Silvaco Group Inc

7. Debt and Financing Obligations

On June 13, 2022, Silvaco entered into the 2022 Credit Line which bears interest at a rate of prime plus 1% per annum. As of December 31, 2023, the principal balance of the 2022 Credit Line was $2.0 million. In May 2024, the outstanding balance under the 2022 Credit Line was repaid in full, and the 2022 Credit Line was terminated. The Company didnot recognize any gain or loss on the extinguishment of the 2022 Credit Line.

In December 2023, the Company entered into a loan facility with East West Bank (the “East West Bank Loan”) which had a maturity date of December 14, 2025 and provided for borrowings of up to $5.0 million bearing interest at a per annum rate equal to one half of one percent (0.5%) above the greater of (i) the prime rate or (ii) four and one half percent (4.5%). The Company drew $4.3 million on the East West Bank Loan during the six months ended June 30, 2024 and repaid the $4.3 million in full in May 2024. Accordingly, the Company recognized a loss on debt extinguishment of $0.1 million during the three and six months ended June 30, 2024. The Company additionally recorded interest expense of $0.1 million and $0.2 million during the three and six months ended June 30, 2024, respectively, with respect to the East West Bank Loan. In May 2024, the East West Bank Loan was terminated.

On April 11, 2024, the Company amended its license agreement with NXP, pursuant to which the Company financed the purchase of licensed IP and recorded an associated vendor financing obligation, which has a balance of $4.8 million as of June 30, 2024. The Company determined that the vendor financing obligation had an imputed interest rate of 9%, which is reflective of its borrowing rate with similar terms to that of the license agreement, and recognized interest expense of $0.1 million for the three and six months ended June 30, 2024. The Company’s vendor financing obligation is comprised of the following payments as of June 30, 2024:

On April 16, 2024, the Company entered into a note purchase agreement with Micron Technology Inc. (“Micron”), which has been and is a customer of the Company, pursuant to which the Company issued to Micron a senior subordinated convertible promissory note in the principal amount of $5.0 million (the “Micron Note”). The Micron Note was contractually subordinated to the East West Bank Loan through a subordination agreement with East West Bank, but was senior to all of our other existing debt and was senior to any new future debt incurred (other than any undrawn amount available under the East West Bank Loan while it was outstanding). The Micron Note accrued interest at a rate of 8% per annum, with principal and interest due upon maturity three years after the date of issuance. Upon the consummation of the IPO, the Micron Note was mandatorily convertible into a number of shares equal to the outstanding principal amount and accrued interest divided by a conversion price equal to (a) the price of the Company’s common stock issued in the initial public offering, times (b)0.90. The Company determined that the feature that allowed for settlement of the Micron Note into a variable number of shares required bifurcation as a derivative liability and should be initially measured at fair value. The Company recorded a derivative liability of $0.5 million and a corresponding debt discount of $0.5 million on the issuance date.

On May 13, 2024, the Micron Note was converted into 294,217 shares of the Company’s common stock in connection with the consummation of the IPO. The shares issued pursuant to the Micron Note have been registered for resale under the Securities Act. Upon the settlement of the Micron Note, the derivative liability was settled and the Company remeasured it to its fair value and recorded a loss on derivative remeasurement of $28,000 during the three and six months ended June 30, 2024, which was recorded in interest and other expense, net on the Company’s condensed consolidated statements of income (loss). As a result, the fair value of the shares issued of $5.6 million was recognized in additional paid-in capital and the Company settled the debt, inclusive of the derivative liability, and recognized a loss on debt extinguishment of $0.7 million during the three and six months ended June 30, 2024.

8. Restricted Stock Units

On March 18, 2024, the number of shares of common stock reserved for issuance of RSU under the Company’s 2014 Stock Incentive Plan (the “2014 Plan”) was increased to 4.6 million and the term of the 2014 Plan was extended to March 18, 2034. On April 26, 2024, in connection with the Company’s IPO, the Company’s board of directors approved and adopted, subject to stockholder approval, the 2024 Stock Incentive Plan (“2024 Plan”), and the Company’s stockholders approved the 2024 Plan on April 29, 2024. The 2024 Plan became effective on May 8, 2024 and supersedes the Company’s 2014 Plan. All shares granted under the 2014 Plan that are forfeited and shares reserved for future issuance under the 2014 Plan are included in the share reserve under the 2024 Plan. As of June 30, 2024, the number of shares of common stock reserved for future issuance under the 2024 Plan was 3,739,932.

