1. DESCRIPTION OF BUSINESS

Description of the Business

Arteris, Inc. and its subsidiaries (collectively, the “Company” or “Arteris”) was incorporated in Delaware on April 12, 2004. The Company develops, licenses, and supports the on-chip interconnect fabric technology used in System-on-Chip (SoC) designs for a variety of devices and in the development and distribution of Network-on-Chip (NoC) interconnect intellectual property (IP). The Company also provides software and services to enable efficient deployment of NoC IP, IP support & maintenance services, professional services and training and on-site support services. The Company is headquartered in Campbell, California and has offices in the United States, France, Japan, South Korea and China.

In October, 2021, the Company completed its initial public offering (IPO), in which it issued and sold 5,750,000 shares of its common stock at the public offering price of $14.00 per share, including 750,000 shares of its common stock upon the full exercise of the underwriters’ option to purchase additional shares. The Company received net proceeds of $71.1 million after deducting underwriting discounts and commissions and offering expenses.

Deferred offering costs for the IPO were $3.8 million and consisted primarily of direct incremental accounting, legal and other fees related to the IPO. Prior to the IPO, all deferred offering costs were capitalized and included in other assets, non-current on the condensed consolidated balance sheets. Upon completion of the IPO, deferred offering costs were reclassified into stockholders’ equity (deficit) as a reduction of the IPO proceeds.

COVID-19 Pandemic

While the duration and extent of the COVID-19 pandemic depends on future developments that cannot be accurately predicted at this time, such as the extent and effectiveness of containment actions and emergence of new variants, it has already had an adverse effect on the global economy and the lasting effects of the pandemic continue to be unknown. In response to the COVID-19 pandemic, the measures implemented by various authorities have caused us to change the Company’s business practices, including those related to where employees work, the distance between employees in the Company’s facilities, limitations on in-person meetings between employees and with customers, suppliers, service providers and stakeholders, as well as restrictions on business travel to domestic and international locations and to attend trade shows, technical conferences and other events.

The Company is unable to accurately predict the full impact that COVID-19 will have on its future results of operations, financial condition, liquidity and cash flows due to numerous uncertainties, including the duration and severity of the pandemic and containment measures. The Company will continue to monitor health orders issued by applicable governments to ensure compliance with evolving domestic and global COVID-19 guidelines.

2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information and do not include all disclosures normally required in annual consolidated financial statements prepared in accordance with GAAP. Accordingly, these unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2021 and the related notes included in the Company’s Form 10-K filed on March 7, 2022 (2021 Form 10-K) with the U.S. Securities and Exchange Commission (SEC). The December 31, 2021 condensed consolidated balance sheet was derived from the audited consolidated financial statements as of that date. In management’s opinion, the unaudited interim consolidated financial statements have been prepared on the same basis as the annual financial statements and reflect all adjustments, which include only normal recurring adjustments necessary for the fair statement of the condensed consolidated financial statements.

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The operating results for the three and nine months ended September 30, 2022 are not necessarily indicative of the results to be expected for the full year or any other future interim or annual period.

Principles of Consolidation

The condensed consolidated financial statements include the accounts of Arteris, Inc. and its wholly-owned subsidiaries. All inter-company transactions and accounts have been eliminated.

Use of Estimates

The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Such estimates relate to, among others, revenue recognition, the useful lives of assets, assessment of recoverability of property, plant and equipment, fair value of investments, impairment of the equity method investment, fair values of goodwill and other intangible assets, including impairments, leases, allowances for doubtful accounts, deferred tax assets and related valuation allowance, stock-based compensation, potential reserves relating to litigation and tax matters, collectability of certain receivables, fair value and amortization of deferred income, as well as other accruals or reserves. Actual results could differ from those estimates and such differences may be material to the condensed consolidated financial statements.

Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with original maturities of three months or less from the purchase date to be cash equivalents. The Company’s cash equivalents include deposits in money market accounts which were unrestricted as to withdrawal or use and are stated at fair value. As of September 30, 2022, cash and cash equivalents consisted of primarily checking, savings, money market accounts and highly liquid investments with original maturities of three months or less. As of December 31, 2021, cash consisted primarily of checking and savings deposits. Interest earned on cash and cash equivalents is included in interest and other income (expense), net in the consolidated statements of loss.

Concentrations of Credit Risk

Financial instruments that potentially subject us to concentration of credit risk consist of cash and cash equivalents, investments and accounts receivable. Cash is currently held in three financial institutions and, at times, may exceed federally insured limits.

The Company’s accounts receivable are derived principally from revenue earned from customers located in Americas, Europe, Middle East and Asia Pacific regions.

Accounts receivable from the Company’s major customers representing 10% or more of total accounts receivable was as follows:


	As of
	September 30, 2022		December 31, 2021
Customer A	30	%	21	%
Customer B	*		33	%
Customer C	*		12	%

*Customer accounted for less than 10% of total accounts receivable at period end.

Revenue from the Company’s major customers representing 10% or more of total revenue was as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Customer B	24	%	23	%	26	%	23	%

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Significant Accounting Policies

There have been no significant changes to the Company’s significant accounting policies during the nine months ended September 30, 2022 from those disclosed in the annual consolidated financial statements for the year ended December 31, 2021, except for those disclosed in this document.

Investments

All investments in debt securities have been classified as “available-for-sale” and are carried at estimated fair value as determined based upon quoted market prices or pricing models for similar securities. Management determines the appropriate classification of its investments in debt securities at the time of purchase and reevaluates such designation as of each balance sheet date. Short-term investments have original maturities of greater than three months but one year or less as of the consolidated balance sheet dates. Long-term investments have maturities greater than one year as of the consolidated balance sheet dates. If the Company expects to sell a debt security within one year, it will classify the investment as a short-term investment regardless of its stated maturity date.

The available-for-sale securities are reported at fair value with unrealized gains and losses included in accumulated other comprehensive income (loss). A decline in the fair value of the available-for-sale securities is recognized directly to net income (loss) if judged to be other than temporary. Interest earned on investments in debt securities, realized gains and losses and impairment losses, if any, on investments in debt securities are included in interest and other income (expense), net in the consolidated statements of loss. The cost of securities sold is based on the specific-identification method.

Equity Method Investments

The Company uses the equity method to account for its investments in companies which the Company does not control but is deemed to have the ability to exercise significant influence over operating and financial decisions of the investee.

The Company generally measures an investment in the common stock of an investee initially at cost. The carrying value of the Company’s equity method investments is reported in equity method investment on the condensed consolidated balance sheets. The Company records its proportionate share of the income or loss in its equity method investments on a one-quarter lag. The cost is adjusted to recognize the Company's proportionate share of the investee’s net income or loss after the date of investment. The Company assesses investments for impairment whenever events or changes in circumstances indicate that the carrying value of an investment may not be recoverable.

Distributions received from an investee reduce the carrying value of an investment and are recorded in the consolidated statements of cash flows using the nature of distribution approach.

Recent Accounting Pronouncements

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments and in May 2019 issued ASU No. 2019-05, Credit Losses (Topic 326): Targeted Transition Relief (collectively referred to as Topic 326), which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. Topic 326 replaces the existing incurred loss impairment model with a forward-looking expected credit loss model which will result in earlier recognition of credit losses. Topic 326 is effective for the Company for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. The Company does not expect the adoption of this guidance to have a material impact on its consolidated financial statements and related disclosures.

In October 2021, the FASB issued ASU No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. This standard requires contract assets and contract liabilities acquired in a business combination to be recognized in accordance with Topic 606 as if the acquirer had originated the contracts. The guidance is effective for fiscal years beginning after December 15, 2022, including interim periods within those years and early adoption is permitted. The Company is currently evaluating the impact that the standard will have on its consolidated financial statements and related disclosures.

