UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the quarterly period ended June 30, 2024
OR
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the transition period from to
Commission file number 001-42043
(Exact name of Registrant as specified in its charter)
| 7372 | ||||||||
(State or other jurisdiction of incorporation or organization) | (Primary Standard Industrial Classification Code Number) | (I.R.S. Employer Identification Number) | ||||||
Silvaco Group, Inc.
(408 ) 567-1000
(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. Yes ☐ No ☒
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer | ☐ | Accelerated filer | ☐ | ||||||||
| ☒ | Smaller reporting company | ||||||||||
| Emerging growth company | |||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
As of August 5, 2024 the registrant had 26,294,217 shares of common stock, $0.0001 par value per share, outstanding.
TABLE OF CONTENTS
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| PART I. | ||||||||
| Item 1. | ||||||||
| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
| PART II. | ||||||||
| Item 1. | ||||||||
| Item 1A. | ||||||||
| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
| Item 5. | ||||||||
| Item 6. | ||||||||
SILVACO GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands except share and par value amounts)
| June 30, 2024 | December 31, 2023 | ||||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Short-term marketable securities | |||||||||||
| Accounts receivable, net | |||||||||||
| Contract assets, net | |||||||||||
| Prepaid expenses and other current assets | |||||||||||
| Deferred transaction costs | |||||||||||
| Total current assets | |||||||||||
| Long-term assets: | |||||||||||
| Long-term marketable securities | |||||||||||
| Property and equipment, net | |||||||||||
| Operating lease right-of-use assets, net | |||||||||||
| Intangible assets, net | |||||||||||
| Goodwill | |||||||||||
| Long-term portion of contract assets, net | |||||||||||
| Other assets | |||||||||||
| Total long-term assets | |||||||||||
| Total assets | $ | $ | |||||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | $ | |||||||||
| Accrued expenses and other current liabilities | |||||||||||
| Accrued income taxes | |||||||||||
| Deferred revenue, current | |||||||||||
| Operating lease liabilities, current | |||||||||||
| Related party line of credit | |||||||||||
| Vendor financing obligation, current | |||||||||||
| Total current liabilities | |||||||||||
| Long-term liabilities: | |||||||||||
| Deferred revenue, non-current | |||||||||||
| Operating lease liabilities, non-current | |||||||||||
| Vendor financing obligation, non-current | |||||||||||
| Other long-term liabilities | |||||||||||
| Total liabilities | |||||||||||
| Commitments and contingencies (Note 11) | |||||||||||
| Stockholders' equity: | |||||||||||
Preferred stock, $ | |||||||||||
Common stock, $ | |||||||||||
| Additional paid-in capital | |||||||||||
| (Accumulated deficit) Retained earnings | ( | ||||||||||
| Accumulated other comprehensive loss | ( | ( | |||||||||
| Total stockholders' equity | |||||||||||
| Total liabilities and stockholders' equity | $ | $ | |||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
1
SILVACO GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF (LOSS) INCOME
(Unaudited, in thousands except share and per share amounts)
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Revenue: | |||||||||||||||||||||||
| Software license revenue | $ | $ | $ | $ | |||||||||||||||||||
| Maintenance and service | |||||||||||||||||||||||
| Total revenue | |||||||||||||||||||||||
| Cost of revenue | |||||||||||||||||||||||
| Gross profit | |||||||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Research and development | |||||||||||||||||||||||
| Selling and marketing | |||||||||||||||||||||||
| General and administrative | |||||||||||||||||||||||
| Estimated litigation claim | |||||||||||||||||||||||
| Total operating expenses | |||||||||||||||||||||||
| Operating (loss) income | ( | ( | ( | ||||||||||||||||||||
| Loss on debt extinguishment | ( | ( | |||||||||||||||||||||
| Interest income | |||||||||||||||||||||||
| Interest and other expense, net | ( | ( | ( | ( | |||||||||||||||||||
| (Loss) income before income tax provision | ( | ( | ( | ||||||||||||||||||||
| Income tax provision (benefit) | ( | ||||||||||||||||||||||
| Net (loss) income | $ | ( | $ | ( | $ | ( | $ | ||||||||||||||||
| (Loss) earnings per share attributable to common stockholders: | |||||||||||||||||||||||
| Basic and diluted | $ | ( | $ | ( | $ | ( | $ | ||||||||||||||||
| Weighted average shares used in computing per share amounts: | |||||||||||||||||||||||
| Basic and diluted | |||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
2
SILVACO GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(Unaudited, in thousands)
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Net (loss) income | $ | ( | $ | ( | $ | ( | $ | ||||||||||||||||
| Other comprehensive (loss) income: | |||||||||||||||||||||||
| Foreign currency translation adjustments | ( | ( | ( | ( | |||||||||||||||||||
| Comprehensive (loss) income | $ | ( | $ | ( | $ | ( | $ | ||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3
SILVACO GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited, in thousands except share amounts)
| Three Months Ended June 30, 2024 | |||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-in Capital | Retained Earnings (Accumulated Deficit) | Accumulated Other Comprehensive Loss | Total Stockholders’ Equity | |||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||
| Balance, March 31, 2024 | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||
Issuance of common stock in connection with initial public offering, net of underwriting fees and commissions and net of deferred transaction costs of $ | — | — | |||||||||||||||||||||||||||||||||
| Conversion of Micron Note into common stock | — | — | — | ||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | — | |||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||
| Net loss | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||
| Balance, June 30, 2024 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||
| Three Months Ended June 30, 2023 | |||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Total Stockholders’ Equity | |||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||
| Balance, March 31, 2023 | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||
| Net loss | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||
| Balance, June 30, 2023 | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4
SILVACO GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited, in thousands except share amounts)
| Six Months Ended June 30, 2024 | |||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-in Capital | Retained Earnings (Accumulated Deficit) | Accumulated Other Comprehensive Loss | Total Stockholders’ Equity | |||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||
| Balance, December 31, 2023 | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||
Issuance of common stock in connection with initial public offering, net of underwriting fees and commissions and net of deferred transaction costs of $ | — | — | |||||||||||||||||||||||||||||||||
| Conversion of Micron Note into common stock | — | — | — | ||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | — | |||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||
| Net loss | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||
| Balance, June 30, 2024 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||
| Six Months Ended June 30, 2023 | |||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Total Stockholders’ Equity | |||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||
| Balance, December 31, 2022 | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||
| — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||
| Balance, January 1, 2023 | ( | ||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||
| Net income | — | — | — | — | |||||||||||||||||||||||||||||||
| Balance, June 30, 2023 | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
5
SILVACO GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
| Six Months Ended June 30, | |||||||||||
| 2024 | 2023 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net (loss) income | $ | ( | $ | ||||||||
| Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: | |||||||||||
| Depreciation and amortization | |||||||||||
| Stock-based compensation expense | |||||||||||
| Provision for credit losses | |||||||||||
| Estimated litigation claim | |||||||||||
| Loss on debt extinguishment | |||||||||||
| Accretion of discount on marketable securities, net | ( | ||||||||||
| Change in fair value of contingent consideration | ( | ||||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Accounts receivable | ( | ||||||||||
| Contract assets | ( | ||||||||||
| Prepaid and other current assets | ( | ( | |||||||||
| Other assets | ( | ||||||||||
| Accounts payable | ( | ( | |||||||||
| Accrued expenses | ( | ( | |||||||||
| Accrued income taxes | ( | ||||||||||
| Deferred revenue | ( | ||||||||||
| Other current liabilities | |||||||||||
| Other long-term liabilities | ( | ( | |||||||||
| Net cash (used in) provided by operating activities | ( | ||||||||||
| Cash flows from investing activities: | |||||||||||
| Purchases of marketable securities | ( | ||||||||||