The Company issues RSUs to its employees, directors and service providers. The RSUs awarded under the 2014 Plan generally hadtwo vesting requirements, a time and service-based requirement (the “Time-Based Requirement”) and a liquidity event requirement (the “Liquidity Event Requirement”). The Liquidity Event Requirement would be satisfied as to any then-outstanding RSUs on the first to occur of: (1) a change in control event (as defined in the award agreement) or (2) the first sale of common stock pursuant to an underwritten IPO, in either case, within 10 years of the grant date. The Liquidity Event Requirement was satisfied upon the consummation of the IPO on May 13, 2024. The Time-Based Requirement generally requires four years for full vesting of the grants, with 25% vesting afterone year and quarterly vesting over the subsequent three years. Certain grants have had modified time-based vesting requirements, including certain grants that have been issued with the Time-Based Requirement satisfied on the grant date. The Company recognizes its stock-based compensation expense ratably over the requisite service period, which is generally four years.

The following table summarizes the Company's RSU activity pursuant to the 2014 Plan and the 2024 Plan for the six months ended June 30, 2024:

(1)Vested RSUs as of June 30, 2024 are excluded from the calculation of the Company’s common stock outstanding on the Company’s condensed consolidated balance sheet and condensed consolidated statements of stockholders’ equity as of June 30, 2024, due to the pending issuance of the common stock which are subject to lock-up agreements.

During the three and six months ended June 30, 2024 prior to the IPO, the grant date fair value of the RSU awards was derived from an interpolation based on the contemplated listing price of the Company’s anticipated IPO. For RSUs granted after the IPO, the Company used the publicly listed stock price as the grant date fair value.

Historically the Company has not recorded stock-based compensation expense for the RSUs, as the Liquidity Event Requirement was not deemed probable. The Company has valued the RSUs granted using historical estimates of the fair value of the Company's common stock. Upon the consummation of the Company’s IPO, the Liquidity Event Requirement was met, and the Company incurred stock-based compensation expense associated with (i) RSUs granted to active employees and service providers, (ii) RSUs granted to certain former employees and service providers whose RSUs become vested in connection with the Liquidity Event, and (iii) the acceleration of the Time Based Requirement for certain awards to executive officers, senior management and directors as a result of the Liquidity Event.

In November 2023, the Company issued 30,000 RSUs with certain performance-based conditions, in addition to the Time-Based Requirement, and a grant date fair value of $0.4 million. The Company estimates the probability of achievement of applicable performance goals for performance-based RSUs in each reporting period and recognizes related stock-based compensation expense using the straight line attribution method. The amount of stock-based compensation expense recognized in any period can vary based on the attainment or expected attainment of the various performance goals. If such performance goals are not ultimately met, no stock-based compensation expense is recognized and any previously recognized compensation expense is reversed. The Company recognized stock-based compensation expense of $0.1 million related to these RSUs during the three and six months ended June 30, 2024.

In November 2023, the Company issued 75,000 RSUs with certain market-based conditions, in addition to the Time Based Requirement and the Liquidity Event Requirement, and a grant date fair value of $0.6 million. The Company estimated the fair value of market-based RSUs on the grant date using a Monte Carlo simulation model. The vesting of the market-based RSUs is contingent on achieving a minimum volume-weighted average stock price (“VWAP”). The assumptions used in the Monte Carlo simulation model to determine the grant date fair value were a daily VWAP of $8.92, a volatility of 50%, and a risk-free rate of 4.3%. The Company recognized stock-based compensation expense of $0.1 million related to these RSUs during the three and six months ended June 30, 2024.

As of June 30, 2024, the Company had unrecognized stock-based compensation expense of $17.8 million which is expected to be recognized over a weighted average period of 2.7 years.

During the three and six months ended June 30, 2024, the Company recorded stock-based compensation expense of $21.8 million for the service period through such date using the straight-line attribution method, net of actual forfeitures, based on the grant-date fair value of the RSU awards. The following table summarizes stock-based compensation expense by function for the three and six months ended June 30, 2024:

During the three and six months ended June 30, 2024, the Company’s compensation committee approved the issuance of a variable number of RSUs as a portion of the employee bonus program for the fiscal year 2024. The number of RSUs issued will be calculated as the volume-weighted average price of the Company’s common stock upon the bonus being finalized after the end of the fiscal year. As the Company has an obligation to issue a variable number of shares for a fixed monetary amount, the RSUs will be accounted for as liability-classified awards and subsequently re-measured to their fair value at each reporting date. The Company recognized stock-based compensation expense of $0.3 million associated with the liability-classified RSUs during the three and six months ended June 30, 2024, with a corresponding increase to accrued expenses of $0.3 million. If the bonus was finalized on June 30, 2024, the Company would be required to issue 33,637 RSUs to its employees.