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3. REVENUE

Disaggregated Revenue

The following table shows revenue by product and services groups (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Licensing, support and maintenance	$	11,135	$	8,136	$	35,743	$	24,353
Variable royalties	695		739		2,266		1,913
Other	768		84		1,166		164
Total	$	12,598	$	8,959	$	39,175	$	26,430

Contract Balances

The following table provides information about accounts receivable, net, contract assets and deferred revenue (in thousands):


	As of
	September 30, 2022		December 31, 2021
Accounts receivable, net	$	9,638	$	13,873
Contract assets	$	2,240	$	1,486
Deferred revenue	$	49,692	$	49,176

The Company recognized revenue of $9.4 million and $6.2 million for the three months ended September 30, 2022 and 2021, respectively, and $22.0 million and $14.7 million for the nine months ended September 30, 2022 and 2021, respectively, that was included in the deferred revenue balance at the beginning of the respective periods.

Contracted but unsatisfied performance obligations were $49.7 million and $49.3 million as of September 30, 2022 and December 31, 2021, respectively, and included unearned revenue and non-cancelable Flexible Spending Account (FSA) Agreements from customers where actual product selection and quantities of specific products are to be determined by customers at a future period. FSA commitments amounted to nil and $0.2 million as of September 30, 2022 and December 31, 2021, respectively. The Company has elected to exclude the potential future royalty receipts from the remaining performance obligations. The contracted but unsatisfied or partially unsatisfied performance obligations, excluding non-cancelable FSA, expected to be recognized in revenue over the next 12 months as of September 30, 2022 are $28.9 million, with the remainder recognized thereafter.

Costs of Obtaining a Contract with a Customer

Incremental costs of obtaining a contract with a customer consist primarily of direct sales commissions incurred upon execution of the contract. These costs are required to be capitalized under ASC 340-40, Other Assets and Deferred Costs — Contracts With Customers, and amortized over the license term. As direct sales commissions paid for term extensions are commensurate with the amounts paid for initial contracts, the deferred incremental costs for initial contracts and for term extensions are recognized over the respective contract terms. Total capitalized direct commission costs were as follows (in thousands):


	As of
	September 30, 2022		December 31, 2021
Short-term commissions capitalized in prepaid expenses and other current assets	$	2,435	$	2,289
Long-term commissions capitalized in other assets	1,554		1,719
Total	$	3,989	$	4,008

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Amortization of capitalized sales commissions was $0.9 million and $0.6 million for the three months ended September 30, 2022 and 2021, respectively, and $2.5 million and $1.5 million for the nine months ended September 30, 2022 and 2021, respectively.

Amortization of capitalized sales commissions are included in sales and marketing expense in the condensed consolidated statements of loss.

4. NET LOSS PER SHARE

The following table presents the calculation of basic and diluted net loss per share attributable to common stockholders (in thousands, except share and per share data):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Numerator:
Net loss	$	(7,684)	$	(4,968)	$	(20,172)	$	(15,594)
Denominator:
Weighted-average shares outstanding - basic and diluted	32,836,014		20,578,386		32,228,429		19,768,574
Net loss per share, basic and diluted	$	(0.23)	$	(0.24)	$	(0.63)	$	(0.79)

Since the Company was in a loss position for all periods presented, the diluted earnings per share is equal to the basic earnings per share as the effect of potentially dilutive securities would have been antidilutive.

