Silvaco Group, Inc.

8. Stock-Based Compensation

Stock-Based Compensation Plans

On March 18, 2024, the number of shares of common stock reserved for issuance 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 initial public offering (“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 forfeited shares underlying RSUs granted under the 2014 Plan and shares reserved for future issuance under the 2014 Plan are included in the share reserve under the 2024 Plan. As of March 31, 2025, the number of shares of common stock reserved for future issuance under the 2024 Plan was 4,084,852.

The following table summarizes the Company's RSU activity pursuant to the 2014 Plan and the 2024 Plan for the three months ended March 31, 2025:

Stock-based Compensation

The Company issues RSUs to its employees, directors and service providers. The RSUs awarded under the 2014 Plan generally hadtwo vesting requirements, a Time-Based Requirement and a 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.

Prior to the IPO the Company did not record stock-based compensation expense for the RSUs, as the Liquidity Event Requirement was not deemed probable. 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 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.

During the three months ended March 31, 2025, the Company’s compensation committee granted a variable number of RSUs to executives which have a vesting term offour years. The number of RSUs issued are calculated as the five day volume-weighted average price of the Company’s common stock on April 1, 2025. As the Company has an obligation to issue a variable number of shares for a fixed monetary amount, the RSUs were accounted for as liability-classified awards and re-measured to their fair value based on the closing fair market value price of the Company’s common stock on April 1, 2025. The Company recognized stock-based compensation expense of $0.1 million associated with the liability-classified RSUs during the three months ended March 31, 2025, with a corresponding increase to accrued expenses of $0.1 million. If the awards were finalized on March 31, 2025, the Company would have been required to issue 663,581 RSUs.

During the three months ended March 31, 2025, the Company recorded total stock-based compensation expense of $2.3 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 months ended March 31, 2025:

As of March 31, 2025, the Company had unrecognized stock-based compensation expense of $18.1 million which is expected to be recognized over a weighted average period of 2.7 years.

9. Income Taxes

During the three months ended March 31, 2025 and 2024, the Company recorded an income tax provision of $0.2 million and $0.8 million, respectively. The effective tax rate for the three months ended March 31, 2025 and 2024 was (1)% and 37%, respectively.

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 a full valuation allowance against net deferred tax assets.

The Company files U.S. federal income tax returns, as well as income tax returns in 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

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 (‘CODM”), who is the Company’s Chief Executive Officer, Dr. Babak A. Taheri, reviews financial information presented on a consolidated basis for purposes of allocating resources and evaluating financial performance. As such, the Company’s operations constitute a single operating segment andone reportable segment.

The following table presents a summary of revenue, payroll expenses, which the CODM reviews in assessing Company performance and deciding how to allocate resources, and total other expenses as a reconciliation to consolidated net (loss) income for the three months ended March 31, 2025 and 2024.

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 months ended March 31, 2025, and 2024, 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.

Contingencies

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, 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 “Contract Damages”). As a result, during the year ended December 31, 2024, the Company recorded a charge to estimated litigation claim and accrued expenses and other current liabilities of $11.3 million for the Contract Damages awarded to the Nangate Parties.

The jury also found the Company and the Co-Defendants liable for certain of the fraudulent and negligent misrepresentation claims and awarded the Nangate Parties $6.6 million. Incremental punitive damages relating to these claims, including $17.0 million payable by the Company and a total of $16.0 million to be paid by the Co-Defendants, were awarded following a hearing on August 16, 2024 (collectively, the “Fraud Damages”). The Nangate Parties have the option to choose either the Contract Damages or the Fraud Damages, but in no circumstances will the Nangate Parties receive both remedies.

The parties have reached preliminary agreement on key terms of a potential settlement, subject to negotiation and execution of a settlement agreement. The Company estimates its probable loss to be $24.4 million, which resulted in an additional charge recorded to estimated litigation claim and accrued expenses and other current liabilities of $13.1 million for the three months ended March 31, 2025. The Company can give no assurance that a settlement will be finalized. If a settlement is not finalized, the Company and the Co-Defendants can appeal the judgement, which will require the Company to collateralize and post an appellate bond of up to $35.4 million. The Company believes it has strong grounds for appeal and is pursuing post-trial motions. Additionally, the Company believes that there are strong arguments in support of substantially reducing the punitive damages portion of the Fraud Damages, which the Company believes are excessive under California Law, and the United States and California constitutions, particularly given the disproportionate nature of the punitive damages relative to the compensatory damages.

The Company is subject export control and import laws and regulations of the United States and other applicable jurisdictions, including the Export Administration Regulations. Between August 2019 and June 2022, the Company filed voluntary self-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 April 2025, BIS issued a warning letter in response to the voluntary self-disclosures instead of pursuing criminal or administrative penalties or taking other enforcement action. However, as is common in these instances, BIS reserved the right to take future enforcement action should additional information warrant renewed attention.

The Company is also involved in routine legal proceedings in the ordinary course of business. Unless disclosed above, 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.

12. Fair Value of Financial Instruments

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 March 31, 2025 and December 31, 2024:

The Company's level 1 financial assets were valued using quoted prices in active markets for identical assets as of March 31, 2025. 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 March 31, 2025.

13. Subsequent Events

On April 29, 2025, Silvaco, Inc., a wholly-owned subsidiary of the Company, entered into a Stock Purchase Agreement (the “Stock Purchase Agreement”) with the shareholders of Tech-X Corporation (the “Sellers”) pursuant to which Silvaco, Inc. acquired all of the outstanding shares of Tech-X Corporation for an aggregate purchase price of $5.0 million, payable in cash and shares of the Company. The Stock Purchase Agreement also provides that the Sellers may receive up to $2.0 million in contingent consideration upon achieving certain research and development milestones.

The Company and Kipee International entered into a new commercial lease agreement, effective as of May 1, 2025, for a three year period ending on April 30, 2028.