9. Income Taxes

The Company’s provision for income taxes consists principally of state and local, and foreign taxes, as applicable, in amounts necessary to align the Company’s year-to-date tax provision with the effective rate that it expects to achieve for the full year.

During the three and six months ended June 30, 2024, the Company recorded an income tax provision of $0.2 million and $1.0 million, respectively, as compared to an income tax benefit of $0.1 million and provision of $0.3 million, respectively, during the three and six months ended June 30, 2023. The effective tax rate for the three and six months ended June 30, 2024 was (1)% and (3)%, respectively, as compared to 25% and 36%, respectively, for the three and six months ended June 30, 2023.

The Company determines its income tax provision for interim periods using an estimate of its annual effective tax rate adjusted for discrete items occurring during the periods presented. The primary difference between its effective tax rate and the federal statutory rate is attributable to state income taxes, foreign income taxes, the effect of certain permanent differences, and full valuation allowance against net deferred tax assets.

Management establishes a valuation allowance for those deductible temporary differences when it is more likely than not that the benefit of such deferred tax assets will not be recognized. The ultimate realization of deferred tax assets is dependent upon the Company's ability to generate taxable income during periods in which the temporary differences become deductible. Management regularly reviews the deferred tax assets for recoverability and establishes a valuation allowance based on historical taxable income, projected future taxable income, and the expected timing of the reversals of existing temporary differences. Through the six months ended June 30, 2024, management believes that it is more likely than not that the deferred tax assets will not be realized, such that a full valuation allowance has been recorded.

The Company files income tax returns in the U.S. federal jurisdiction, various state jurisdictions and certain foreign jurisdictions. The Company is not currently under audit by the Internal Revenue Service or other similar state, local, and foreign authorities. All tax years remain open to examination by major taxing jurisdictions to which the Company is subject for a period of three years for federal and four years for states, after the utilization of net operating losses and credits.

10. Segment Reporting and Geographical Concentration

The Company manages its operations through an evaluation of a consolidated business segment that solves semiconductor design challenges by offering affordable and competitive TCAD software, EDA software and design IP to support engineers and researchers across the globe. The chief operating decision maker, who is the Company’s Chief Executive Officer, reviews financial information presented on a consolidated basis for the purpose of allocating resources and evaluating financial performance. As such, the Company’s operations constitute a single operating segment andone reportable segment.

11. Commitments and Contingencies

Warranties

The Company typically provides its customers a warranty on its software licenses for a period of no more than 90 days and on its other tools for a period of no more thanone year. Such warranties are accounted for in accordance with the authoritative guidance issued by the FASB on contingencies. For the three and six months ended June 30, 2024 and 2023, the Company has not incurred any costs related to warranty obligations.

Indemnification

Under the terms of substantially all of its license agreements, the Company has agreed to indemnify its customers for costs and damages arising from claims against such customers based on, among other things, allegations that the Company’s software infringes the intellectual property rights of a third party. In most cases, in the event of an infringement claim, the Company retains the right to (i) procure for the customer the right to continue using the software; (ii) replace or modify the software to eliminate the infringement while providing substantially equivalent functionality; or (iii) if neither (i) nor (ii) can be reasonably achieved, the Company may terminate the license agreement and refund to the customer a pro-rata portion of the license fee paid to the Company. Such indemnification provisions are accounted for in accordance with the authoritative guidance issued by the FASB on guarantees. From time to time, in the ordinary course of business, the Company receives claims for indemnification.

Guarantees

In February of 2012, Gu-Guide LP, a real estate entity controlled by the Company’s founding principal stockholder, Bank of the West and Silvaco Group, Inc., as guarantor, entered into a loan agreement pursuant to which Bank of the West agreed to lend Gu-Guide LP certain amounts of money. The Loan is secured by a building representing a total of 9,000 square feet located at 4701 Patrick Henry Drive, Santa Clara, California 95054. In the event that the proceeds from the foreclosure of the foregoing collateral are insufficient to repay the outstanding amounts under the Loan, Silvaco Group Inc. has guaranteed the repayment of the outstanding amounts under the Loan. The Loan was repaid and the Company was released from the guarantee in July of 2024.

Contingencies

The Company is involved in routine legal proceedings in the ordinary course of business. The outcome of such matters is not expected to have a material adverse effect on the Company’s consolidated financial position, results of operations, or liquidity. However, each of these matters is subject to various uncertainties and it is possible that an unfavorable resolution of one or more of these proceedings could materially affect the Company's results of operations, cash flows or financial position.