The following table summarizes the potentially dilutive securities that were excluded from the calculation of diluted earnings per share because they would be antidilutive:


	As of
	September 30, 2022	September 30, 2021
Stock options	4,037,721	5,964,043
Restricted stock units	5,104,347	3,935,229
Redeemable convertible preferred stock	—	4,471,316
Total	9,142,068	14,370,588

5. INVESTMENTS

The following tables summarize the fair value and amortized cost of the Company’s cash equivalents and available-for-sale securities by major security type:


	Amortized Cost		Unrealized Gain/(Loss)		Aggregate Fair Value
Assets:
Money market funds	$	43,334	$	—	$	43,334
Commercial paper	2,444		(1)		2,443
Corporate bonds	2,483		(8)		2,475
U.S. government agency securities	14,940		(12)		14,928
U.S. treasury securities	4,498		—		4,498
Total financial assets	$	67,699	$	(21)	$	67,678

The maturity dates of the Company’s investments are as follows:


	September 30, 2022
Less than one year	$	65,695
1-2 years	1,983
Total	$	67,678

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There were no impairments of available-for-sale securities during the three and nine months ended September 30, 2022.

The Company did not invest in any available-for-sale securities during 2021 and did not have any available-for-sale securities as of December 31, 2021.

6. FAIR VALUE MEASUREMENTS

Assets Measured and Recorded at Fair Value on a Non-Recurring Basis

Equity method investments, and certain non-financial assets, such as intangible assets and property, plant and equipment, are remeasured at fair value only if an impairment or observable price adjustment is recognized in the current period.

Financial Instruments Not Recorded at Fair Value on a Recurring Basis

Financial instruments not recorded at fair value on a recurring basis include vendor financing arrangements. The carrying value of the vendor financing agreements were $1.9 million as of September 30, 2022 and $1.1 million as of December 31, 2021, respectively. The Company’s vendor financing arrangements are classified within Level 2 because these borrowings are not actively traded and have a variable interest rate structure based upon market rates currently available to the Company for debt with similar terms and maturities. The estimated fair values of these financial instruments approximate their carrying values.

Financial Instruments Recorded at Fair Value on a Recurring Basis

The following tables summarize the Company’s financial assets measured at fair value on a recurring basis by level within the fair value hierarchy (in thousands):


	As of
	September 30, 2022
	Level 1		Level 2		Level 3		Fair Value
Assets:
Cash equivalents:
Money market funds	$	43,334	$	—	$	—	$	43,334
Commercial paper	—		2,000		—		2,000
U.S. government agency securities	—		11,463		—		11,463
U.S. treasury securities	—		4,498		—		4,498
Total cash equivalents	43,334		17,961		—		61,295
Short-term investments:
Commercial paper	—		443		—		443
Corporate bonds	—		1,986		—		1,986
U.S. government agency securities	—		1,971		—		1,971
Total short-term investments	—		4,400		—		4,400
Long-term investments:
Corporate bonds	—		489		—		489
U.S. government agency securities	—		1,494		—		1,494
Total long-term investments	—		1,983		—		1,983
Total financial assets	$	43,334	$	24,344	$	—	$	67,678

Money market funds are highly liquid investments and are actively traded. The fair value is based on quoted prices for identical assets in active markets and therefore classified as Level 1 of the fair value hierarchy.

The Company’s other investments are considered Level 2 financial instruments as their fair values are determined using inputs that are directly or indirectly observable in active or less active markets. There were no transfers between levels during the three and nine months ended September 30, 2022.

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The Company did not have any investments in available-for-sale securities as of December 31, 2021.

7. INTANGIBLE ASSETS AND GOODWILL

Intangible assets, net

Intangible assets, net consisted of the following as of September 30, 2022 (in thousands):


	Gross Fair Value		Accumulated Amortization		Net Book Value
Developed technology	$	1,700	$	(623)	$	1,077
Customer relationships	1,100		(252)		848
IPR&D	500		—		500
Trade name and other	150		—		150
Total intangibles	$	3,450	$	(875)	$	2,575

Intangible assets, net consisted of the following as of December 31, 2021 (in thousands):


	Gross Fair Value		Accumulated Amortization		Net Book Value
Developed technology	$	1,700	$	(368)	$	1,332
Customer relationships	1,100		(149)		951
IPR&D	500		—		500
Trade name and other	176		—		176
Total intangibles	$	3,476	$	(517)	$	2,959

Amortization expense of intangible assets was $0.1 million for both the three months ended September 30, 2022 and 2021, and $0.4 million for both the nine months ended September 30, 2022 and 2021.