| Purchases of property and equipment | ( | ( | |||||||||
| Net cash used in investing activities | ( | ( | |||||||||
| Cash flows from financing activities: | |||||||||||
| Proceeds from initial public offering, net of underwriting fees | |||||||||||
| Proceeds from issuance of convertible note, net of debt issuance costs | |||||||||||
| Proceeds from loan facility | |||||||||||
| Repayment of loan facility | ( | ||||||||||
| Repayment of 2022 line of credit | ( | ||||||||||
| Deferred transaction costs | ( | ||||||||||
| Contingent consideration | ( | ( | |||||||||
| Payments of vendor financing obligation | ( | ||||||||||
| Net cash provided by (used in) financing activities | ( | ||||||||||
| Effect of exchange rate fluctuations on cash and cash equivalents | ( | ||||||||||
| Net increase in cash and cash equivalents | |||||||||||
| Cash and cash equivalents, beginning of period | |||||||||||
| Cash and cash equivalents, end of period | $ | $ | |||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
6
SILVACO GROUP, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Description of Business
Silvaco Group, Inc. (“Silvaco,” and together with its subsidiaries, the “Company”) 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 its 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 initial public offering, 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 December 31, 2023 condensed consolidated balance sheet was derived from the audited consolidated financial statements as of that date. In management’s opinion, the unaudited 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 six months ended June 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 six months ended June 30, 2023, general and administrative expenses were understated by $0.2 million and $0.4 million, respectively, in the Company’s condensed consolidated statement of income (loss) and accrued expenses were understated by $0.4 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 six months ended June 30, 2023 and has increased accrued expenses and other current liabilities and general and administrative expenses to correct these immaterial errors.
7
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 initial public offering (“IPO”), (b) in which the Company’s total annual gross revenue is at least $1.2 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 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 was 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, RSUs, 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 June 30, 2024, three customers represented 25 %, 13 % and 10 % 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 and six months ended June 30, 2024, one customer represented 37 % and 19 % of the Company’s total revenue, respectively. During the three and six months ended June 30, 2023, none of the Company’s customers represented more than 10% of the Company’s total revenue.
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 are insured through various public and private bank deposit insurance programs, foreign and domestic; however, a significant portion of cash balances held as of June 30, 2024 and December 31, 2023 exceeded insured limits.
As of June 30, 2024, $8.8 million, or 26 %, 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. Past macroeconomic conditions have resulted in the actual or perceived financial distress of many financial institutions, including the failures of Silicon Valley Bank, Signature Bank and First Republic Bank and the UBS takeover of Credit Suisse. If the financial institutions with whom the Company does business were to be placed into receivership, the Company may be unable to access the cash it has on deposit with such institutions. If the Company is unable to access its cash as needed, the Company’s financial position and ability to operate its business could be adversely affected.
8
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 statement of income (loss).
Allowance for credit losses
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 $0.2 million and $0.4 million for the three and six months ended June 30, 2024, respectively, and, $0.1 million and $46,000 for the three and six months ended June 30, 2023, respectively, within accumulated other comprehensive loss.
9
Accumulated other comprehensive loss
Earnings per share
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 six months ended June 30, 2024, and (ii) the securities were contingent upon conditions for issuance which were not satisfied as of June 30, 2023. See Note 8, Restricted Stock Units for additional information.
| June 30, | |||||||||||
| 2024 | 2023 | ||||||||||
| RSU Grants | |||||||||||
Recently adopted accounting pronouncements
In August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update ASU 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 Accounting Standards Update ASU 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 and related disclosures.
In December 2023, the FASB issued ASU No. 2023-09 (“ASU 2023-09”), Income Taxes (Topic 740): Improvement to Income Tax Disclosures to enhance the transparency and decision usefulness of income tax disclosures. ASU 2023-09 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 and related disclosures.
10
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 are generally recognized upon shipment and delivery of license keys. For certain arrangements revenue is recognized based on usage or ratably over the term of the arrangement. 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 June 30, 2024, approximately $33.2 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 47 % 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.
4. Leases
The Company’s headquarters are located in Santa Clara, California, where the Company has an operating lease covering its corporate office expiring in March of 2025. The Company also has operating leases in Duluth, Georgia, and abroad, in Japan, France, China, the United Kingdom, Taiwan, Singapore, and Korea, among other countries. The expiration dates for these operating leases range from 2024 through 2029. As of June 30, 2024 and December 31, 2023, the Company’s operating lease right-of-use assets and operating lease liabilities were as follows:
11
| June 30, | December 31, | ||||||||||
| 2024 | 2023 | ||||||||||
| (in thousands) | |||||||||||
| Operating lease right-of-use assets, net | $ | $ | |||||||||
| Operating lease liabilities, current | |||||||||||
| Operating lease liabilities, non-current | $ | $ | |||||||||
The components of operating lease cost during the periods presented were as follows:
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| (in thousands) | (in thousands) | ||||||||||||||||||||||
| Operating lease cost | $ | $ | $ | $ | |||||||||||||||||||
Variable lease cost(1) | |||||||||||||||||||||||
Total operating lease cost | $ | $ | $ | $ | |||||||||||||||||||
(1)Variable lease cost includes common area maintenance, utilities, security, insurance and property taxes.
Additional information related to the Company’s operating leases for the three and six months ended June 30, 2024 and 2023 was as follows:
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| (in thousands) | (in thousands) | ||||||||||||||||||||||
| Cash paid for operating lease liabilities | $ | $ | $ | $ | |||||||||||||||||||
| Right-of-use assets obtained in exchange for lease obligations | $ | $ | $ | $ | |||||||||||||||||||
| Six Months Ended June 30, | |||||||||||
| 2024 | 2023 | ||||||||||
| Weighted average remaining lease term (in years) | |||||||||||
| Weighted average discount rate | % | % | |||||||||
As of June 30, 2024 maturities of operating lease liabilities were as follows:
| Year Ending December 31, | Amount | ||||
| (in thousands) | |||||
| Remainder of 2024 | $ | ||||
| 2025 | |||||
| 2026 | |||||
| 2027 | |||||
| 2028 | |||||
| Thereafter | |||||
| Total lease payments | $ | ||||
| Less: imputed interest | ( | ||||
Total operating lease liabilities | $ | ||||
Current portion of lease liability | $ | ||||
Non-current portion of lease liability | $ | ||||
5. Goodwill and Intangible Assets
There were no
12
As of June 30, 2024 intangible assets were classified as follows:
| June 30, 2024 | |||||||||||||||||||||||
| Intangible assets: | Weighted Average Amortization Period (in years) | Gross Carrying Value | Accumulated Amortization | Net Carrying Value | |||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Developed technology | $ | $ | ( | $ | |||||||||||||||||||
| Customer relationships | ( | ||||||||||||||||||||||
| Non-compete agreements | ( | ||||||||||||||||||||||
| Licensed IP | ( | ||||||||||||||||||||||
Total intangible assets | $ | $ | ( | $ | |||||||||||||||||||
| December 31, 2023 | |||||||||||||||||||||||
| Intangible assets: | Weighted Average Amortization Period (in years) | Gross Carrying Value | Accumulated Amortization | Net Carrying Value | |||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Developed technology | $ | $ | ( | $ | |||||||||||||||||||
| Customer relationships | ( | ||||||||||||||||||||||
| Non-compete agreements | ( | ||||||||||||||||||||||
Total intangible assets | $ | $ | ( | $ | |||||||||||||||||||
On April 11, 2024, the Company amended and reinstated its license agreement to offer semiconductor intellectual property (“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 $4.7 million as of June 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 7, Debt and Financing Obligations, for further discussion.
