Silvaco Group Inc

(Unaudited)

1. Description of Business

Silvaco Group, Inc. (“Silvaco,” “us,” “our”, “we,” and the “Company” refers to Silvaco Group Inc. and its subsidiaries, unless the context specifically requires otherwise) was incorporated as a Delaware corporation on November 18, 2009. The Company is a provider of technology computer aided design (“TCAD”) software, electronic data automation (“EDA”) software and semiconductor intellectual property (“SIP”). TCAD, EDA and SIP solutions enable semiconductor and photonics companies to increase productivity, accelerate their products’ time-to-market and reduce their development and manufacturing costs. The Company has decades of expertise developing the “technology behind the chip” and providing solutions that span from atoms to systems, starting with providing software for the atomic level simulation of semiconductor and photonics material for devices, to providing software and SIP for the design and analysis of circuits and system level solutions. The Company provides SIP for system-on-a-chip (“SoC”), integrated circuits (“ICs”) and SIP management tools to enable team collaborations on complex SoC designs. The Company’s customers include semiconductor manufacturers, original equipment manufacturers (“OEMs”) and design teams who deploy the Company’s solutions in production flows across the Company’s target markets, including display, power devices, automotive, memory, high performance computing (“HPC”), internet of things (“IoT”) and 5G/6G mobile markets.

Initial public offering

In May 2024, the Company completed its initial public offering (“IPO”), in which it issued and sold 6,000,000 shares of its common stock at the public offering price of $19.00 per share. The Company received gross proceeds of $114.0 million, with $106.0 million funded to the Company after deducting underwriting discounts and commissions of $8.0 million.

2. Summary of Significant Accounting and Reporting Policies

Basis of presentation and consolidation

The accompanying condensed consolidated financial statements have been prepared in accordance with U.S. Generally Accepted Accounting Principles ("GAAP") and include the accounts of Silvaco and all of the Company's wholly owned subsidiaries with operations in North America, Europe, Asia and South America. All intercompany transactions and balances have been eliminated upon consolidation.

Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been omitted from these condensed consolidated financial statements, as permitted by Securities and Exchange Commission (“SEC”) rules and regulations. Accordingly, these condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements for the year ended December 31, 2023 and the related notes thereto included in the Company’s final prospectus relating to the IPO, dated May 8, 2024, relating to the registration statement on Form S-1 (File No. 333-278666), as amended, filed with the SEC on May 10, 2024, pursuant to Rule 424(b)(4) under the Securities Act of 1933, as amended (“Securities Act”). The condensed consolidated balance sheet as of December 31, 2023 was derived from the audited consolidated financial statements as of that date. In management’s opinion, the unaudited condensed consolidated financial statements have been prepared on the same basis as the annual financial statements and reflect all adjustments, which include only normal recurring adjustments necessary for the fair statement of the condensed consolidated financial statements.

The results of operations for the three and nine months ended September 30, 2024 are not necessarily indicative of the Company’s operating results to be expected for the full fiscal year or any other future interim or annual period.

Revision of prior financial statements

For the three and nine months ended September 30, 2023, general and administrative expenses were understated by $0.1 million and $0.5 million, respectively, in the Company’s condensed consolidated statements of (loss) income and accrued expenses were understated by $0.5 million in the Company’s condensed consolidated balance sheet due to certain accruals for professional services rendered not being recorded. The Company has determined that such errors are immaterial for the three and nine months ended September 30, 2023, and has increased accrued expenses and other current liabilities and general and administrative expenses in the prior periods to correct these immaterial errors.

Emerging growth company status

The Company is an emerging growth company as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act, until such time as those standards apply to private companies.

The Company will remain an emerging growth company until the earliest of (i) the last day of the first fiscal year (a) following the fifth anniversary of the consummation of the Company’s IPO, (b) in which the Company’s total annual gross revenue is at least $1.235 billion, or (c) when the Company is deemed to be a large accelerated filer, which means the market value of our common stock that is held by non-affiliates exceeds $700.0 million as of the prior June 30th and (ii) the date on which the Company has issued more than $1.0 billion in non-convertible debt securities during the prior three-year period.

Use of estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Estimates also affect the amounts of revenue and expenses during the reported periods. The Company’s most significant estimates relate to revenue recognition. Other estimates include, but are not limited to, accounts receivable allowances, stock-based compensation expense, valuation of goodwill and other intangible assets, contingent consideration, derivative valuations, uncertain tax positions, legal contingencies and income taxes. Actual results could differ from those estimates.

Stock split

On April 29, 2024, the Company effected a 1-for-2 reverse split of its common stock. Upon the effectiveness of the reverse stock split, (i) every two shares of outstanding common stock were combined into a single share of common stock, (ii) the number of shares of common stock to be granted upon the vesting of each outstanding restricted stock unit (“RSU”) was proportionally decreased on a 2-for-1 basis, and (iii) the fair value of each outstanding RSU was proportionately increased on a 1-for-2 basis. All of the outstanding common stock share numbers, RSU numbers, RSU fair values and per share amounts have been adjusted, on a retroactive basis, to reflect this 1-for-2 reverse stock split for all periods presented. The par value per share and authorized number of shares of common stock were not adjusted as a result of the reverse stock split.

Concentrations of credit risk

As of September 30, 2024, two customers represented 16% and 15% of the Company’s accounts receivable. As of December 31, 2023, two customers represented 20% and 15% of the Company’s accounts receivable.

During the three months ended September 30, 2024, none of the Company’s customers represented more than 10% of the Company’s total revenue. One customer represented 14% of the Company’s total revenue during the nine months ended September 30, 2024. During the three months ended September 30, 2023, two of the Company’s customers represented 20% and 11% of the Company’s total revenue. None of the Company’s customers represented more than 10% of the Company’s total revenue during the nine months ended September 30, 2023.

In addition to the concentration of credit risk with respect to trade receivables, the Company's cash on deposit with financial institutions is also exposed to concentration risk. The Company's cash on deposit with financial institutions is insured through various public and private bank deposit insurance programs, foreign and domestic; however, a significant portion of cash balances held as of September 30, 2024 and December 31, 2023 exceeded insured limits.

As of September 30, 2024, $5.0 million, or 18.7%, of the Company’s cash and cash equivalents was maintained with one financial institution, where the Company’s current deposits are in excess of federally insured limits, and $3.4 million, or 12.7%, was held by the Company’s foreign subsidiaries.

Accumulated other comprehensive loss

Accumulated other comprehensive loss is composed of foreign currency translation adjustments and unrealized gains and losses on marketable securities.

Marketable securities

The Company’s investments in marketable securities have been classified and accounted for as available-for-sale and are recorded at estimated fair value. The Company’s available-for-sale marketable securities are comprised of money market funds, U.S. treasury securities and U.S. government securities. The Company classifies its investments with original maturities of three months or less when acquired as cash equivalents. The Company classifies its marketable securities with original maturities of longer than three months but within twelve months as of the reporting date as short-term marketable securities. Marketable securities with maturities of twelve months or longer as of the reporting date are classified as long-term marketable securities. Purchase discounts are accreted using the effective interest method over the life of the related security and such accretion is included in interest income in the condensed consolidated statements of (loss) income.

For available-for-sale debt securities in an unrealized loss position, the Company evaluates whether it intends to sell the security before the recovery of its amortized cost basis. If both of these criteria are met, the security’s amortized cost basis is written down to fair value and a loss is recorded in interest expense and other, net on the condensed consolidated statements of (loss) income, not to exceed the amount of the unrealized loss. The Company did not recognize any other-than-temporary impairment on its marketable securities during the three and nine months ended September 30, 2024. Unrealized gains and losses (excluding other-than-temporary impairment and credit loss) on available-for-sale marketable securities are reported in other comprehensive loss on the condensed consolidated statements of comprehensive (loss) income. Credit-related unrealized losses are recognized as an allowance on the condensed consolidated balance sheets with a corresponding charge to interest and other (expense) income, net on the condensed consolidated statements of (loss) income. The cost of securities sold is based on the specific identification method and realized gains and losses are reported in interest income and interest and other (expense) income, net on the condensed consolidated statements of (loss) income, respectively. The Company recognized $0.3 million of unrealized gains on available-for-sale marketable securities in other comprehensive loss on the condensed consolidated statements of comprehensive (loss) income during the three and nine months ended September 30, 2024.

Allowance for credit losses

The Company assesses its ability to collect outstanding receivables and contract assets and provides customer-specific allowances, allowances for credit losses for the portion of receivables and contract assets that are estimated to be uncollectible. Allowances for credit losses are based on historical collection experience and expected credit losses, customer specific financial condition, current economic trends in the customer's industry and geographic region, changes in customer demand and the overall economic climate in the market the Company serves. Provisions for the allowance for expected credit losses attributable to bad debt are recorded as general and administrative expenses in the condensed consolidated statements of (loss) income. Account balances deemed uncollectible are written off, net of actual recoveries. If circumstances related to specific customers or the market the Company serves change, the Company’s estimate of the recoverability of its accounts receivable and contract assets could be further adjusted. The Company does not have any material account receivable or contract asset balances that are past due and has not written off any significant balances in its portfolio against the allowance for credit losses for the periods presented. The Company’s provision for credit losses wasimmaterial for the three months ended September 30, 2024 and a loss of $0.1 million for the nine months ended September 30, 2024, and losses of $0.2 million for the three and nine months ended September 30, 2023. The Company’s allowance for expected credit losses on accounts receivable and contract assets, in the aggregate, was $0.5 million as of September 30, 2024 and December 31, 2023.

Foreign currencies

The financial statements of Silvaco's international subsidiaries with local functional currencies are translated to U.S. dollars upon consolidation. Assets and liabilities are translated at the effective exchange rate on the balance sheet date. Results of operations are translated at average exchange rates, which approximate rates in effect when the underlying transactions occur. The Company recorded foreign currency translation adjustments of $0.7 million and $0.3 million for the three and nine months ended September 30, 2024, respectively, and $0.3 million and $0.4 million for the three and nine months ended September 30, 2023, respectively, within accumulated other comprehensive loss.

Certain of the Company’s sales and intercompany transactions are denominated in foreign currencies. These transactions are recorded in functional currency at the appropriate exchange rate on the transaction date. Monetary assets and liabilities denominated in a currency other than the Company's functional currency or its subsidiaries' functional currencies are remeasured at the effective exchange rate on the balance sheet date. Gains and losses resulting from foreign exchange transactions are included in interest and other (expense) income, net in the Company’s condensed consolidated statements of (loss) income. The Company recorded net foreign exchange transaction losses of $0.2 million and $0.4 million for the three and nine months ended September 30, 2024, respectively, a foreign exchange transaction gain of $0.1 million for the three months ended September 30, 2023, and a foreign exchange transaction loss of $0.3 million for the nine months ended September 30, 2023.

Earnings per share

Basic earnings per share (“EPS”) is computed based on the weighted average number of shares of common stock outstanding, including RSUs vested but not yet issued. Diluted EPS is computed based on the weighted average number of common shares outstanding increased by dilutive common stock equivalents attributable to RSU grants.

The following outstanding securities were excluded from the computation of diluted earnings per share because (i) the effect would be anti-dilutive for the three and nine months ended September 30, 2024, and (ii) the securities were contingent upon conditions for issuance which were not satisfied as of September 30, 2023. See Note 7, Restricted Stock Units for additional information.

Recently adopted accounting pronouncements

In August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. This ASU simplifies accounting for convertible instruments by removing major separation models required under current GAAP. The Company adopted this standard on January 1, 2024, and the adoption did not impact the condensed consolidated financial statements.

Accounting guidance issued and not yet adopted

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

In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740): Improvement to Income Tax Disclosures to enhance the transparency and decision usefulness of income tax disclosures. This ASU is effective for annual periods beginning after December 15, 2024, on a prospective basis. Early adoption is permitted. The Company is currently evaluating the impact of this accounting standard update on the condensed consolidated financial statements.

In November 2024, the FASB issued ASU No. 2024-03, Income Statement – Reporting Comprehensive Income – Expense Disaggregation Disclosures (Topic 220): Disaggregation of Income Statement Expenses. This ASU requires additional disclosure of certain amounts included in the expense captions presented on the statements of (loss) income as well as disclosures about selling expenses. This ASU is effective on a prospective basis, with the option for retrospective application, for annual periods beginning after December 15, 2026 and interim reporting periods beginning after December 15, 2027. Early adoption is permitted. The Company is currently evaluating the impact of this accounting standard update on the condensed consolidated financial statements.

3. Revenue

The Company's revenue is derived principally from contracts which promise to deliver combinations of software licensing and related maintenance and services, which are accounted for as separate performance obligations with differing revenue recognition patterns. The transaction price is allocated to each distinct performance obligation based on the relative standalone selling price. Software license revenue consists of the Company’s software sold under a software license. Revenue related to stand-alone software applications is generally recognized upon shipment and delivery of license keys. Maintenance and service revenue consists of both maintenance revenues and professional services revenues which is recognized based on usage or ratably over the term of the arrangement. The timing of revenue recognition may differ from the timing of invoicing to customers. The Company records a contract asset when revenue is recognized prior to invoicing, an accounts receivable upon invoicing or deferred revenue when invoicing precedes revenue recognition.

Customer contracts

The Company accounts for a contract with a customer when both parties have approved the contract and are committed to perform their respective obligations, each party’s rights and payment terms can be identified, the contract has commercial substance, and it is probable the Company will collect substantially all of the consideration it is entitled to. Revenue is recognized when, or as, performance obligations are satisfied by transferring control of a promised software or providing service to a customer.

For multi-year software licenses, the Company generally invoices customers annually at the beginning of each annual coverage period.

Transaction price allocated to the remaining performance obligations

As of September 30, 2024, approximately $32.6 million of revenue is expected to be recognized from remaining performance obligations. Revenue allocated to remaining performance obligations represents contracted revenue that has not yet been recognized, which includes both deferred revenue and backlog. The Company's backlog represents installment billings for periods beyond the current billing cycle. The Company expects to recognize revenue on approximately 48% of these remaining performance obligations over the next 12 months, with the remaining balance recognized thereafter.

Deferred revenue

Deferred revenue is comprised mainly of unearned revenue related to maintenance and service on software licenses and pending software license deliveries. Maintenance and service revenue is recognized ratably over the coverage period. Software license revenue is recognized upfront upon delivery of the licensed software. Deferred revenue also includes contracts for professional services to be performed in the future which are recognized as revenue when the company delivers the related service pursuant to the terms of the customer arrangement.

During the three and nine months ended September 30, 2024, the Company recognized revenue of $1.4 million and $5.5 million, respectively, that was included in the total deferred revenue balance as of December 31, 2023. All other activity in deferred revenue is due to the timing of invoices in relation to the timing of revenue during the three and nine months ended September 30, 2024, as described above.

4. Goodwill and Intangible Assets

There wereno changes in goodwill during the three and nine months ended September 30, 2024 and 2023.

As of September 30, 2024 and December 31, 2023, intangible assets were classified as follows:

On April 11, 2024, the Company amended its license agreement to sell SIP developed in partnership with NXP (the “NXP IP”) for total cash consideration of $6.0 million, to be paid over 5 years. The NXP IP has a net book value of $4.5 million as of September 30, 2024 and a useful life of 5 years, which is the length of the license agreement. The Company recorded a corresponding vendor financing obligation related to the license agreement with NXP. See Note 6, Debt and Financing Obligations, for further discussion.

Amortization expense for intangible assets was $0.3 million and $0.7 million during the three and nine months ended September 30, 2024, respectively, of which $0.3 million and $0.5 million was recognized in cost of revenue for the three and nine months ended September 30, 2024, respectively, with the remainder recognized in research and development expense in the Company’s condensed consolidated statements of (loss) income. Amortization expense for intangible assets was $0.1 million and $0.3 million during the three and nine months ended September 30, 2023, respectively, all of which was recognized in research and development expense in the Company’s condensed consolidated statements of (loss) income.

As of January 1, 2024, the Company removed the carrying value of $4.3 million of fully amortized intangible assets which at time of removal hadnil net book value.

As of September 30, 2024, estimated future amortization expense for the intangible assets reflected above was as follows:

5. Related Parties

The Company has a commercial lease agreement with Kipee International, Inc., a related party controlled by Katherine Ngai-Pesic, who is the Company's founding principal stockholder and chairperson of the Board of Directors, for Silvaco's corporate office in Santa Clara, California. In connection with this lease arrangement, the Company recorded rent expense of $0.1 million and $0.2 million during the three and nine months ended September 30, 2024 and 2023, respectively. The Company's right-of-use asset and operating lease liability under this three-year arrangement, which commenced on May 1, 2022 and expires on March 31, 2025, is $0.1 million as of September 30, 2024.

The Company hastwo international office leases with New Horizons (Cambridge) LTD (“NHC”) and New Horizons France (“NHF”) in Cambridgeshire, England and Grenoble, France, respectively. NHC and NHF are real estate entities owned and controlled by Ms. Ngai-Pesic. In connection with these lease arrangements, the Company recorded rent expense of $0.1 million and $0.2 million during the three and nine months ended September 30, 2024 and 2023, respectively. The Company's right-of-use asset and operating lease liability under the NHC lease, which expires on December 31, 2029, is $1.0 million as of September 30, 2024. The Company's right-of-use asset and operating lease liability under the NHF lease, which expires on April 30, 2026, is $0.1 million as of September 30, 2024.

On June 13, 2022, Silvaco entered into a $4.0 million line of credit with Ms. Ngai-Pesic (the “2022 Credit Line”). In connection with this line of credit, the Company recorded interest expense of $0.1 million during the nine months ended September 30, 2024, and $47,000 and $0.1 million during the three and nine months ended September 30, 2023, respectively. The outstanding amounts due under the 2022 Credit Line were repaid in full and the 2022 Credit Line was terminated in May 2024. See Note 6, Debt and Financing Obligations, for further discussion.

In February of 2012, Gu-Guide LP, a real estate entity controlled by Ms. Ngai-Pesic, Bank of the West and the Company, 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”). The Loan was secured by a 9,000 square foot building located in Santa Clara, California. In the event that the proceeds from the foreclosure of the foregoing collateral were insufficient to repay the outstanding amounts under the Loan, the Company guaranteed the repayment of the outstanding amounts under the Loan. The Loan was repaid in full and the Company was released from the guarantee in July of 2024.