The expected future amortization expense of these intangible assets as of September 30, 2022 is as follows (in thousands):


Fiscal year ending December 31,	Amount
Remainder of 2022	$	120
2023	478
2024	478
2025	449
2026	138
Thereafter	262
Total future amortization expense	$	1,925

Goodwill

As of September 30, 2022 and December 31, 2021, goodwill was $2.7 million. No goodwill impairments were recorded during the three and nine months ended September 30, 2022 and 2021.

8. LEASES

The Company leases its offices at various locations under noncancelable operating lease agreements expiring at various dates through 2027. Under the terms of these agreements, the Company also bears the costs for certain insurance, property tax, and maintenance. The terms of certain lease agreements provide for increasing rental payments at fixed intervals.

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Total operating lease related costs were as follows (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Operating lease cost	$	263	$	333	$	802	$	807
Short-term lease cost	38		25		263		77
Total lease cost	$	301	$	358	$	1,065	$	884

The weighted-average remaining term of the Company’s operating leases was 3.2 years and 3.6 years as of September 30, 2022 and December 31, 2021, respectively, and the weighted-average discount rate used to measure the present value of the operating lease liabilities was 7.5% as of both September 30, 2022 and December 31, 2021.

Maturities of operating lease liabilities as of September 30, 2022 were as follows (in thousands):


Fiscal year ending December 31,	Amount
Remainder of 2022	$	296
2023	990
2024	449
2025	278
2026	212
Thereafter	212
Total undiscounted cash flows	$	2,437
Less: imputed interest	(270)
Present value of lease liabilities	$	2,167

Operating lease liabilities, current	$	1,033
Operating lease liabilities, non-current	1,134
	$	2,167

9. BORROWINGS

Vendor financing arrangements—The Company has various vendor financing arrangements with extended payment terms on the purchase of software licenses and equipment. In order to determine the present value of the commitments, the Company used an imputed interest rate of 7.5%, which is reflective of its collateralized borrowing rate with similar terms to that of the software licenses and equipment transactions.

Vendor financing arrangements as of September 30, 2022 were as follows (in thousands):


Fiscal year ending December 31,	Amount
Remainder of 2022	$	402
2023	1,100
2024	556
Total undiscounted cash flows	$	2,058
Less: imputed interest	(123)
Present value of vendor financing arrangements	$	1,935

Vendor financing arrangements, current	$	1,502
Vendor financing arrangements, noncurrent	433
	$	1,935

Interest expense was less than $0.1 million for both the three months ended September 30, 2022 and 2021. Interest expense was $0.1 million for both the nine months ended September 30, 2022 and 2021.

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10. COMMITMENTS AND CONTINGENCIES

Indemnifications—The Company often enters into limited indemnification provisions in license agreements in the ordinary course of the Company’s licensing business. Pursuant to these provisions, which are often inserted into license agreements in the semiconductor IP and software licensing industries, the Company agrees to indemnify, hold harmless, and reimburse the indemnified parties up to a capped amount for losses suffered or incurred by such indemnified parties due to third party claims if such claims are determined to be caused by the Company. The term of these indemnification provisions is generally either for a term of years or perpetual, in each case beginning on the execution date of the agreement. The Company has also agreed to indemnify under indemnity agreements with its directors and officers, to the extent legally permissible, against liabilities incurred in connection with any action in which such individual may be involved by reason of such individual being or having been a director or officer, other than certain liabilities arising from willful misconduct of the individual.

The Company has incurred no actual payment obligations from these above-noted indemnification provisions and director and officer indemnity agreements for three and nine months ended September 30, 2022 and 2021 and the condensed consolidated financial statements do not include liabilities for any potential indemnity-related obligations as of September 30, 2022 and December 31, 2021.