Amortization expense for intangible assets was $0.3 million and $0.4 million during the three and six months ended June 30, 2024, respectively, of which $0.2 0.1 million and $0.2 million during the three and six months ended June 30, 2023, respectively, all of which was recognized in research and development expense on the Company’s condensed consolidated statement of income (loss).
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 had nil net book value.
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As of June 30, 2024, estimated future amortization expense for the intangible assets reflected above was as follows:
| Year Ending December 31, | ||||||||
| Amount | ||||||||
| (in thousands) | ||||||||
| Remainder of 2024 | $ | |||||||
| 2025 | ||||||||
| 2026 | ||||||||
| 2027 | ||||||||
| 2028 | ||||||||
| Thereafter | ||||||||
Total net carrying value of intangible assets | $ | |||||||
6. 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 $54,000 0.1 three year arrangement, which commenced on May 1, 2022 and expires on March 31, 2025, is $0.2
The Company has two 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 $74,000 0.1 1.0 0.1
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 $22,000 and $0.1 million during the three and six months ended June 30, 2024, respectively, and $47,000 and $0.1 million during the three and six months ended June 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 of 2024. See Note 7, 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 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”). The Loan was 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. had guaranteed the repayment of the outstanding amounts under the Loan. The Loan was repaid in July of 2024.
A member of the Company’s board of directors also serves as chairman of the board for one of Silvaco’s customers. The Company recorded $28,000 and $0.6 million in software revenue from this customer during the three and six months ended June 30, 2024, respectively, and $10,000 and $0.1 million in software revenue from this customer during the three and six months ended June 30, 2023, respectively. As of June 30 2024, the balance of the Company’s contract assets with this customer was $0.3 million.
14
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 not 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 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 The Company’s vendor financing obligation is comprised of the following payments as of June 30, 2024:
| For the year ending December 31, | Amount | ||||
| (in thousands) | |||||
| Remainder of 2024 | $ | ||||
| 2025 | |||||
| 2026 | |||||
| 2027 | |||||
| 2028 | |||||
| Total undiscounted cash flows | $ | ||||
| Less: Imputed interest | |||||
| Present value of vendor financing obligation | $ | ||||
| Vendor financing obligation, current | |||||
| Vendor financing obligation, non-current | $ | ||||
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.
15
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 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
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 had two 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 after one 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:
| Weighted Average | Number of Awards | |||||||||||||||||||
| Grant Date Fair Value | Remaining Contract Term (in years) | |||||||||||||||||||
| Balance as of December 31, 2023 | $ | |||||||||||||||||||
| Granted | ||||||||||||||||||||
Vested(1) | ( | |||||||||||||||||||
| Forfeited / canceled | ( | |||||||||||||||||||
| Balance as of June 30, 2024 | $ | |||||||||||||||||||
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.
16
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
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
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 The following table summarizes stock-based compensation expense by function for the three and six months ended June 30, 2024:
| Amount | |||||
| (in thousands) | |||||
| General and administrative | $ | ||||
| Research and development | |||||
| Selling and marketing | |||||
| Cost of revenue | |||||
| $ | |||||
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 0.3 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.
17
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 and one
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 than one 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.
18
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
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.
19
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.
20
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:
| Fair value measurements as of June 30, 2024 | |||||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Carrying value | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||
| Financial assets: | |||||||||||||||||||||||
| Cash equivalents: | |||||||||||||||||||||||
| Money market funds | |||||||||||||||||||||||
| U.S. treasury securities | |||||||||||||||||||||||
| Total | |||||||||||||||||||||||
| Available-for-sale marketable securities: | |||||||||||||||||||||||
| U.S. treasury securities | |||||||||||||||||||||||
| U.S. government agencies securities | |||||||||||||||||||||||
| Total | |||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
| Liabilities: | |||||||||||||||||||||||
| Contingent consideration | |||||||||||||||||||||||
Total | $ | $ | $ | $ | |||||||||||||||||||
| Fair value measurements as of December 31, 2023 | |||||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Carrying value | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||
| Liabilities: | |||||||||||||||||||||||
| Contingent consideration | |||||||||||||||||||||||
Total | $ | $ | $ | $ | |||||||||||||||||||
21
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:
| (in thousands) | |||||
| Fair value as of January 1, 2023 | $ | ||||
| Change in fair value | |||||
| Earn-out payments | ( | ||||
| Milestone achievement | ( | ||||
| Foreign exchange | ( | ||||
| Fair value as of December 31, 2023 | $ | ||||
| Change in fair value | ( | ||||
| Earn-out payments | ( | ||||
| Fair value as of 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.
22
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
You should read the following discussion and analysis of financial condition and results of operations together with our audited consolidated financial statements set forth in our final prospectus relating to the initial public offering, dated May 8, 2024 (the “Prospectus”), relating to the Registration Statement on Form S-1 (File No. 333-278666), as amended (“Registration Statement”), filed with the SEC on May 10, 2024, pursuant to Rule 424(b)(4) under the Securities Act of 1933, as amended (“Securities Act”). This discussion contains forward-looking statements that involve risks, uncertainties and assumptions set forth in our Registration Statement. Our actual results could differ materially from those discussed in or implied by these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in this Quarterly Report on Form 10-Q titled “Risk Factors.” Forward-looking statements may be identified by words including, but not limited to, “may,” “will,” “could,” “would,” “can,” “should,” “anticipate,” “expect,” “intend,” “believe,” “estimate,” “project,” “continue,” “forecast,” "likely," "potential," "seek," or the negatives of such terms and similar expressions. The information included herein represents our estimates and assumptions as of the date of this filing. Unless required by law, we undertake no obligation to update publicly any forward-looking statements, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future. All subsequent written or oral forward-looking statements attributable to the Company or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. The following discussion and analysis also includes a discussion of certain non-GAAP financial measures. For a description and reconciliation of the non-GAAP measures discussed in this section, see "Key Operating Indicators and Non-GAAP Financial Measures."
Overview
We are a provider of TCAD software, EDA software and 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. We have 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. We provide SIP for SoC and ICs, and SIP management tools to enable team collaborations on complex SoC designs. Our customers include semiconductor manufacturers, OEMs and design teams who deploy our solutions in production flows across our target markets, including display, power devices, automotive, memory, HPC, IoT and 5G/6G mobile markets.
EDA offerings, including our solutions, enable companies to streamline their IC design workflows, develop complex IC designs in a cost-efficient manner, and maintain acceptable IC manufacturing yield, by providing interoperable tools that capture and simulate designs from concept to analysis. Our TCAD device and process simulation tools provide compatible data structures that can be used with our EDA modeling, analysis, simulation, verification and yield enhancement tools. Further, our EDA tools are used for designing SIP and IC designs that can be managed and validated by our SIP management tools.
Our go-to-market strategy centers on selling software solutions and associated maintenance and services. Our software solutions accounted for 74% and 75% of our revenue for the three and six months ended June 30, 2024, respectively, and 71% and 73% of our revenue for the three and six months ended June 30, 2023, respectively. Associated maintenance and services revenue accounted for 26% and 25% of our revenue for the three and six months ended June 30, 2024, respectively, and 29% and 27% of our revenue for the three and six months ended June 30, 2023, respectively. For the three and six months ended June 30, 2024, approximately 91% and 89% of our bookings came from existing customers, respectively, and 9% and 11% came from new customers, respectively. For the three and six months ended June 30, 2023, approximately 81% and 79% of our bookings came from existing customers, respectively, and 19% and 21% came from new customers, respectively.
During the three and six months ended June 30, 2024, we continued to experience an increase in bookings and revenue. Our bookings were $19.5 million and $35.6 million for the three and six months ended June 30, 2024, respectively, and $14.4 million and $30.0 million for the three and six months ended June 30, 2023, respectively. Our revenue was $15.0 million and $30.8 million for the three and six months ended June 30, 2024, respectively, and $12.5 million and $26.8 million for the three and six months ended June 30, 2023, respectively.
Key Factors Affecting our Results of Operations and Future Performance
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 quarterly 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 to sustain the growth of our business and enhance our results of operations.
Relationships with Our Existing Customers
Building long-term relationships with our existing customer base is critical in driving renewals for our licenses and overall revenue growth. We have a global sales force selling to semiconductor companies and engineering universities which instruct the next generation of chip designers and fabrication facility managers on the use and benefits of our design tools. Most of our customers enter into multi-year software license agreements for a fixed price including a multi-year software license and maintenance and services.
When we renew expiring contracts with our customers, we may increase our bookings by selling them additional or new software or SIP. Over time, we expect that existing customers will choose to upgrade and purchase additional products, particularly as we de-emphasize our lower margin products, which we expect will over the long term drive margin expansion. Our ability to continue to generate sales from our existing customers and to expand those relationships is dependent on our ability to continue to offer software solutions that our existing customers demand. Any failure to continue to generate sales with our existing customers or expand our product and service offerings with our existing customers may have an adverse effect on our revenue and results of operations.
We enter into standard software licensing agreements with each of our customers. Pursuant to these agreements, we grant our customers a non-exclusive, non-transferable limited license, without the right to sublicense, to execute, use and operate certain software. Each party has the right to terminate the software license agreement under certain circumstances, in which event the customer will be required to remove, delete and return all software, related documentation and confidential information furnished under the license agreement.
Our Ability to Expand Our Product Offerings
To meet the increasing complexity of semiconductor designs, the introduction of new advanced materials, and the increased costs associated with more advanced semiconductor technology nodes, we will need to continually enhance our product offerings through our own in-house research and development efforts, acquisitions, or strategic partnerships with third parties. The in-house development of new product offerings or enhancements to our existing product offerings requires significant research and development activities and time and may or may not result in offerings we can successfully market and sell to customers. For example, we have developed an artificial intelligence-based solution named fab technology co-optimization or FTCOTM for wafer level fabrication facilities. FTCO utilizes manufacturing data to perform statistical and physics-based machine learning software simulations to create a computer model of a wafer, which we call the “digital twin” of the wafer, in order to simulate the fabrication of wafers. We may also seek to acquire companies or assets for products or solutions which we believe are complementary to our existing products or solutions. Additionally, we currently, and have in the past, and may in the future, partner with third parties to expand our product offerings to our customers. If in the future, we enter into additional licensing agreements with other third parties and are unable to extend the term of those licensing arrangements, we will experience an associated decline in revenue relating to those products.
Our Ability to Expand into New Markets and Applications and Expansion of our Existing Markets
According to Grand View Research, the global EDA software market was estimated to reach $11.1 billion in potential revenue in 2022 and is expected to reach $22.2 billion in potential revenue in 2030, representing a 9% CAGR, driven in part by the growth in the integrated circuits and electronics manufacturing markets, growing complexity of semiconductor and photonics designs and increasing challenges associated with advanced materials and shrinking process technology nodes across the EDA market. We believe these trends will increase the demand for our software solutions over time, which will have a direct impact on our future revenues and results of operations. In response to this increase in complexity and new challenges facing designers, we have increased investments in our research and development for new software product offerings. For example, our research and development expense was 52% and 37% of revenue for the three and six months ended June 30, 2024, respectively, and 25% and 24% of revenue for the three and six months ended June 30, 2023, respectively. We plan to continue to invest in our software solutions to establish and expand a leadership position in our target markets. We also plan to use our research and development efforts to continue to cater to strategic customer needs.
The drive to increase performance and diversification of applications is further accelerated by a broad-scale transition to cloud-based software applications and computing on mobile platforms. The development of semiconductors that are optimized for specific applications, including AI, 5G/6G communications and IoT, has continued to fuel demand for TCAD and EDA software tools, which in turn fuels demand to develop solutions to meet our markets’ evolving needs. Our ability to successfully generate customer demand amongst new customers and in new markets is dependent on our ability to educate these customers and markets about our software solutions and our ability to generate sufficient new solutions that solve problems for these potential customers. Our ability to continue to expand our product offerings into new markets also requires that we direct our research and development efforts toward value-generating new and existing initiatives. Our future revenues and results of operations will be directly impacted by our ability to produce and provide new software solutions in new and expanding markets.
Our Ability to Successfully Identify, Complete and Integrate Acquisitions
Our success depends in part on our ability to identify, complete and integrate acquisitions. Our goal for future potential acquisition is to pursue acquisitions that will increase our competitiveness in our markets, and increase our bookings and revenue. Our ability to successfully identify, complete and integrate acquisitions will depend on a number of factors, including access to adequate capital, potential competition for the assets, and technology fit. When we engage in M&A, we aim to retain the customers of our acquired companies due to our expanded offerings or improved services. As a result, acquiring target companies is a key part of our growth strategy and may allow us to access and serve a broader range of customers, which ultimately may lead to more bookings, increased revenue growth and expansion in our market share presence.
Our Ability to Calibrate Our Product Mix to Enhance Margin Expansion
We anticipate that our results will be impacted by the increase or decrease of a given product or service as a percentage of total revenue relative to our other products and services. If and as higher margin products become a larger part of our product mix, or conversely as low margin products become a smaller part of our product mix, our gross margin will expand. While we may enter into agreements with third parties for lower margin product solutions, we anticipate our focus on higher margin solutions will continue to lead our other products and services within our product mix, which we anticipate may lead to gross margin and operating margin expansion. Our future ability to shape our product mix with higher margin products making up a larger percentage of our total revenue will impact our results of operations.
Our Ability to Scale While Mitigating Increases in Expenses
If we can execute on our growth strategy and grow our revenue through a combination of new customer growth, upgrades and increased usage of our products by existing customers, as well as accretive acquisitions, our results will be impacted by our ability to reduce the rate at which our expenses increase in proportion with a rise in revenue. We believe this is possible in a number of expense line items, which may provide for additional gross margin and operating margin expansion. For example, we anticipate as our existing customers choose to upgrade to newer software solutions, our costs related to the support of legacy software decreases, outpacing any increases in cost related to supporting the upgraded software. Additionally, we have incurred increased general and administrative expenses in connection with preparing to become a public company, including increased staff costs and professional services fees, including legal and accounting fees. While we anticipate the increased level of costs to remain, we do not anticipate those costs scaling proportionally with our revenue. Finally, we may be able to gain sales efficiencies as our revenue grows, such that our sales and marketing expenses will decrease as a percentage of revenue. In the aggregate, our ability to keep these expenses from growing proportionally with our revenue may provide for meaningful gross margin and operating margin expansion.
Components of Results of Operations
Revenue
Our revenue is derived from software licensing and maintenance and services. Our customer agreements include combinations of licensed software and maintenance and services, which are accounted for as separate performance obligations with differing revenue recognition patterns.
Software License Revenue
Revenue from our software licenses is classified as software license revenue. Software license revenue is recognized upfront upon delivery of the licensed product. We also offer licenses of our standard SIP developed in house, and we offer licenses to our SIP developed in partnership with a third party vendor. Our SIP licenses provide customers with access to SoC design SIP which meet established industry standards, thus saving customers the time and resources required to develop similar design methodologies. Our standard SIPs are generally ready to use upon delivery, meaning no customization is required for our customers to obtain value from the use of our SIP in their IC designs. We recognize revenue associated with licenses of our SIP at the commencement of the contract upon delivery of the licensed SIP. With respect to our SIP developed in partnership with a third party vendor, we generally acted as a principal to the transaction because we controlled the promised SIP that we delivered to the customer. Consistent with our role as the principal, we recognized SIP revenue of our SIP developed in partnership with the third party vendor on a gross basis. Any royalty fees based upon unit sales, revenue or flat fees which were paid to the third party vendor were reported in cost of revenue upon delivery pursuant to the terms and conditions of our contractual obligations with the licensors.
Under certain SIP license agreements, we can also derive revenue through royalties from customers who agree to pay usage-based fees to embed our SIP into their own software offerings. Revenue under SIP royalty agreements is generally recognized during the period in which the customer sells its solutions which incorporate our SIP.
Maintenance and Service Revenue
Typically, our software solutions are sold with post-contract support, or PCS, which includes unspecified technical enhancements and customer support. PCS is classified as maintenance revenue and is recognized ratably over the term of the contract, as we satisfy the PCS performance obligation over time.
We also recognized an immaterial portion of our revenue from device characterization and modeling services for the three and six months ended June 30, 2024 and 2023. Revenue is recognized upon the completion of the requested services and, as applicable, satisfaction of customer acceptance terms. Revenue from these services is classified as maintenance and service revenue.
Cost of Revenue and Gross Profit
Cost of revenue consists of personnel costs comprised of salaries and benefits for employees directly involved in our customer support function, such as customer support engineering salary and benefits, costs of our other customer services, allocation of overhead and facility costs and royalties related to the recognized revenue. We recognized $2.5 million of stock-based compensation expense in cost of revenue during the three and six months ended June 30, 2024. Gross profit represents revenue less cost of revenue.
Operating Expenses
Our operating expenses consist of research and development, selling and marketing, general and administrative expenses, and estimated litigation claim. Personnel costs are the most significant component of our operating expenses and consist of salaries, benefits, stock-based compensation expense, bonuses and commissions. Our operating expenses also include consulting costs, costs of facilities, information technology, depreciation and amortization. We expect our operating expenses to fluctuate as a percentage of revenue over time. Historically, we have not recognized stock-based compensation expense, but after the consummation of the IPO, we recognized an aggregate of $21.8 million of stock-based compensation expense during the three and six months ended June 30, 2024. Of the aggregate stock-based compensation expense recorded during the three and six months ended June 30, 2024, we recognized $11.7 million, $4.1 million, and $3.6 million in general and administrative expense, research and development expense, and selling and marketing expense, respectively.
Research and Development
Our research and development expense consists primarily of personnel costs comprised of salaries, stock-based compensation expense, and benefits for employees directly involved in our research and development efforts, as well as engineering, quality assessment, other related costs associated with the development of new products, enhancements to existing products, quality assurance and testing and allocated overhead costs. We expense research and development costs as incurred. We believe that continued investment in our software solutions and services is important for our future growth and acquisition of new customers and, as a result, we expect our research and development expenses to continue to increase, although it may fluctuate as a percentage of revenue from period to period depending on the timing of these expenses.
Selling and Marketing
Selling and marketing expense consists of personnel costs comprised of salaries, stock-based compensation expense, benefits, sales commissions, travel costs, and field application engineering directly involved in our selling and marketing efforts, as well as professional and consulting fees, advertising expenses, and allocated overhead costs. We expect selling and marketing expense to continue to increase as we increase our sales and marketing personnel and grow our international operations, although it may fluctuate as a percentage of revenue from period to period depending on the timing of these expenses.
General and Administrative
General and administrative expense consists of personnel costs associated with our executive, legal, finance, human resources, information technology and other administrative functions, including salaries, stock-based compensation expense, benefits and bonuses. General and administrative expense also includes professional and consulting fees, accounting fees, legal costs, and allocated overhead costs. We expect general and administrative expense to increase as we expand our finance and administrative personnel, grow our operations, and incur additional expense associated with operating as a public company, including director and officer liability insurance and legal and compliance costs, although it may fluctuate as a percentage of revenue from period to period depending on the timing of these expenses.
Estimated Litigation Claim
Estimated litigation claim expense consists of legal costs that became probable and reasonably estimable associated with our obligations with respect to the earnout payment due to the selling shareholders of Nangate, Inc. (“Nangate”), along with a third cross-complainant (collectively, the “Nangate Parties”). 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.
Loss on Debt Extinguishment
Loss on debt extinguishment includes losses incurred related to the extinguishment of our note purchase agreement with Micron Technology Inc. and our loan facility with East West Bank.
Interest Income
Interest income includes interest income earned on our cash and marketable securities balances and accretion of the purchase discounts on our marketable securities balances.
Interest and Other Expense, Net
Interest and other expense, net includes interest expense associated with cost of borrowings, leases or interest-bearing agreements, foreign exchange gains and losses and changes in the fair value of contingent consideration associated with legacy acquisitions.
Income Tax Provision
Income tax provision is our estimate of current tax expense incurred from the consolidated results of operations globally.
Results of Operations
The following table sets forth our results of operations for the three and six months ended June 30, 2024 and 2023:
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||||||||||||||
| 2024 | 2023 | % Change | 2024 | 2023 | % Change | ||||||||||||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||||||||||||||
| Revenue: | |||||||||||||||||||||||||||||||||||
| Software license revenue | $ | 11,023 | $ | 8,845 | 25 | % | $ | 23,281 | $ | 19,510 | 19 | % | |||||||||||||||||||||||
| Maintenance and service | 3,937 | 3,680 | 7 | % | 7,568 | 7,306 | 4 | % | |||||||||||||||||||||||||||
| Total revenue | 14,960 | 12,525 | 19 | % | 30,849 | 26,816 | 15 | % | |||||||||||||||||||||||||||
| Cost of revenue | 4,861 | 2,373 | 105 | % | 6,834 | 4,398 | 55 | % | |||||||||||||||||||||||||||
| Gross profit | 10,099 | 10,152 | (1) | % | 24,015 | 22,418 | 7 | % | |||||||||||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||||||||||||||
| Research and development | 7,707 | 3,169 | 143 | % | 11,323 | 6,544 | 73 | % | |||||||||||||||||||||||||||
| Selling and marketing | 7,171 | 2,930 | 145 | % | 10,483 | 5,735 | 83 | % | |||||||||||||||||||||||||||
| General and administrative | 18,314 | 4,258 | 330 | % | 22,914 | 8,811 | 160 | % | |||||||||||||||||||||||||||
| Estimated litigation claim | 14,696 | — | 100 | % | 14,696 | — | 100 | % | |||||||||||||||||||||||||||
| Total operating expenses | 47,888 | 10,357 | 362 | % | 59,416 | 21,090 | 182 | % | |||||||||||||||||||||||||||
| Operating (loss) income | (37,789) | (205) | 18,334 | % | (35,401) | 1,328 | (2,766) | % | |||||||||||||||||||||||||||
| Loss on debt extinguishment | (718) | — | 100 | % | (718) | — | 100 | % | |||||||||||||||||||||||||||
| Interest income | 682 | 2 | 34,000 | % | 682 | 3 | 22,633 | % | |||||||||||||||||||||||||||
| Interest and other expense, net | (349) | (240) | 45 | % | (554) | (572) | (3) | % | |||||||||||||||||||||||||||
| (Loss) income before income tax provision | (38,174) | (443) | 8,517 | % | (35,991) | 759 | (4,842) | % | |||||||||||||||||||||||||||
| Income tax provision (benefit) | 214 | (112) | (291) | % | 1,019 | 276 | 269 | % | |||||||||||||||||||||||||||
| Net (loss) income | $ | (38,388) | $ | (331) | 11,498 | % | $ | (37,010) | $ | 483 | (7,763) | % | |||||||||||||||||||||||
The following table summarizes our results of operations as a percentage of total revenue for the three and six months ended June 30, 2024 and 2023:
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||||||||||||
| (as a percentage of total revenue) | ||||||||||||||||||||||||||
| Revenue: | ||||||||||||||||||||||||||
| Software license revenue | 74 | % | 71 | % | 75 | % | 73 | % | ||||||||||||||||||
| Maintenance and service | 26 | % | 29 | % | 25 | % | 27 | % | ||||||||||||||||||
| Total revenue | 100 | % | 100 | % | 100 | % | 100 | % | ||||||||||||||||||
| Cost of revenue | 32 | % | 19 | % | 22 | % | 16 | % | ||||||||||||||||||
| Gross profit | 68 | % | 81 | % | 78 | % | 84 | % | ||||||||||||||||||
| Operating expenses: | ||||||||||||||||||||||||||
| Research and development | 52 | % | 25 | % | 37 | % | 24 | % | ||||||||||||||||||
| Selling and marketing | 48 | % | 23 | % | 34 | % | 21 | % | ||||||||||||||||||
| General and administrative | 122 | % | 34 | % | 74 | % | 33 | % | ||||||||||||||||||
| Estimated litigation claim | 98 | % | — | % | 48 | % | — | % | ||||||||||||||||||
| Total operating expenses | 320 | % | 83 | % | 193 | % | 79 | % | ||||||||||||||||||
| Operating income | (253) | % | (2) | % | (115) | % | 5 | % | ||||||||||||||||||
| Loss on debt extinguishment | (5) | % | — | % | (2) | % | — | % | ||||||||||||||||||
| Interest Income | 5 | % | — | % | 2 | % | — | % | ||||||||||||||||||
| Interest and other expense, net | (2) | % | (2) | % | (2) | % | (2) | % | ||||||||||||||||||
Income before income tax provision | (255) | % | (4) | % | (117) | % | 3 | % | ||||||||||||||||||
| Income tax provision | 1 | % | (1) | % | 3 | % | 1 | % | ||||||||||||||||||
| Net income | (257) | % | (3) | % | (120) | % | 2 | % | ||||||||||||||||||
Comparison of the Three and Six Months Ended June 30, 2024 and 2023
Revenue
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Revenue: | (in thousands) | ||||||||||||||||||||||
| Software license revenue | $ | 11,023 | $ | 8,845 | $ | 23,281 | $ | 19,510 | |||||||||||||||
| Maintenance and service | 3,937 | 3,680 | 7,568 | 7,306 | |||||||||||||||||||
| Total revenue | $ | 14,960 | $ | 12,525 | $ | 30,849 | $ | 26,816 | |||||||||||||||
Total revenue increased $2.4 million, or 19%, to $15.0 million for the three months ended June 30, 2024 from $12.5 million for the three months ended June 30, 2024. The growth in total revenue was driven primarily by a $3.1 million increase in revenue associated with our TCAD and EDA tools, partially offset by a $0.7 million decline in revenue derived from IP sales, as a result of the lapse in the previous contractual arrangement with NXP. Software license revenue increased $2.2 million, or 25%, to $11.0 million for the three months ended June 30, 2024 from $8.8 million for the three months ended June 30, 2023. Maintenance and service revenue increased $0.3 million, or 7%, to $3.9 million for the three months ended June 30, 2024 from $3.7 million for the three months ended June 30, 2023.
Total revenue increased $4.0 million, or 15%, to $30.8 million for the six months ended June 30, 2024 from $26.8 million for the three months ended June 30, 2023. The growth in total revenue was driven primarily by a $5.4 million increase in revenue associated with our TCAD and EDA tools, including a significant FTCOTM digital-twin modeling product sale to a memory customer, partially offset by a $1.4 million decline in revenue derived from IP sales, as a result of the lapse in the previous contractual arrangement with NXP. Software license revenue increased $3.8 million, or 19%, to $23.3 million for the six months ended June 30, 2024 from $19.5 million for the six months ended June 30, 2023. Maintenance and service revenue increased $0.3 million, or 4%, to $7.6 million for the six months ended June 30, 2024 from $7.3 million for the six months ended June 30, 2023.
