Arteris Inc

ARTERIS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. DESCRIPTION OF BUSINESS

Arteris, Inc. was incorporated in Delaware on April 12, 2004. Arteris, Inc. and its subsidiaries (collectively, the Company or Arteris) develop, license, and support 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.

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, 2023 and the related notes included in the Company’s Form 10-K filed on February 20, 2024 (2023 Form 10-K) with the U.S. Securities and Exchange Commission (SEC). The December 31, 2023 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 unaudited condensed consolidated financial statements.

The operating results for the three months ended March 31, 2024 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 unaudited condensed consolidated financial statements include the accounts of Arteris, Inc. and its wholly-owned subsidiaries. All intercompany transactions and accounts have been eliminated.

Use of Estimates

The preparation of the unaudited 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 unaudited condensed consolidated financial statements.

Cash, Cash Equivalents and Restricted Cash

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 March 31, 2024, cash and cash equivalents consisted primarily of checking, savings, money market accounts and highly liquid investments with original maturities of three months or less. Interest earned on cash and cash equivalents is included in other income (expense), net in the unaudited consolidated statements of loss.

As of both March 31, 2024 and December 31, 2023, the Company’s long-term restricted cash balance was $0.4 million, primarily related to a letter of credit for its facility lease agreement. Restricted cash, noncurrent is included in other assets on the unaudited condensed consolidated balance sheets.

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 that the Company believes are creditworthy. Cash held at these financial institutions generally exceed federally insured limits. The Company is exposed to credit risk in the event of default by the financial institution holding its cash, cash equivalents, and investments to the extent recorded in the balance sheet. The Company has not experienced any losses to date related to these concentrations.

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:

• 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:

• Customer accounted for less than 10% of total revenue during the period.

Significant Accounting Policies

There have been no significant changes to the Company’s significant accounting policies during the three months ended March 31, 2024 from those disclosed in the annual consolidated financial statements for the year ended December 31, 2023.

Recent Accounting Pronouncements

Recently Issued Accounting Pronouncements

In December 2023, the FASB issued ASU 2023-09, Improvements to Income Tax Disclosures, which amends the guidance in ASC 740, Income Taxes. This ASU is intended to improve the transparency of income tax disclosures by requiring (1) consistent categories and greater disaggregation of information in the rate reconciliation and (2) income taxes paid disaggregated by jurisdiction. It also includes certain other amendments to improve the effectiveness of income tax disclosures. This ASU is effective for fiscal years beginning after December 15, 2024. Adoption is either prospectively or retrospectively, the Company will adopt this ASU on a prospective basis. The Company is currently evaluating the impact of adopting this ASU on its consolidated financial statements and disclosures.

In November 2023, the FASB issued ASU No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which requires disclosure of incremental segment information on an annual and interim basis. This ASU is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, and requires retrospective application to all prior periods presented in the financial statements. The Company is currently evaluating the impact of adopting this ASU on its consolidated financial statements and disclosures.

3. REVENUE

Disaggregated Revenue

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

Contract Balances

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

During the three months ended March 31, 2024 and 2023, the Company recognized revenue of $10.7 million and $8.6 million, respectively, that was included in the deferred revenue balance at the beginning of the respective periods. Contract assets, current, and contract assets, noncurrent are included in prepaid expenses and other current assets and other assets, respectively, on the unaudited condensed consolidated balance sheets.

As of March 31, 2024, non-cancelable contracted but unsatisfied or partially satisfied performance obligations that have not yet been recognized is $73.6 million which includes deferred revenue, amounts that will be invoiced and recognized as revenues in future periods and Flexible Spending Accounts (FSA) commitments, from customers where actual product selection and quantities of specific products are to be determined by customers at a future period. The Company expects to recognize $36.9 million of this balance over the next 12 months and the remainder thereafter. FSA commitments amounted to $5.5 million and $6.2 million as of March 31, 2024 and December 31, 2023, respectively. The Company has elected to exclude the potential future royalty receipts from these amounts.