Legal—In the normal course of business, the Company may receive inquiries or become involved in legal disputes regarding various litigation matters. Although claims are inherently unpredictable, the Company currently is not aware of any matters that may have a material adverse effect on the Company’s financial position, results of operations, or cash flows.

The Company has no other material contractual noncancelable commitments as of September 30, 2022 and December 31, 2021.

11. REDEEMABLE CONVERTIBLE PREFERRED STOCK, PREFERRED STOCK AND COMMON STOCK

Redeemable Convertible Preferred Stock

Immediately prior to the closing of the IPO, all shares of the Company’s redeemable convertible preferred stock outstanding, totaling 4,471,316, were automatically converted into an equal number of shares of common stock and their carrying value of $5.7 million was reclassified into stockholders’ equity. As of both September 30, 2022 and December 31, 2021, there were zero shares of redeemable convertible preferred stock issued and outstanding.

Preferred Stock

In connection with the IPO, the Company amended and restated its certificate of incorporation to authorize 10,000,000 shares of preferred stock with a par value of $0.001, which shares of preferred stock are currently undesignated.

Common Stock

Holders of common stock are entitled to one vote per share and to receive dividends and, upon liquidation or dissolution, are entitled to receive all assets available for distribution to common stockholders. The common stock has no preemptive or other subscription rights and there are no redemption or sinking fund provisions with respect to such shares. Common stock is subordinate to the preferred stock with respect to dividend rights and rights upon liquidation, winding-up, and dissolution of the Company. In connection with the IPO, the Company amended and restated its certificate of incorporation to authorize 300,000,000 shares of common stock.

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12. STOCK-BASED COMPENSATION

2016 Stock Plan

On October 10, 2016, the Company amended and restated the 2013 Equity Incentive Plan (the 2013 Plan) and changed the name of the plan to Arteris, Inc. 2016 Incentive Plan (the 2016 Plan). Adoption of the 2016 Plan provides for participation by foreign nationals or those employed outside of the United States.

The 2016 Plan provides for the granting of the following types of stock awards: incentive stock options, non-statutory stock options, stock appreciation rights, restricted stock awards, restricted stock unit awards (RSUs) and other stock awards. The number of shares authorized for award was 20,803,838. The Company has granted awards of common stock in the form of 14,142,208 shares as of December 31, 2021. Following the Company’s IPO in October 2021, all future grants will be made under the 2021 Plan (as defined below), with none remaining available for future grant under the 2016 Plan.

2021 Stock Plan

The Company adopted the 2021 Incentive Award Plan (the 2021 Plan) effective October 26, 2021. The 2021 Plan provides for a variety of stock-based compensation awards, including stock options, stock appreciation rights, or SARs, restricted stock awards, restricted stock unit awards, performance bonus awards, performance stock unit awards, dividend equivalents, or other stock or cash based awards.

Following the effectiveness of the 2021 Plan, the Company will not make any further grants under the 2016 Plan. However, the 2016 Plan will continue to govern the terms and conditions of the outstanding awards granted under this plan. Shares of common stock subject to awards granted under the 2016 Plan that are forfeited, lapse unexercised and withheld to cover taxes which following the effective date of the 2021 Plan are not issued under the 2016 Plan will be available for issuance under the 2021 Plan.

2021 Employee stock purchase plan

The Company adopted the 2021 Employee Stock Purchase Plan (the 2021 ESPP) effective on October 26, 2021. The 2021 ESPP would enable eligible employees of the Company to purchase shares of common stock at a discount to fair market value. As of September 30, 2022, there had been no offering period under the ESPP.

Shares Available for Future Grant

Shares available for future grant consisted of the following:


			As of
			September 30, 2022
Shares available for future grant under the 2021 Plan			3,469,764
Shares available for future grant under the 2021 ESPP			922,306

The Company issues new shares upon a share option exercise or release of restricted stock units.

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Stock Options

The following table summarizes the stock option activities under the Company’s 2016 Plan: