ARTERIS, INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included under Part II, Item 8 in this Annual Report on Form 10-K. This discussion and analysis contains forward-looking statements based upon current beliefs, plans and expectations that involve risks, uncertainties and assumptions, such as statements regarding our plans, objectives, expectations, intentions and projections. Our actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of several factors, including those set forth under the heading "Risk Factors" and elsewhere in this Annual Report on Form 10-K. You should carefully read the "Risk Factors" section of this Annual Report on Form 10-K to gain an understanding of the important factors that could cause actual results to differ materially from forward-looking statements. Please also see the section titled "Cautionary Note Regarding Forward-Looking Statements."
Unless the context otherwise requires, all references in this report to "we,"
"us," "our," the "Company," and "Arteris" refer to
Overview
We are a leading provider of interconnect and other IP technology that manages the on-chip communications in SoC semiconductor devices. Our products enable our customers to deliver increasingly complex SoCs that not only process data but are also able to make decisions. Growth in the TAM for our solutions is being driven by the addition of more processors, channels of memory access, machine learning sections, chiplets, additional I/O interface standards and other subsystems within SoCs. The growth in the numbers of these connected on-chip subsystems place an increasing premium on the interconnect IP capability to move data inside complex SoCs. We believe this increase in SoC complexity is creating a significant opportunity for sophisticated SoC system IP solutions which incorporate NoC interconnect IP, IP deployment software and NoC interface IP (consisting of peripheral data transport IP and control plane networks connected to NoC interconnect IP). Our IP deployment solutions, which were significantly enhanced by our acquisition of Magillem in 2020, complement our interconnect IP solutions by helping to automate not only the customer configuration of its NoC interconnect but also the process of integrating and assembling all of the customer's IP blocks into an SoC. Products incorporating our IP are used to carry most of the important data inside complex SoCs for sophisticated applications, including automated driving, AI/ML, 5G and wireless communications, data centers, and consumer electronics. As ofDecember 31, 2021 , we had 217 full-time employees and offices in eight locations inthe United States ,France ,China ,South Korea andJapan . For the year endedDecember 31, 2021 , we generated revenue of$37.9 million , net loss of$23.4 million and net loss per share - basic and diluted of$1.06 . As ofDecember 31, 2021 , we had Annual Contract Value (as defined below) of$47.4 million and 192 Active Customers (as defined below). During the year endedDecember 31, 2021 , our customers had 86 Design Starts (as defined below).
Initial Public Offering
In October, 2021, we completed our initial public offering (IPO), in which we issued and sold 5,750,000 shares of common stock at the public offering price of$14.00 per share, including 750,000 shares issued upon the full exercise of the underwriters' option to purchase additional shares. We received net proceeds of$71.1 million after deducting underwriting discounts and commissions and offering expenses. In connection with the IPO, all of the shares of our outstanding redeemable convertible preferred stock prior to the IPO automatically converted into an aggregate of 4,471,316 shares of common stock. 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 consolidated balance sheets. Upon completion of the IPO, deferred offering costs were reclassified into stockholders' equity as a reduction of the IPO proceeds.
Acquisition
OnNovember 30, 2020 , Arteris IP, SAS, our wholly owned subsidiary, completed the acquisition of Magillem for a total consideration of$7.8 million . Magillem is a leading provider of design flow and content management software solutions for the complex chip market. The primary reason for the acquisition was to integrate our technologies in order to accelerate and simplify the SoC assembly design flow and enhance innovation in both SoC IP integration software and the highly configurable on-chip interconnect IP that implements chip architectures. 60
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Factors Affecting Our Business
We believe that the growth of our business and our future success are dependent upon many factors including those described above under "Risk Factors" and elsewhere in this report and those described below. While each of these factors presents significant opportunities for us, these factors also pose challenges that we must successfully address in order to sustain the growth of our business and enhance our results of operations.
License Agreements with New and Existing Customers
Our ability to generate revenue from new license agreements, and the timing of such revenue, is subject to a number of factors, risks and contingencies. For new products, the time from initial development until we generate license revenue can be lengthy, typically between one and three years. In addition, because the selection process by our customers is typically lengthy and market requirements and alternative solutions available to customers for IP-based products change rapidly, we may be required to incur significant research and development expenditures in pursuit of new products over extended, multiyear periods of time with no assurance that our solutions will be successfully developed or ultimately selected by our customers. While we make efforts to observe market demand and market need trends, we cannot be certain that our investment in developing and testing new products will generate an adequate rate of return in the form of fees, royalties or other revenues, or any revenues. Moreover, the customer acquisition process has a typical duration of six to nine months; following this, a customer's chip design cycle is typically between one to three years and may be delayed due to factors beyond our control, which may result in our customer's product not reaching the market until long after we entered into a contract with such customer. Customers typically start shipping their products containing our interconnect IP solutions between one to five years following completion of their product design, known as mass production, at which point we start to receive royalties; this lasts for up to seven years depending on the market segment. Any significant delay in the ramp-up of volume production of the customer's products into which our product is designed could adversely affect our business due to delayed or significantly reduced revenues. Further, because the average selling prices (ASPs) of our products may decline over time, we consider new license agreements and new product launches to be critical to our future success and anticipate that for our newer products, we are and will remain highly dependent on market demand timing and revenue from new license agreements.
End Customer Product Demand and Market Conditions
Demand for our interconnect IP solutions and associated royalty revenue is highly dependent on market conditions in the end markets in which our customers operate. These end markets, which include the automotive, AI/ML, 5G communications, data centers and consumer electronics sectors, are subject to a number of factors including end-product acceptance and sales, competitive pressures, supply chain issues and general market conditions. For example, our revenue has been supported by the increased need for more complex SoCs to enable sophisticated automated driving. If the demand in this market continues to grow, we anticipate it will continue to have a positive impact on our revenue. In contrast, if general market conditions deteriorate or other factors occur such as supply chain issues resulting in fewer semiconductors utilizing our IP solutions being available for sale, our revenue would be adversely affected.
Terms of our Agreements with Customers
Our revenue from period to period can be impacted by the terms of the agreements we enter into with our customers. For example, in recent periods we have structured certain agreements with customers that include substantial up front licensing payments. As a result of how these contracts are structured and the revenue is recognized, our revenue in the year endedDecember 31, 2021 may not be comparable to future periods if we do not enter into similar contractual agreements. Further, a meaningful percentage of our revenue is generated through royalty payments. Because the time between a new license agreement win and the customer's end product being sold can be substantial, with sales of the end product being subject to a number of factors outside our control, our revenue from royalties is difficult to predict. As a result of the foregoing, revenue may fluctuate significantly from period to period and any increase or decrease in such revenue may not be indicative of future period-to-period increases or decreases.
We believe our growth has been and will continue to be driven by technology
trends in our end markets. For example, the requirements of smaller die size,
lower power consumption, a higher frequency of operation and management of
critical net latency in a timely and cost-effective manner
for on-chip processing in the automotive, AI/ML, 5G and wireless communications,
data center and consumer electronic markets has resulted in increased SoC design
complexity for chips used in these markets. This trend in turn has created
increased demand for in-licensing commercial semiconductor design IP, which in
turn has positively impacted our revenue and growth.
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In order to address technological developments such as the above and expand our offerings, we have invested significantly in our research and development efforts. These investments, which included growth in engineering headcount, have resulted in substantially increased research and development expenses in recent periods. As we continue to invest in our technology and new product design efforts, we anticipate research and development expense will increase on an absolute basis and as a percentage of revenue in the near term. In the medium to longer term, however, while we expect to increase our research and development expense on an absolute basis, we expect this expense to reduce as a percentage of revenue.
We will continue to evaluate growth opportunities through acquisitions of other businesses, although there are currently no discussions with potential targets.
Cyclical Nature of the Semiconductor Industry
The semiconductor industry in which our customers operate is highly cyclical and is characterized by increasingly rapid technological change, product obsolescence, competitive pricing pressures, evolving standards, short product life cycles and fluctuations in product supply and demand. New technology may result in sudden changes in system designs or platform changes that may render some of our IP solutions obsolete and require us to devote significant research and development resources to compete effectively. Periods of rapid growth and capacity expansion are occasionally followed by significant market corrections in which our customers' sales decline, inventories accumulate and facilities go underutilized. During an expansion cycle, we may increase research and development hiring to add to our product offerings or spend more on sales and marketing to acquire new customers, such as during the recent cycle of expansion in which we increased the number of our engineers significantly. During periods of slower growth or industry contractions, our sales generally suffer due to a decrease in customers' Design Starts or in sales of our customers products.
COVID-19 Impact
InMarch 2020 , theWorld Health Organization declared the outbreak of COVID-19 a pandemic which has resulted in substantial global economic disruption and uncertainty. In response to the COVID-19 pandemic, the measures implemented by various authorities have caused us to change our business practices, including those related to where employees work, the distance between employees in our 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. Although we have experienced, and may continue to experience, some impact on certain parts of our business as a result of governmental restrictions and other measures to mitigate the spread of COVID-19, our results of operations, cash flows and financial condition were not materially adversely impacted in the year endedDecember 31, 2021 . In addition, the number of Design Starts in 2021 was higher than the number of Design Starts in 2020. We are unable to accurately predict the full impact that COVID-19 will have on our 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. Although we expect most of our employees to return to physical offices in the future, the nature and extent of that return is uncertain. We will continue to monitor health orders issued by applicable governments to ensure compliance with evolving domestic and global COVID-19 guidelines. For additional details, see the section titled "Risk Factors-Our business has been, and may continue to be, adversely affected by health epidemics, pandemics and other outbreaks of infectious disease, including the current COVID-19 pandemic."
Key Performance Indicators
We use the following key performance indicators to analyze our business performance and financial forecasts and to develop strategic plans, which we believe provide useful information to investors and others in understanding and evaluating our results of operations in the same manner as our management team. These key performance indicators are presented for supplemental informational purposes only, should not be considered a substitute for financial information presented in accordance with generally accepted accounting principles inthe United States (GAAP), and may differ from similarly titled metrics or measures presented by other companies, securities analysts, or investors. 62
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Annual Contract Value
We define Annual Contract Value (ACV) for an individual customer agreement as the total fixed fees under the agreement divided by the number of years in the agreement term. Our total ACV is the aggregate ACVs for all our customers as measured at a given point in time. Total fixed fees includes licensing, support and maintenance and other fixed fees under IP licensing or software licensing agreements but excludes variable revenue derived from licensing agreements with customers, particularly royalties. ACV was$47.4 million and$37.7 million as ofDecember 31, 2021 andDecember 31, 2020 , respectively. In addition, total ACV and trailing twelve months royalties and other revenue was$50.0 million and$41.9 million as ofDecember 31, 2021 and 2020, respectively. We monitor this metric to measure our success and believe the increase in the number shows our progress in expanding our customers' adoption of our solutions.
Active Customers and Customer Retention
We define Active Customers as customerswho have entered into a license agreement with us that remains in effect. The retention and expansion of our relationships with existing customers are key indicators of our revenue potential. We had 192 and 150 Active Customers as ofDecember 31, 2021 and 2020, respectively. Our annual average customer retention rate, excluding IP deployment solutions, was 94.6% fromDecember 31, 2020 toDecember 31, 2021 . Additionally, we added 38 Active Customers for our IP deployment solutions through our acquisition of Magillem inNovember 2020 .
Design Starts
We define Design Starts as when customers commence new semiconductor designs using our interconnect IP and notify us. Design Starts is a metric management uses to assess the activity level of our customers in terms of the number of new semiconductor designs that are started using our interconnect IP in a given period. Our interconnect IP and NoC interface IP customer base started a total of 86 designs in 2021 and 57 designs 2020. The number of Design Starts in 2020 slowed due to the adverse impact of the COVID-19 pandemic on the operations of some of our customers. We believe that the number of Design Starts is an important indicator of the growth of our business and future royalty revenue trends.
Remaining Performance Obligations
We define Remaining Performance Obligations (RPO) as the amount of contracted future revenue that has not yet been recognized, including both deferred revenue and contracted amounts that will be invoiced and recognized as revenue in future periods. The RPO amount is intended to provide visibility into future revenue streams. We expect RPO to fluctuate up or down from period to period for several reasons, including amounts, timing, and duration of customer contracts, as well as the timing of billing cycles for each contract. Our RPO was$60.5 million and$47.9 million as ofDecember 31, 2021 and 2020, respectively.
Components of Our Results of Operations
Revenue: Our revenue is primarily derived from licensing intellectual property, licensing software, support and maintenance services, professional services, training services, and royalties. Our agreements often include other service elements including training and professional services which were immaterial for the years endedDecember 31, 2021 and 2020, respectively. Our interconnect solutions product arrangements provide customers the right to software licenses, services, software updates and technical support. We enter into licensing arrangements with customers that typically range from two to three years and generally consist of delivery of a design license that grants the customer the right to use the IP to design a contractually defined number of products and stand-ready support services that provides the customer with our application engineer support services. We believe our customers derive a significant benefit from our engineer support services, which consist of our proprietary software tool (RTL), ongoing access to Corporate Application Engineers (CAE) and Field Application Engineers (FAE) that perform certain verifications including benchmark performance, simulations and ultimately, through RTL, instantiate designs into silicon over the design term.
The support services, including access to application engineering support services and the benefits of the RTL, are integral and fundamental to the customer's ability to derive its intended benefit from the IP.
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CAEs are part of the product development team providing detailed requirements for engineering projects, working very closely with a customer's chief technology officer and the marketing department, and performing quality assurance testing of customer products prior to shipment to their customers.
FAEs provide assistance to the customer's engineering team in translating their desired SoC architecture into inputs for NoC IP configuration, assistance in optimizing the NoC configuration, answers to customer questions by the online support system or phone, constructive reviews of the progress achieved by the customer's development team and provision of advice on how to best use the licensed IP, performance of design reviews before customer project RTL freeze and tape-out to ensure the customer used the licensed IP configuration tooling as intended so that the RTL output meets customer requirements and expectations. FAE reviews of the customer's design are generally mandatory and consist of an understanding of the customer requirements and analysis of the adequacy of the contemplated IP considering the customer's desired architecture and design goals and objectives, taking into consideration bandwidth, coherence/non-coherence, latency, clock and timing, areas, and any and all constraints, as identified and specific to the design under review. Besides application engineer support services, support and maintenance services also consist of a stand-ready obligation to provide technical support and software updates over the support term. Generally, the first-year of technical support and software updates are bundled with and into the license fee with a customer option to renew additional years of support throughout the license term. However, we continue to provide technical support and software updates throughout the license term even if the customer does not renew these services in subsequent years, making the license term and support and maintenance term co-terminus. Revenues that are derived from the sale of a licensee's products that incorporate our IP are classified as royalty revenues. Royalty revenues are recognized during the quarter in which the sale of the product incorporating the IP occurs. Royalties are calculated either as a percentage of the revenues received by a licensee's sale of products incorporating the IP or on a per unit basis, as specified in the agreements with the licensees. For a majority of our royalty revenues, we receive the actual sales data from our customers after the quarter ends and account for it as unbilled receivables. When we do not receive actual sales data from the customer prior to the finalization of its financial statements, royalty revenues are recognized based on our estimation of the customer's sales during the quarter. Our deployment solutions product arrangements provide customers the right to software licenses, software updates and technical support. The software licenses are time-based licenses with terms generally ranging from one to three years. These arrangements generally have two distinct performance obligations that consist of transferring the licensed software and the support and maintenance service. Support and maintenance services consist of a stand-ready obligation to provide technical support and software updates over the support term. Revenue allocated to the software license is recognized at a point in time upon the later of the delivery date or the beginning of the license period, and revenue allocated to support services is recognized ratably over the support term.
Cost of revenue: Cost of revenue relates to costs associated with our licensing agreements and support and maintenance, including applicable FAE personnel-related costs including stock-based compensation, travel, and allocated overhead. We expect cost of revenue as a percentage of revenue to modestly decline over time due to productivity improvements of our FAE processes.
Research and development (R&D) expenses: R&D expenses consist primarily of
salaries and associated personnel-related costs, facilities expenses associated
with research and development activities, third-party project-related expenses
connected with the development of our intellectual property which are expensed
as incurred, and stock-based compensation expense and other allocated costs. We
expect R&D expenses to increase in absolute terms and as a percentage of revenue
in the short term and to continue to increase in absolute terms in the medium to
long term but decrease as a percentage of revenue as certain new products are
launched.
Sales and marketing (S&M) expenses: S&M expenses consist primarily of salaries,
commissions, travel and other costs associated with S&M activities, as well as
advertising, trade show participation, public relations, and other marketing
costs, stock-based compensation expenses and other allocated costs. We expect
S&M expenses to increase in absolute terms but decrease as a percentage of
revenue due to productivity improvements of our sales processes.
General and administrative (G&A) expenses: G&A expenses consist primarily of
salaries for management and administrative employees, depreciation, insurance
costs, accounting, legal and consulting fees, other professional service fees,
expenses related to the development of corporate initiatives and facilities
expenses associated with G&A activities and stock-based compensation expense,
fees for directors and other allocated costs.
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We incur additional expenses as a result of operating as a public company, including costs to comply with the rules and regulations applicable to companies listed on a national securities exchange, costs related to compliance and reporting obligations, and increased expenses for additional G&A personnel, directors and officers insurance, investor relations, and professional services. We expect G&A expenses to increase as our business grows. In addition, we expect G&A expenses as a percentage of revenue to vary from period to period but generally decrease over the long term.
Gain on extinguishment of debt: Gain on extinguishment of debt consists of
forgiveness of a loan from the
Interest and other expense, net: Interest and other expense, net consists primarily of interest expense associated with our term loan and gains and losses from foreign currency transactions.
Provision for income taxes: Our income tax provision consists primarily of income taxes in certain foreign jurisdictions in which we conduct business and includes foreign non-recoverable withholding taxes. We have a full valuation allowance against ourU.S. federal and state deferred tax assets as the realization of the full amount of these deferred tax assets is uncertain, including net operating loss carryforwards and tax credits related primarily to research and development. We expect to maintain this full valuation allowance until it becomes more likely than not that the deferred tax assets will be realized.
Results of Operations
The following table summarizes our GAAP results of operations for the periods
presented. The results below are not necessarily indicative of results to be
expected for future periods.
Year ended December 31,
2021 2020
(in thousands)
Total revenue $ 37,864 $ 31,812
Cost of revenue 3,731 1,491
Gross profit 34,133 30,321
Operating expenses:
Research and development (1) 30,812 17,020
Sales and marketing (1) 11,726 9,749
General and administrative (1) 13,360 7,329
Total operating expenses 55,898 34,098
Loss from operations (21,765) (3,777)
Gain on extinguishment of debt 10 1,593 Interest and other expense, net (589)
(50)
Loss before provision for income taxes (22,344) (2,234) Provision for income taxes 1,040 1,026 Net loss$ (23,384) $ (3,260)
(1)Includes stock-based compensation expense as follows:
Year Ended December 31,
2021 2020
(in thousands)
Research and development $ 3,495 $ 263
Sales and marketing 797 92
General and administrative 1,218 103
Total stock-based compensation expense (a) $ 5,510 (a) Stock-based compensation expense attributable to cost of revenue is immaterial.
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During the year endedDecember 31, 2021 , we began recognizing, using graded vesting, stock-based compensation expense associated with our restricted stock units (RSUs) granted prior to our IPO as the performance-based vesting conditions applicable to such RSUs were satisfied upon the effectiveness of our IPO inOctober 2021 . We recognized stock-based compensation expense of$3.5 million associated with such RSUs for the year endedDecember 31, 2021 .
See Note 13 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for further details.
The following table summarizes our results of operations as a percentage of total revenue for each of the periods indicated:
Year Ended
2021 2020
(as a percentage of total revenue)
Total revenue 100 % 100 %
Cost of revenue 10 5
Gross profit 90 95
Operating expenses:
Research and development 81 54
Sales and marketing 31 31
General and administrative 36 22
Total operating expenses 148 107
Loss from operations (58) (12)
Gain on extinguishment of debt - 5
Interest and other expense, net (1) -
Loss before provision for income taxes (59) (7)
Provision for income taxes 3 3
Net loss (62) % (10) %
Comparison of the Years Ended
Revenue
Year Ended December 31, Change
2021 2020 $ %
(in thousands)
Licensing, support and maintenance $ 34,731 $ 27,408 $ 7,323 27 %
Variable royalties 2,647 3,470 (823) (24)
Other 486 934 (448) (48)
Total $ 37,864 $ 31,812 $ 6,052 19 %
Revenue from licensing, support and maintenance increased 27% during the year
ended December 31, 2021 as compared to the year ended December 31, 2020 . The
increase was primarily due to the addition of new customers, including those
gained as a result of the Magillem acquisition in November 2020 , and the
increase in new license agreements with existing customers. The decrease in
variable royalty revenue during the year ended December 31, 2021 was primarily
due to a decrease in sales volume of a significant customer as a result of U.S.
government trade restrictions limiting the customer's ability to have their
semiconductors fabricated.
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Cost of revenue
Year Ended December 31, Change
2021 2020 $ %
(in thousands)
Cost of revenue $ 3,731 $ 1,491 $ 2,240 150 %
The increase in cost of revenue during the year ended
Operating expenses
Year Ended December 31, Change
2021 2020 $ %
(in thousands)
Research and development $ 30,812 $ 17,020 $ 13,792 81 %
Sales and marketing 11,726 9,749 1,977 20
General and administrative 13,360 7,329 6,031 82
Total operating expenses $ 55,898 $ 34,098 $ 21,800 64 %
Research and development expenses
R&D expenses increased,$13.8 million , or 81%, to$30.8 million for the year endedDecember 31, 2021 from$17.0 million for the year endedDecember 31, 2020 . The increase in research and development expenses during the year endedDecember 31, 2021 , as compared to the prior fiscal year, was primarily due to the increase in employee-related cost of$13.2 million mainly driven by an increase in engineering headcount as a result of our growth and investment in our interconnect technology, including costs associated with additional headcount resulting from the Magillem acquisition and an increase in stock-based compensation expense partially related to the satisfaction of the performance-based vesting condition of our outstanding RSUs upon the effectiveness of our IPO inOctober 2021 .
The increase in research and development expenses for the year ended
Sales and marketing expenses S&M expenses increased,$2.0 million , or 20%, to$11.7 million for the year endedDecember 31, 2021 from$9.7 million for the year endedDecember 31, 2020 . The increase in sales and marketing expenses during the year endedDecember 31, 2021 , as compared to the prior fiscal year, was primarily due to the increase in employee-related cost of$0.5 million mainly driven by higher headcount to support our continued growth and an increase in stock-based compensation expense partially due to the satisfaction of the performance-based vesting condition of our outstanding RSUs upon the effectiveness of our IPO inOctober 2021 . Other sales and marketing program expenses also increased$0.7 million primarily due to increases in advertising and brand awareness efforts aimed at acquiring new customers.
General and administrative expenses
G&A expenses increased,$6.0 million , or 82%, to$13.4 million for the year endedDecember 31, 2021 from$7.3 million for the year endedDecember 31, 2020 . The increase in general and administrative expenses during the year endedDecember 31, 2021 , as compared to the prior fiscal year, was primarily due to an increase in employee compensation costs of$5.8 million , which was mainly driven by higher headcount to support our continued growth and an increase in stock-based compensation expense partially due to the satisfaction of the performance-based vesting condition of our outstanding RSUs upon the effectiveness of our IPO inOctober 2021 . Expenses relating to outside services also increased$1.5 million for the year endedDecember 31, 2021 compared to the prior fiscal year, primarily related to legal, accounting, and other professional services fees. 67
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Gain on extinguishment of debt:
Year Ended December 31, Change
2021 2020 $ %
(in thousands)
Gain on extinguishment of debt $ 10 $ 1,593 $ (1,583) (99) %
Gain on extinguishment of debt decreased to$10 thousand for the year endedDecember 31, 2021 compared to$1.6 million for the year endedDecember 31, 2020 . The change was due to the forgiveness inDecember 2020 of a loan from theUS Treasury Department's Small Business Administration under their PPP Loan, which was introduced as an economic stimulus following the COVID-19 pandemic.
Interest and other expense, net
Year Ended December 31, Change
2021 2020 $ %
(in thousands)
Interest and other expense, net $ (589) $ (50) $ (539) *
* not meaningful
Interest and other expense, net for the year ended December 31, 2021 was
$0.6 million , compared to $0.1 million for the year ended December 31, 2020 . The
increase in interest and other expense, net was primarily related to foreign
currency exchange, which was partially offset by a reduced interest expense on
our term loan as a result of the reduction in outstanding principal.
Provision for income taxes
Year Ended December 31, Change
2021 2020 $ %
(in thousands)
Provision for income taxes $ 1,040 $ 1,026 $ 14 1 %
The provision for income taxes for the year ended
Liquidity and Capital Resources
Since inception we have financed operations primarily through proceeds received from payments received from our customers, the net proceeds from the sale of our common stock in the IPO as well as the net proceeds from the private issuance of our convertible preferred stock and common stock, and to a lesser extent, borrowings under our 2018 Term Loan agreement, which was paid off inNovember 2021 . As ofDecember 31, 2021 , we had$85.8 million in cash. Approximately$5.4 million of total cash was held by our foreign subsidiaries as ofDecember 31, 2021 . InNovember 2018 , we entered into a business financing agreement withBridge Bank (Lender) for a term loan of$1.5 million with a maturity date ofNovember 2021 , repayable monthly (2018 Term Loan). The interest rate of the 2018 Term Loan was prime plus 2%. We paid the remaining outstanding principal balance of the 2018 Term Loan upon maturity inNovember 2021 . The 2018 Term Loan was not renewed. InApril 2020 , we entered into a loan agreement under the Coronavirus Aid, Relief, and Economic Security (CARES) Act known as the Paycheck Protection Program with a lender for the amount of$1.6 million at an interest rate of 1% per annum, and repayable in two years (the PPP Loan). We used proceeds of the PPP Loan to fund qualifying payroll and other expenses. InDecember 2020 , the full amount of the PPP Loan, including principal and accrued interest, was forgiven. We believe our cash and cash expected to be generated from operations will be sufficient to meet our expected working capital needs, capital expenditures, financial commitments and other liquidity requirements associated with our existing operations for at least the next 12 months. If these resources are not sufficient to satisfy our liquidity requirements, we may be required to seek additional financing. If we raise additional funds by issuing equity securities, our stockholders will experience dilution. Debt financing, if available, may contain covenants that significantly restrict our operations or our ability to obtain additional debt financing in the future. Any additional 68
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financing that we raise may contain terms that are not favorable to us or our
stockholders. We cannot assure you that we would be able to obtain additional
financing on terms favorable to us or our existing stockholders, or at all. See
"Risk Factors -Risks Related to Our Business and Industry-Our ability to raise
capital in the future may be limited and could prevent us from executing our
growth strategy."
Cash Flows
The following table summarizes changes in our cash flows for the periods
indicated:
Year Ended December 31,
2021 2020
(in thousands)
Net cash (used in) provided by operating activities $ (814) $ 2,163
Net cash used in investing activities (1,359) (5,147)
Net cash provided by financing activities 76,254 790
Operating Activities
Cash flows from operating activities may vary significantly from period to
period depending on a variety of factors including the timing of our receipts
and payments. Our ongoing cash outflows from operating activities primarily
relate to payroll-related costs, payments for professional services, obligations
under our property leases and design tool licenses. Our primary source of cash
inflows is receipts from our accounts receivable. The timing of receipts of
accounts receivable from customers is based upon the completion of agreed
milestones or agreed dates as set forth in the contracts.
For the year ended December 31, 2021 , net cash used in operating activities was
$0.8 million , primarily due to our net loss of $23.4 million , adjusted for
non-cash charges of $7.1 million and $15.5 million changes in operating assets
and liabilities. Non-cash charges primarily consisted of stock-based
compensation of $5.5 million and depreciation and amortization of $1.5 million .
The primary drivers of the changes in operating assets and liabilities were a
$16.3 million increase in deferred revenue, $2.8 million increase in accrued
expenses and other liabilities, $0.5 million decrease in accounts receivables
and $0.4 million increase in accounts payable, partially offset by $4.4 million
increase in prepaid expenses and other assets.
For the year ended December 31, 2020 , net cash provided by operating activities
was $2.2 million primarily due to our net loss of $3.3 million , adjusted for
non-cash charges of $0.4 million and $5.1 million changes in operating assets
and liabilities. Non-cash charges primarily consisted of depreciation and
amortization and stock-based compensation, partially offset by gain on
extinguishment of debt. The primary drivers of the changes in operating assets
and liabilities were a $11.1 million increase in deferred revenue and $3.0
million increase in accrued expenses and other current liabilities, partially
offset by $6.3 million increase in accounts receivable and $2.6 million increase
in prepaid expenses and other assets.
Investing Activities
Net cash used in investing activities for the year endedDecember 31, 2021 was$1.4 million compared to$5.1 million for the year endedDecember 31, 2020 . The change was primarily due to the cash consideration of$4.5 million paid related to the Magillem acquisition for the year endedDecember 31, 2020 , partially offset by a deferred consideration payment of$0.5 million year endedDecember 31, 2021 .
Financing Activities
For the year endedDecember 31, 2021 , net cash provided by financing activities was$76.3 million , primarily attributable to proceeds from issuance of common stock upon initial public offering net of underwriting commissions and other issuance costs of$71.3 million and proceeds from issuance of common stock of$5.4 million .
For the year ended
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Contractual Obligations
Our principal commitments consist of obligations under our operating leases for office space and data center hosting space and vendor finance arrangements. Information regarding our non-cancelable lease commitments as of December 31, 2021 can be found in Note 9 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K. Our obligations as of December 31, 2021 under our vendor finance arrangements are described in Note
10 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
Critical Accounting Estimates Our consolidated financial statements are prepared in accordance with GAAP. The preparation of consolidated financial statements requires us to make certain estimates, judgments, and assumptions. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable based upon information available to us at the time that these estimates, judgments, and assumptions are made. Our estimates and related judgments and assumptions are continually evaluated based on available information and experiences. However, actual amounts could differ from those estimates.
The following are the critical accounting policies requiring estimates, judgments, and assumptions that we believe have the most significant impact on our consolidated financial statements.
Revenue Recognition
We recognize license revenues as we transfer control of deliverables (software and services) to our customers in an amount reflecting the consideration to which we expect to be entitled. To recognize revenues, we apply the following five step approach: (1) identify the contract with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when a performance obligation is satisfied. We account for a contract when it has approval and commitment from all parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable. We apply judgment in determining the customer's ability and intention to pay based on a variety of factors including the customer's historical payment experience.
Nature of Products and Services
Our revenue is derived from licensing intellectual property, licensing software, support and maintenance services, professional services, training services, and royalties. Design Solutions Interconnect solutions product agreements provide customers the right to software licenses, services, software updates and technical support. We enter into licensing agreements with customers that typically range from two to three years and generally consist of delivery of a design license that grants the customer the right to use our IP to design a contractually defined number of products and stand-ready support services that provide the customer a significant benefit from our RTL as well as ongoing access to application engineer support services to perform certain verifications including benchmark performance, simulations and ultimately, through the RTL, instantiate designs into silicon over the design term.
The support services, including access to application engineering support services and the benefits of the RTL, are integral and fundamental to the customer's ability to derive its intended benefit from the IP.
CAEs are part of the product development team providing detailed requirements
for engineering projects, working very closely with a customer's chief
technology officer, and similar staff, and their marketing department, and
performing quality assurance testing of customer products prior to shipment to
their customers.
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FAEs provide assistance to the customer's engineering team in translating their desired SoC architecture into inputs for NoC IP configuration, assistance in optimizing the NoC configuration, answer to customer questions by the online support system or phone, constructive reviews of the progress achieved by the customer's development team and provision of advice on how to best use the licensed IP, performance of design reviews before customer project RTL freeze and tape-out to ensure the customer used the licensed IP configuration tooling as intended so that the RTL output meets customer requirements and expectations. FAE reviews of the customer's design are mandatory and consist of an understanding of the customer requirements and analysis of the adequacy of the contemplated IP considering the customer's desired architecture and design goals and objectives, taking into consideration bandwidth, coherence/non-coherence, latency, clock and timing, areas, and any and all constraints, as identified and specific to the design under review. Besides application engineer support services, support and maintenance services also consist of a stand-ready obligation to provide technical support and software updates over the support term. Generally, the first-year of technical support and software updates are bundled with and into the license fee with a customer option to renew additional years of support throughout the license term. However, we continue to provide technical support and software updates throughout the license term even if the customer does not renew these services in subsequent years, making the license term and support and maintenance term co-terminus. Considering the nature of the combined design tool and assisting our customers in applying our IP technology in our customers' development environment and the relative significance thereof, we have concluded that our Interconnect Solutions IP licensing agreements are not distinct from its obligation to provide the application engineering support services and benefits of the RTL. The Interconnect Solutions IP, RTL, and the application engineering support services serve to fulfill our commitment to the customer, as they represent inputs to a single, combined performance obligation that commences upon the later of the agreement effective date or transfer of the software license. The design license and the regular two-way interaction between the design tool, RTL , and the application engineering support services give the customer the intended benefit from the arrangement, which is the ability to commercialize their design. Customers cannot benefit from the design license on its own or together with other readily available resources as no other RTL or application engineer support service exists in the marketplace that a customer could use with the design license. Consequently, the RTL and application engineer support service cannot be used on its own or together with any other design license as we do not allow the use of the RTL or provide application engineer support services separately from the design license. Further, although technical support and software updates is a distinct performance obligation, it is accounted for as if it were part of a single performance obligation that includes the licenses, RTL and application engineer support services because the technical support and updates are provided in practice for the same period of time and have the same time-based pattern of transfer to the customer as the combined design license, RTL, and application support services. Revenues that are derived from the sale of a licensee's products that incorporate our IP are classified as royalty revenues. Royalty revenues are recognized during the quarter in which the sale of the product incorporating our IP occurs. Royalties are calculated either as a percentage of the revenues received by a licensee's sale of products incorporating our IP or on a per unit basis, as specified in the agreements with the licensees. For a majority of our royalty revenues, we receive the actual sales data from its customers after the quarter ends and account for it as unbilled receivables. When we do not receive actual sales data from the customer prior to the finalization of our financial statements, royalty revenues are recognized based on our estimation of the customer's sales during the quarter.
Deployment Solutions
Deployment Solutions product agreements provide customers the right to software licenses, software updates and technical support. The software licenses are time-based licenses with terms generally ranging from one to three years. These agreements generally have two distinct performance obligations that consist of transferring the licensed software and the support and maintenance service. Support and maintenance services consist of a stand-ready obligation to provide technical support and software updates over the support term. Revenue allocated to the software license is recognized at a point in time upon the later of the delivery date or the beginning of the license period, and revenue allocated to support services is recognized ratably over the support term.
A limited number of Deployment Solutions contracts include tokens, a mechanism used to both enable "peak" users to choose a combination of the software products on a monthly basis and restrict the number of users. We recognize revenue related to these tokens at a point in time, based on quarterly consumption information provided by the customer.
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Professional Services
Our agreements often include service elements (other than maintenance and support services). These services include training, design assistance, and consulting. Services performed on a time and materials basis are recognized over the period the services are provided either using an output method such as labor hours, or a method that is otherwise consistent with the way in which value is delivered to the customer. Services performed on a fixed price basis are recognized over time, generally using costs incurred or hours expended to measure progress.
Multiple Performance Obligations
Most of our contracts with customers contain multiple performance obligations. For these contracts, we account for individual performance obligations separately, if they are distinct. The transaction price is allocated to the separate performance obligations on a relative standalone selling price basis, which are estimated considering multiple factors including observable industry pricing practices and internal pricing strategies and objectives. Standalone selling prices of software licenses are typically estimated using the residual approach. Standalone selling prices of professional services are typically estimated based on observable transactions when these services are sold on a standalone basis. Transaction price Revenue is recognized when, or as, control of a promised product or service transfers to a client, in an amount that reflects the consideration to which we expect to be entitled in exchange for transferring those products or services. If the consideration promised in a contract includes a variable amount, we estimate the amount to which we expect to be entitled using either the expected value or most likely amount method, to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur. Generally, the transaction price of our contracts is fixed at the inception of the contract. Our contracts generally do not include terms that could cause variability in the transaction price. We assess the timing of the transfer of goods or services to the customer as compared to the timing of payments to determine whether a significant financing component exists. As a practical expedient, we do not assess the existence of a significant financing component when the difference between payment and transfer of deliverables is a year or less. If the difference in timing arises for reasons other than the provision of finance to either the customer or us, no financing component is deemed to exist. When contracts involve a significant financing component, we adjust the promised amount of consideration for the effects of the time value of money if the timing of payments agreed to by the parties to the contract (either explicitly or implicitly) provide the customer with a significant benefit of financing.
We report revenue net of any revenue-based taxes assessed by governmental authorities that are imposed on and concurrent with specific revenue-producing transactions.
In instances where foreign licensees withhold and remit taxes to local authorities in accordance with local laws and regulations, we recognize and present revenue on a gross basis, and include the withholding tax in income tax expense.
Flexible Spending Accounts Some customers enter into a non-cancelable Flexible Spending Account (FSA) agreements whereby the customer commits to a fixed dollar amount over a specified period of time that can be used to purchase from a list of our products or services. These agreements do not meet the definition of a revenue contract until the customer executes a separate order to identify the required products and services that they are purchasing. The combination of the FSA agreement and the subsequent order creates enforceable rights and obligations, thus meeting the definition of a revenue contract. Each separate order under the agreement is treated as an individual contract and accounted for based on the respective performance obligations included within the FSA agreements.
Contract modifications
Our contracts may be modified to add, remove or change existing performance
obligations. The accounting for modifications to our contracts involves
assessing whether the products and services added to an existing contract are
distinct and whether the pricing is at the standalone selling price. Products
and services added that are not distinct are accounted for on a
cumulative catch-up basis, while those that are distinct are accounted for
prospectively, either as a separate contract if the additional services are
priced at the standalone selling price, or as a termination of the existing
contract and creation of a new contract if not priced at the standalone selling
price. Our more significant contract modifications include extensions of the
design license term and the purchase of additional years of support and
maintenance.
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Judgments
Our contracts with customers often include promises to transfer multiple products and services to a customer. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together requires significant judgment. Judgment is also required to determine the standalone selling price for each distinct performance obligation. Contract Balances The timing of revenue recognition may differ from the timing of invoicing to customers, and these timing differences result in receivables (billed or unbilled), contract assets, or contract liabilities (deferred revenue) on our consolidated balance sheet. We record a contract asset when revenue is recognized prior to the right to invoice. We record deferred revenue when we invoice customers and revenue is not yet recognized. For time-based software agreements, customers are generally invoiced in single or annual amounts, although some customers are invoiced more frequently over-time. We record an unbilled receivable when revenue is recognized and it has an unconditional right to invoice and receive payment. We capitalize sales commission as costs of obtaining a contract when they are incremental and, if they are expected to be recovered, amortized in a manner consistent with the pattern of transfer of the good or service to which the asset relates.
Income Taxes
We account for income taxes under the asset and liability method. Under this method, deferred taxes are determined based on the temporary differences between the financial statement and tax basis of assets and liabilities using tax rates expected to be in effect during the years in which the basis differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. We provide for a valuation allowance when it is more likely than not that some portion, or all of our deferred tax assets will not be realized. In making such determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. As ofDecember 31, 2021 , we recorded a full valuation allowance against ourU.S. federal, state, and certain foreign jurisdiction deferred tax assets. As ofDecember 31, 2020 , we recorded a full valuation allowance against ourU.S. federal and state deferred tax assets.
Stock-based Compensation
We measure equity classified stock-based awards, including stock options, RSUs, and RSAs granted to employees, directors, and non-employees based on the estimated fair values of the awards on the date of the grant. Stock-based compensation expense for awards with service-based vesting only is recognized on a straight-line basis over the requisite service period which is generally the vesting period of such awards, as a component of operating expenses within the Consolidated Statements of Income (Loss). For awards that include performance conditions stock-based compensation expense is recognized on a graded vesting basis over the requisite service period. Compensation expense is not recognized until the performance condition becomes probable. The performance-based vesting condition of certain awards is satisfied in connection with us becoming a publicly listed company or a change in control. Upon the effectiveness of our initial public offering (IPO), the performance-based vesting condition was satisfied and therefore, we recognized cumulative stock-based compensation expense of$3.5 million associated with such RSUs for the portion for which the service-based vesting condition had been fully or partially satisfied for the year endedDecember 31, 2021 . RSUs granted after our IPO do not contain the performance-based vesting condition described above.
We account for forfeitures related to these awards as they occur.
The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option-pricing model. This valuation model for stock-based compensation expense requires us to make assumptions and judgments about the variables used in the calculation including the expected term, the volatility of our common stock, and an assumed risk-free interest rate. As a result, if we revise our assumptions and estimates, our stock-based compensation expense could change. We determine valuation assumptions for Black-Scholes as follows:
Risk-Free Interest Rate-We base the risk-free interest rate used in the
Black-Scholes option-pricing model on the implied yield available on
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Expected Term-The expected term represents the period that our stock-based awards are expected to be outstanding. The expected term assumption is based on the simplified method. We expect to continue using the simplified method until sufficient information about our historical behavior is available.
Volatility-We determine the price volatility factor based on the historical volatilities of our peer group as the we do not have sufficient trading history for its common stock.
Dividend Yield-We have never declared or paid any cash dividend and does not currently plan to pay a cash dividend in the foreseeable future. Consequently, we used an expected dividend yield of zero.
The following table summarizes the valuation assumptions:
Year Ended December 31
2020
Fair value of common stock $0.60 - $2.74
Expected volatility 33.9% - 39.9%
Expected term (in years) 5.4 - 6.1
Risk-free interest rate 0.3% - 1.5%
Expected dividend yield 0%
We had no stock option grants during the year ended
The fair value of RSUs and RSAs granted is measured as the fair value per share of our common stock on the date of grant.
Common Stock Valuations
Prior to our IPO, the fair value of the common stock underlying our stock-based awards has historically been determined by our board of directors, with input from management and contemporaneous independent third-party valuations. We believe that our board of directors has the relevant experience and expertise to determine the fair value of our common stock. Given the absence of a public trading market of our common stock, and in accordance with theAmerican Institute of Certified Public Accountants Practice Aid , Valuation of Privately-Held Company Equity Securities Issued as Compensation, our board of directors exercised reasonable judgment and considered numerous objective and subjective factors to determine the best estimate of the fair value of our common stock, including:
?independent third-party valuations of our common stock;
?the rights, preferences and privileges of our redeemable convertible preferred stock relative to those of our common stock;
?our financial condition, results of operations and capital resources;
?the industry outlook;
?the valuation of comparable companies;
?the lack of marketability of our common stock;
?the fact that option and RSU grants have involved rights in illiquid securities in a private company;
?the likelihood and timeline of achieving a liquidity event, such as a public offering or a sale of our company given prevailing market conditions;
?the history and nature of our business, industry trends and competitive environment; and
?general economic outlook including economic growth, inflation and unemployment, interest rate environment and global economic trends.
After our IPO, the fair value of our common stock is based on the closing price as reported on the date of grant on the primary stock exchange on which our common stock is traded.
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Business Combinations
We allocate the purchase price to the tangible assets acquired, liabilities assumed, and intangible assets acquired based on their estimated fair values. The excess of the purchase price over the fair values of these identifiable assets and liabilities is recorded as goodwill. Such valuations require management to make significant estimates and assumptions, especially with respect to intangible assets. These estimates are based on information obtained from management of the acquired companies, our assessment of this information, and historical experience. Significant estimates in valuing certain intangible assets include, but are not limited to, future expected cash flows from acquired customers, acquired technology, and trade names from a market participant perspective, useful lives, and discount rates. Management's estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. In addition, unanticipated events and circumstances may occur that may affect the accuracy or validity of such estimates, and if such events occur, we may be required to adjust the value allocated to acquired assets or assumed liabilities. During the measurement period, which may be up to one year from the acquisition date, we may record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to our consolidated statements of loss. Acquisition costs, such as legal and consulting fees, are expensed as incurred.
We perform our goodwill and other indefinite-lived intangible assets impairment tests annually or more frequently if events or changes in circumstances occur that would more likely than not reduce the fair value below its carrying value. For the year endedDecember 31, 2021 and 2020, we did not have any goodwill or other indefinite-lived intangible assets impairment. Acquired finite-lived intangible assets are amortized on a straight-line basis over the estimated useful lives of the assets, which range from five to eight years, unless the lives are determined to be indefinite. We routinely review the remaining estimated useful lives of finite-lived intangible assets. Amortization expenses are recorded operating expenses on the consolidated statements of loss.
Recently Issued and Adopted Accounting Pronouncements
For more information regarding recently issued accounting pronouncements, see
Note 2 to our consolidated financial statements included elsewhere in this report.
JOBS Act We are an emerging growth company, as defined in the Jumpstart Our Business Startups (JOBS) Act. The JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards. This provision allows an emerging growth company to delay the adoption of some accounting standards until those standards would otherwise apply to private companies. We have elected to use the extended transition period under the JOBS Act for the adoption of certain accounting standards until the earlier of the date we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. See Note 2 , Basis of Presentation and Summary of Significant Accounting Policies, in the notes to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K. As a result, our financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates.
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