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):

Amortization of capitalized sales commissions was $0.9 million for both the three months ended March 31, 2024 and 2023, and are included in sales and marketing expense in the unaudited 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):

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 anti-dilutive:

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 (in thousands):

The maturity dates of the Company’s investments are as follows (in thousands):

As of March 31, 2024 and December 31, 2023, securities with a fair value of $1.7 million and $3.7 million, respectively, were in a continuous net unrealized loss position for more than 12 months. As of both March 31, 2024 and December 31, 2023, the unrealized losses for available-for-sale investments were non-credit related and the Company does not intend to sell the investments that were in an unrealized loss position, nor does it foresee or project that it will be required to sell those investments before recovery of their amortized costs basis, which may be at maturity. Thus, as of both March 31, 2024 and December 31, 2023 no allowance for credit losses or impairment losses for the Company’s investments were recorded.

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 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 was $3.1 million and $3.4 million as of March 31, 2024 and December 31, 2023, 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 the Company’s incremental borrowing rate. 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):

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 months ended March 31, 2024.

7. INTANGIBLE ASSETS AND GOODWILL

Intangible assets, net

Intangible assets, net consisted of the following as of March 31, 2024 (in thousands):

Intangible assets, net consisted of the following as of December 31, 2023 (in thousands):

Amortization expense of intangible assets was$0.2 million for both the three months ended March 31, 2024 and 2023.

The expected future amortization expense of these intangible assets as of March 31, 2024 is as follows (in thousands):

Goodwill

As of both March 31, 2024 and December 31, 2023, goodwill was$4.2 million. No goodwill impairments were recorded during the three months ended March 31, 2024 and 2023.

8. LEASES

The Company leases its offices at various locations under noncancelable operating lease agreements expiring at various dates through 2032. 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.

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

The weighted-average remaining term of the Company’s operating leases was 4.6 years and 4.8 years as of March 31, 2024 and December 31, 2023, respectively, and the weighted-average discount rate used to measure the present value of the operating lease liabilities was 10.0% as of both March 31, 2024 and December 31, 2023. Cash payments made related to operating lease liabilities were$0.2 million and $0.3 millionfor the three months ended March 31, 2024 and 2023, respectively.

Maturities of operating lease liabilities as of March 31, 2024 were as follows (in thousands):

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 10.0%, which is an estimate based on the Company’s collateralized borrowing rate.

Expected cash flows related to vendor financing arrangements as of March 31, 2024 were as follows (in thousands):

Interest expense from vendor financing arrangements was $0.1 million for both the three months ended March 31, 2024 and 2023.

10. COMMITMENTS AND CONTINGENCIES

Letter of Credit—In conjunction with the execution of the operating lease for the Company’s new headquarter facility, a letter of credit in the amount of$0.4 million was issued and outstanding as of both March 31, 2024 and December 31, 2023. No draws have been made under such letter of credit.

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 months ended March 31, 2024 and 2023 and the unaudited condensed consolidated financial statements do not include liabilities for any potential indemnity-related obligations as of March 31, 2024 and December 31, 2023.

Legal—The Company has been and will continue to be subject to legal proceedings and claims.

In the normal course of business, the Company may receive inquiries or become involved in legal disputes regarding such litigation matters. Pursuant to ASC 450, Contingencies, the Company makes a provision for a liability relating to legal matters when it is both probable that a liability has been incurred, and the amount of the loss can be reasonably estimated. These provisions are reviewed at least quarterly and adjusted to reflect the impacts of negotiations, estimated settlements, legal rulings, advice of legal counsel and other information and events pertaining to a particular matter.

In December 2022, the Company received notice of a complaint filed against the Company and another defendant in the semiconductor industry, by Network System Technologies, LLC in the United States District Court for the Western District of Texas, and additional complaints were filed in the Eastern District of Texas against certain companies, including some customers of the Company, asserting among other things patent infringement relating to the Company’s technology seeking damages and injunctive relief. The Company filed a Motion to Dismiss the indirect and willful infringement claims in the Amended Complaint on September 5, 2023 and claim construction hearings, the results of which are pending, in the Western District of Texas. These complaints and claims are complex in subject matter, multiple in number, in varying stages among the courts in which complaints were filed and indeterminate as to the amount of damages sought. The Company continues to vigorously defend itself in respect to these complaints and anticipates an increase in legal expenses to do so.

Due to the inherent uncertainties and complex technical issues arising from such intellectual property litigation, the Company cannot predict or guarantee any result of such intellectual property litigation. As with any such litigation of this complexity, the Company cannot comment on the possible final litigation results of ongoing litigation or the risk whether the Company may not prevail in such intellectual property litigation. In addition, such litigation may make it necessary to support or defend the Company or the Company’s customers relating to the claims in the litigation.

Further, the ultimate outcome of the litigation, like any litigation, is uncertain and, regardless of outcome, litigation can have an adverse impact on the Company because of defense costs, potential negative publicity, diversion of management resources and other factors, which in turn may have a material adverse impact on the Company’s business, consolidated financial position, results of operations, or cash flows. As intellectual property claims are inherently unpredictable, the Company is currently evaluating whether such matters may have a material adverse effect on the Company’s financial position, results of operations, or cash flows.

In addition, significant judgement is required in both the determination of probability and determination as to whether a loss is reasonably estimable. Future revisions to such estimates could materially impact the Company’s results. Accordingly, there can be no assurance that existing or any future legal proceedings for liability estimates arising in the ordinary course of business or otherwise will not have a material adverse effect on the Company’s business, consolidated financial position, results of operations or cash flows.

The Company has no material contractual noncancelable commitments as of both March 31, 2024 and December 31, 2023.

11. STOCK-BASED COMPENSATION

Stock-based compensation expense is recorded on a departmental basis, based on the classification of the award holder. The following table presents the amount of stock-based compensation related to stock-based awards to employees on the Company’s unaudited condensed consolidated statements of loss (in thousands):

12. INCOME TAXES

The Company’s effective tax rate was (4.1)% and (3.4)% for the three months ended March 31, 2024 and 2023, respectively. The Company’s income tax provision was $0.4 million and $0.3 million for the three months ended March 31, 2024 and 2023, respectively. The change in forecasted foreign withholding tax, changes in the geographic mix of worldwide earnings which are taxed at different rates, and the impact of losses in jurisdictions with full valuation allowances, has resulted in an increase in the income tax provision for the period ended March 31, 2024 compared to the period ended March 31, 2023.

The Company’s management continuously evaluates the need for a valuation allowance and, as of March 31, 2024, concluded that a full valuation allowance on its federal, state, and certain foreign jurisdictions deferred tax assets was still appropriate.

As of March 31, 2024 and 2023, the Company’s gross liability for unrecognized tax benefits was $3.5 million and $2.6 million, respectively. The Company’s practice is to recognize interest and/or penalties related to income tax matters in income tax expense. As of March 31, 2024 and 2023, the Company hadno accrued interest or penalties related to its unrecognized tax benefits. If any unrecognized tax benefits are realized, it would not result in any income tax benefit as the Company currently has a full valuation allowance against the deferred tax assets in which there is currently an uncertain tax benefit.

13. RELATED PARTY TRANSACTIONS

The Company defines related parties as directors, executive officers, nominees for director, stockholders that have significant influence over the Company, or are a greater than 10% beneficial owner of the Company’s capital and their affiliates or immediate family members.

In November 2020, the Company entered into a lease agreement with Isabelle Geday, a member of the Board of Directors. The lease payments were less than $0.1 million for both the three months ended March 31, 2024 and 2023. In addition, the Company signed a consulting agreement with Ms. Geday on December 1, 2021, which was subsequently assigned to Magillem Design Services S.A., effective January 10, 2022. Prior to signing the consulting agreement, Ms. Geday was paid as an executive employee of the Company from December 1, 2020 through November 30, 2021. As a consultant, Ms. Geday will provide services for an initial three-year term and is eligible to receive $26,445 per month for the first 12 months of the consulting term and $19,445 per month for the remaining 24 months of the consulting term. For both thethree months ended March 31, 2024 and 2023, the Company paid Ms. Geday$0.1 million for consulting services. Lastly, the 455,000 stock options and 62,200 RSUs granted in connection with Ms. Geday’s prior employment continue to vest.

In December 2022, the Company entered into a no-fee non-exclusive evaluation license agreement of Magillem products with Transchip Technology (Nanjing) Co., Ltd. (Transchip), an equity method investee. The evaluation was extended and is ongoing as of March 31, 2024. Commencing August 2023, Transchip is carrying out a no-fee evaluation of additional Company products. Refer to Note 15 in the 2023 Form 10-K for additional discussion of the Company’s transactions with Transchip.