Gross Profit
Gross profit declined $0.1 million, or 1%, to $10.1 million for the three months ended June 30, 2024 from $10.2 million for the three months ended June 30, 2023. Gross profit margin decreased to 68% for the three months ended June 30, 2024 from 81% for the three months ended June 30, 2023. Excluding the impact of $2.5 million in non-cash stock-based compensation expense recorded upon the consummation of the IPO, gross profit increased $2.4 million, or, 24%, to $12.6 million for the three months ended June 30, 2024 from $10.2 million for the three months ended June 30, 2023, and gross profit margin increased to 84% for the three months ended June 30, 2024 from 81% for the three months ended June 30, 2023, primarily due to the increase of TCAD and EDA tool sales partially offset by a decrease in IP sales.
Gross profit increased $1.6 million, or 7%, to $24.0 million for the six months ended June 30, 2024 from $22.4 million for the six months ended June 30, 2023. Gross profit margin decreased to 78% for the six months ended June 30, 2024 from 84% for the six months ended June 30, 2023. Excluding the impact of $2.5 million in non-cash stock-based compensation expense recorded upon the consummation of the IPO, gross profit increased $4.1 million, or 18%, to $26.5 million for the six months ended June 30, 2024 from $22.4 million for the six months ended June 30, 2023, and gross profit margin increased to 86% for the six months ended June 30, 2024 from 84% for the six months ended June 30, 2023, primarily due to the increase of TCAD and EDA tool sales partially offset by a decrease in IP sales.
Operating Expenses
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Operating expenses | |||||||||||||||||||||||
| Research and development | $ | 7,707 | $ | 3,169 | $ | 11,323 | $ | 6,544 | |||||||||||||||
| Selling and marketing | 7,171 | 2,930 | 10,483 | 5,735 | |||||||||||||||||||
| General and administrative | 18,314 | 4,258 | 22,914 | 8,811 | |||||||||||||||||||
| Estimated litigation claim | 14,696 | — | 14,696 | — | |||||||||||||||||||
Total operating expenses | $ | 47,888 | $ | 10,357 | $ | 59,416 | $ | 21,090 | |||||||||||||||
Research and Development Expenses
Research and development expenses were $7.7 million and $3.2 million for the three months ended June 30, 2024 and 2023, respectively. The increase of $4.5 million, or 143%, was primarily due to $4.1 million of stock-based compensation expense recorded as a result of the consummation of the IPO and a $0.4 million increase in software maintenance expense.
Research and development expenses were $11.3 million and $6.5 million for the six months ended June 30, 2024 and 2023, respectively. The increase of $4.8 million, or 73%, was primarily due to $4.1 million of stock-based compensation expense recorded as a result of the consummation of the IPO, a $0.4 million increase in software maintenance expense, and a $0.3 million increase in consulting, simulation and engineering support expenses.
Selling and Marketing Expenses
Selling and marketing expenses were $7.2 million and $2.9 million for the three months ended June 30, 2024 and 2023, respectively. The increase of $4.2 million, or 145%, was primarily due to $3.6 million of stock-based compensation expense recorded as a result of the consummation of the IPO, a $0.3 million increase in salary and benefits expenses, primarily related to increased headcount and merit increases, a $0.2 million increase in commission expenses and a $0.1 million increase in trade show related expenses.
Selling and marketing expenses were $10.5 million and $5.7 million for the six months ended June 30, 2024 and 2023, respectively. The increase of $4.7 million, or 83%, was primarily due to $3.6 million of stock-based compensation expense recorded as a result of the consummation of the IPO, a $0.7 million increase in salary and benefits expenses, primarily related to increased headcount and merit increases, a $0.1 million increase in professional fees, and a $0.1 million increase in commission expenses.
General and Administrative Expenses
General and administrative expenses were $18.3 million for the three months ended June 30, 2024 as compared to $4.3 million during the three months ended June 30, 2023. The increase of $14.1 million, or 330%, was primarily due to $11.7 million of stock-based compensation expense recorded as a result of the consummation of the IPO and a $2.4 million increase in legal, professional and audit fees.
General and administrative expenses were $22.9 million for the six months ended June 30, 2024 as compared to $8.8 million during the six months ended June 30, 2023. The increase of $14.1 million, or 160%, was primarily due to $11.7 million of stock-based compensation expense recorded as a result of the consummation of the IPO, and a $2.5 million increase in legal, professional and audit fees.
Estimated Litigation Claim
Estimated litigation claim was $14.7 million for the three and six months ended June 30, 2024. The estimated litigation claim consists of a $14.7 million charge recorded due to a jury’s verdict to award the Nangate Parties $11.3 million with additional statutory pre-judgment interest, and court and litigation related costs and certain expert expenses (the “Nangate Litigation”).
Loss on debt extinguishment
On May 13, 2024, the Micron Note was converted into 294,217 shares of our common stock in connection with the consummation of the IPO. As a result, $5.6 million was recognized in additional paid-in capital and we recognized a loss on debt extinguishment of $0.6 million during the three and six months ended June 30, 2024. We also recognized a loss on debt extinguishment of $0.1 million associated with the settlement of our East West Bank Loan. See Note 7 of our condensed consolidated financial statements for further discussion.
Interest Income
Interest income reflects interest earned and accretion on our cash and cash equivalents and marketable securities.
Interest and Other Expense, Net
Interest and other expense, net, was $0.3 million and $0.2 million for the three months ended June 30, 2024 and 2023, respectively, and $0.6 million for each of the six months ended June 30, 2024 and 2023, respectively. Interest and other expense, net, includes interest expense associated with cost of borrowings, vendor financing, leases, vendor financing or interest-bearing agreements, foreign exchange gains and losses and changes in the fair value of contingent consideration associated with legacy acquisitions. The increase in interest and other expense, net, for the three months ended June 30, 2024 was primarily due an increase in the amount of interest-bearing debt outstanding during the period. The Company does not have any interest-bearing debt outstanding as of June 30, 2024.
Income Tax Provision
Income tax provision (benefit) was a provision of $0.2 million and a benefit of $0.1 million for the three months ended June 30, 2024 and 2023, respectively, and provisions of $1.0 million and $0.3 million for the six months ended June 30, 2024 and 2023, respectively. See Note 9 of our condensed consolidated financial statements for further discussion.
Key Operating Indicators and Non-GAAP Financial Measures
We use the following key performance indicators and non-GAAP financial measures 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 and non-GAAP financial measures are presented for supplemental informational purposes only, should not be considered a substitute for financial information presented in accordance with GAAP and may differ from similarly titled metrics or measures presented by other companies.
Bookings
We define a booking as a signed contract and related purchase commitment from a customer, based on the value set forth in a purchase order. We believe bookings are a useful metric to measure the success of customer sales and provide an indication of trends in our operating results that are not necessarily reflected in our revenue, because we recognize revenues on the later satisfaction of the obligations to our customers, and not at the time of sale to a customer. Reported bookings may be subject to adjustments and potential cancellations prior to the satisfaction of the obligations to our customers. For the three and six months ended June 30, 2024, we recorded $19.5 million and $35.6 million in bookings, respectively, as compared to $14.4 million and $30.0 million in bookings for the three and six months ended June 30, 2023, respectively.