In December 2020, the Company sought declaratory relief in the California Superior Court to clarify its obligations regarding the earnout payments due to the selling shareholders of Nangate, Inc. (“Nangate”) following its acquisition by the Company in 2018. In February 2021, two of the selling shareholders of Nangate, along with a third cross-complainant (collectively, the “Nangate Parties”) filed a cross-complaint against the Company, as well as one current and one former member of the Company’s board of directors (the “Co-Defendants”). The cross-complaint alleged breach of contract, fraud, and negligent misrepresentation among other causes of action.

In January 2022, the Nangate Parties filed a third amended cross-complaint against the Company, as well as one current and one former member of the Company’s board of directors, seeking $20.0 million in damages for breach of contract, fraud, and unfair business practices, as well as punitive damages.

On July 23, 2024, a jury awarded the Nangate Parties $11.3 million in damages under breach of contract related claims, including breach of contract and breach of the covenant of good faith and fair dealing, along with the potential for an award of statutory pre-judgment interest, and court and litigation related costs and certain expert expenses subject to the Nangate Parties establishing the legal right to them and to be determined by the court. The interest, if awarded, is estimated to be between $3.4 million to $3.8 million as of June 30, 2024 (collectively with the $11.3 million damages award, the “Contract Damages”). As a result, during the three and six months ended June 30, 2024, the Company recorded a charge to estimated litigation claim and accrued expenses and other current liabilities of $14.7 million for the amount awarded to the Nangate Parties. The Company believes it has strong grounds for appeal on multiple issues and is actively evaluating its legal strategies and options, including the possibility of post-trial motions and appeals.

The jury also found the Company and the Co-Defendants liable for certain of the fraud claims and awarded the Nangate parties $6.6 million. Punitive damages relating to the fraud claims, including false promise and intentional misrepresentation, will be considered at a hearing scheduled for August 16, 2024. Any punitive damages awarded would be incremental to the $6.6 million awarded for the fraud claims (collectively, the “Fraud Damages”). After the hearing, the Nangate Parties will have the option to choose either the Contract Damages or the Fraud Damages, but in no circumstances will the Nangate Parties receive both remedies. Given the uncertainty surrounding the potential range of punitive damages and therefore, whether the Fraud Damages will exceed the Contract Damages, the Company at this time cannot reasonably estimate the possible loss or range of loss, if any, that might arise from the Fraud Damages, and above-mentioned court and litigation related costs and certain expert expenses that may be awarded. Therefore, the Company has not recorded any charges for potential liability related to Fraud Damages, and court and litigation related costs and certain expert expenses that may be awarded in this matter.

On August 19, 2021, Aldini AG (“Aldini”) sued the Company, the Company’s French affiliate, a member of the Company’s board of directors and the Company’s CEO, among numerous other noncompany defendants, in connection with the Company’s interactions with Dolphin Design SAS (“Dolphin”). Aldini’s allegations center around the bankruptcy and reorganization of Dolphin in 2018 and Silvaco, Inc.’s acquisition of certain memory assets of Dolphin, which Aldini alleges was done in violation of its rights as a shareholder of Dolphin. Aldini’s First Amended Complaint asserts various tort claims against Silvaco, Inc., Silvaco France, and officers Iliya Pesic and Babak Taheri, including claims for trade secret theft, conspiracy, and intentional interference with a prospective economic advantage. Silvaco, Inc. filed a motion to dismiss; the trade secret theft and conspiracy claims were dismissed with prejudice and the intentional tort claims were dismissed with leave to amend. On August 23, 2022, Aldini filed a Second Amended Complaint against Silvaco, Inc., Silvaco France, and officers Iliya Pesic and Babak Taheri that included similar claims of trade secret theft, conspiracy, and intentional interference with a prospective economic advantage in relation to Silvaco, Inc.’s acquisition of certain assets of Dolphin. Aldini seeks $703.0 million and punitive damages. On March 17, 2023, the Second Amended Complaint was dismissed on all counts, subject to a right of appeal. Aldini filed a notice of appeal on April 27, 2023. The Company is vigorously defending itself in this litigation. The Company accordingly has not recorded a charge for this contingency.

The Company’s software solutions and technology are subject to sanctions, export control and import laws and regulations of the United States and other applicable jurisdictions, including the Export Administration Regulations, U.S. Customs regulations, and economic and trade sanctions regulations administered by the U.S. Department of Treasury’s Office of Foreign Assets Control (“OFAC”). Between August 2019 and June 2022, the Company filed various voluntary disclosures with U.S. Department of Commerce, Bureau of Industry and Security (“BIS”) regarding potential violations of U.S. export control laws and regulations, specifically, the export of the Company’s licenses to certain parties designated on BIS’s Entity List and Unverified List, and the export of certain software modules without a license which was required at the time of the transaction. Such software modules were declassified by BIS in October 2020 to a lesser controlled export classification, meaning that such software generally no longer requires an export license. In July and October 2022 and January 2023, the Company also filed voluntary disclosures with OFAC regarding potential violations of certain OFAC sanctions programs, specifically the download of certain Company software modules by users in U.S. embargoed countries.

After establishing its branch office in Russia in 2017, the Company used a local bank (“Bank A”) as its primary financial institution and engaged a local service provider (“Local Agent”) to act as its tax, accounting and legal consultant to advise with respect to matters affecting the branch office. As a result of the conflict in Ukraine, Bank A was sanctioned by OFAC on April 6, 2022, and based on the recommendation from the Local Agent, the Company established replacement bank accounts at another local bank (“Bank B”), which were opened on June 2, 2022. Following the opening of the new accounts at Bank B, the Local Agent used the Bank B accounts to receive injections of funds from the Company’s US bank accounts; transferred the funds from Bank B to Bank A and paid compensation of certain of the Company’s employees and other expenses using the Company’s bank accounts at Bank A. The discovery of transactions involving the Company’s funds through Bank A following the establishment of the Company’s accounts at Bank B led to the Company’s subsequent voluntary self-disclosure to OFAC in October 2023.

In July 2024, OFAC issued a cautionary letter regarding the sanctions matters instead of pursuing a civil monetary penalty or taking other enforcement action. However, OFAC reserved the right to take future enforcement action should additional information warrant renewed attention.

On September 22, 2023 and May 3, 2024, the Company received demand letters from a customer related to alleged deficiencies in certain intellectual property used by the customer. Management is in initial discussions with the customer regarding the nature of the claims set forth in the letter. Given the early stages of the matter and the unknown financial impact, the Company cannot estimate any reasonable range of loss. The Company accordingly has not recorded a charge for this contingency.

12. Fair Value of Financial Instruments

Fair value measurements

The Company defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company uses valuation approaches that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. The Company determines fair value based on assumptions that market participants would use in pricing an asset or liability in the principal or most advantageous market. When considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the following levels:

■Level 1 Inputs: Unadjusted quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date.

■Level 2 Inputs: Other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly (i.e., as prices) or indirectly (i.e., derived from prices), such as quoted prices for similar assets or liabilities in active markets or quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions.

■Level 3 Inputs: Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at measurement date.

Financial instruments measured at fair value on a recurring basis

The following tables present the Company's financial assets and liabilities that are measured at estimated fair value on a recurring basis as of June 30, 2024 and December 31, 2023:

The Company's level 1 financial assets were valued using quoted prices in active markets for identical assets as of June 30, 2024. The Company’s level 2 financial assets were determined based on third-party inputs which are either directly or indirectly observable, such as reported trades and broker or dealer quotes. The Company's marketable securities have an amortized cost that approximates fair value as of June 30, 2024.

Pursuant to the Company’s stock purchase agreements for the acquisition of Nangate in March of 2018 and PolytEDA Cloud LLC (“PolytEDA”) in January of 2021, the selling shareholders are entitled to additional milestone and earn out consideration based on net revenues, operating income and technical achievement. The milestone consideration and earn-out liabilities are classified as contingent consideration as the obligations are due in cash. As such the obligations are recorded at their fair value and re-valued period to period with any changes recorded to other income (expense).

The Company's contingent consideration is valued using a discounted cash flow model, and the assumptions used in preparing the discounted cash flow model include estimates for interest rates and the amount of cash flows, in addition to the expected net revenue, operating income and technical achievement of the acquired technology.

The following is a reconciliation of changes in the liability related to contingent consideration as of December 31, 2023 and June 30, 2024:

Nonfinancial assets such as property and equipment, operating lease right-of-use assets, intangibles assets, and goodwill are evaluated for impairment and adjusted to fair value using Level 3 inputs only when impairment is recognized.

13. Subsequent Events

On July 23, 2024, a jury awarded the Nangate Parties $11.3 million in damages under breach of contract related claims, including breach of contract and breach of the covenant of good faith and fair dealing, along with the potential for an award of statutory pre-judgment interest, and court and litigation related costs and certain expert expenses subject to the Nangate Parties establishing the legal right to them and to be determined by the court. Refer to Note 11, Commitments and Contingencies, for further discussion.