The following table sets forth our bookings for each of the three month periods during the trailing five quarters as of June 30, 2024.
| Jun 30, 2024 | Mar 31, 2024 | Dec 31, 2023 | Sep 30, 2023 | Jun 30, 2023 | ||||||||||||||||||||||||||||
| Bookings | $ | 19,478 | $ | 16,112 | $ | 15,565 | $ | 12,487 | $ | 14,362 | ||||||||||||||||||||||
Non-GAAP Operating Income and Non-GAAP Net Income
We report our financial results in accordance with GAAP. However, our management believes that non-GAAP operating income and non-GAAP net income provide investors with additional useful information in evaluating our performance. These financial measures are not required by or presented in accordance with GAAP. We believe, however, that these non-GAAP financial measures, when taken together with our financial results presented in accordance with GAAP, provide meaningful supplemental information regarding our operating performance and facilitates internal comparisons of our historical operating performance on a more consistent basis by excluding certain items that may not be indicative of our business, results of operations or outlook and provide a useful measure for period-to-period comparisons of our business performance.
We define non-GAAP operating income (loss) as our GAAP operating income (loss) adjusted to exclude certain costs, including certain transaction-related costs, IPO preparation costs, acquisition-related estimated litigation claim and legal costs, stock-based compensation expense, amortization of acquired intangible assets, impairment charges, and executive severance costs. We define non-GAAP net income (loss) as our GAAP net income (loss) adjusted to exclude certain costs, including certain transaction-related costs, IPO preparation costs, acquisition-related estimated litigation claim and legal costs, stock-based compensation expense, amortization of acquired intangible assets, impairment charges, executive severance costs, change in fair value of contingent consideration, foreign exchange (gain) loss, loss on debt extinguishment, and the income tax effect on non-GAAP items. We monitor non-GAAP operating income (loss) and non-GAAP net income (loss) as non-GAAP financial measures to supplement the financial information we present in accordance with GAAP to provide investors with additional information regarding our financial results.
Certain items are excluded from our non-GAAP operating income (loss) and non-GAAP net income (loss) because these items are non-cash in nature or are not indicative of our core operating performance and render comparisons with prior periods and competitors less meaningful. We adjust GAAP operating income (loss) and net income (loss) for these items to arrive at non-GAAP operating income (loss) and non-GAAP net income (loss) because these amounts can vary substantially from company to company within our industry depending upon accounting methods and book values of assets, capital structure and the method by which the assets were acquired. By excluding certain items that may not be indicative of our recurring core operating results, we believe that non-GAAP operating income (loss) and non-GAAP net income (loss) provide meaningful supplemental information regarding our performance.
The following table reconciles operating income to non-GAAP operating income.
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Operating (loss) income | $ | (37,789) | $ | (205) | $ | (35,401) | $ | 1,328 | |||||||||||||||
| Add: | |||||||||||||||||||||||
Acquisition-related estimated litigation claim and legal costs(1) | 16,717 | 233 | 17,311 | 469 | |||||||||||||||||||
Amortization of acquired intangible assets(2) | 296 | 74 | 366 | 175 | |||||||||||||||||||
IPO preparation costs(3) | 607 | 711 | 873 | 979 | |||||||||||||||||||
Stock-based compensation expense | 21,829 | — | 21,829 | — | |||||||||||||||||||
| Non-GAAP operating income | $ | 1,660 | $ | 813 | $ | 4,978 | $ | 2,951 | |||||||||||||||
The following table reconciles net income to non-GAAP net income.
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
Net (loss) income | $ | (38,388) | $ | (331) | $ | (37,010) | $ | 483 | |||||||||||||||
| Add: | |||||||||||||||||||||||
Acquisition-related estimated litigation claim and legal costs(1) | 16,717 | 233 | 17,311 | 469 | |||||||||||||||||||
Amortization of acquired intangible assets(2) | 296 | 74 | 366 | 175 | |||||||||||||||||||
IPO preparation costs(3) | 607 | 711 | 873 | 979 | |||||||||||||||||||
| Stock-based compensation expense | 21,829 | — | 21,829 | — | |||||||||||||||||||
Change in fair value of contingent consideration(4) | (10) | 65 | (18) | 341 | |||||||||||||||||||
| Foreign exchange loss | 114 | 168 | 244 | 415 | |||||||||||||||||||
Loss on debt extinguishment(5) | 718 | — | 718 | — | |||||||||||||||||||
Income tax effect of non-GAAP adjustments(6) | (43) | (81) | (76) | (104) | |||||||||||||||||||
Non-GAAP net income | $ | 1,840 | $ | 839 | $ | 4,237 | $ | 2,758 | |||||||||||||||
(1)Reflects litigation-related expenses incurred in connection with our acquisitions and the Nangate Litigation estimated claim accrual.
(2)Reflects the amortization of intangible assets attributable to our acquisitions.
(3)Reflects one-time costs including third-party professional services fees and costs incurred in connection with, and in preparation for, the IPO. Such costs do not include those costs that were considered direct and incremental to the IPO and therefore capitalized as deferred transaction costs.
(4)Includes the change in fair value of contingent consideration recorded in connection with our acquisitions.
(5)Reflects loss incurred on conversion of the Micron Note to common stock in connection with the IPO and the loss incurred on the extinguishment of the East West Bank Loan.
(6)Reflects the increase in income tax expenses due to non-GAAP adjustments.
Liquidity and Capital Resources
Since inception, we have financed operations primarily through proceeds received from payments from our customers, borrowings from Ms. Ngai-Pesic and other lenders, and the net proceeds from the sale of our common stock in the IPO. Our primary sources of liquidity are cash, cash equivalents and marketable securities including cash generated from operations. As of June 30, 2024, we had $34.3 million in cash and cash equivalents, of which $3.4 million was held by our foreign subsidiaries, $54.6 million in short-term marketable securities and $13.4 million in long-term marketable securities.
On June 13, 2022, we entered into a $4.0 million line of credit (“the 2022 Credit Line”) with Ms. Ngai-Pesic bearing 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 2022 Credit Line was repaid in full and terminated.
In December 2023, we entered into a loan facility with East West Bank (“the East West Bank Loan”) which provides 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 as reported in The Wall Street Journal or (ii) four and one half percent (4.5%). In addition, if any payment required of us under the East West Bank Loan is not made within ten (10) days after such payment is due, we are required to pay East West Bank a late fee equal to the lesser of (i) six (6%) of such unpaid amount or (ii) the maximum amount permitted to be charged under applicable law, not in any case to be less than $5.00. We drew $4.3 million on the East West Bank Loan during the six months ended June 30, 2024 and repaid the outstanding amounts due under the East West Bank Loan in full during the three and six months ended June 30, 2024. In May 2024, the East West Bank Loan was repaid in full and terminated.
On April 11, 2024, we amended our license agreement with NXP, pursuant to which we recorded an associated vendor financing obligation of $4.8 million. We determined that the vendor financing obligation had an imputed interest rate of 9%, which is reflective of our borrowing rate with similar terms to that of the license agreement.
On April 16, 2024, we entered into a note purchase agreement with Micron Technology, Inc. (“Micron”), which has been and is a customer of Silvaco, pursuant to which we issued to Micron a senior subordinated convertible promissory note in the principal amount of $5.0 million (“the Micron Note”). 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. On May 13, 2024, the Micron Note was converted into 294,217 shares of our common stock in connection with the consummation of the IPO.
On May 13, 2024, we sold 6,000,000 shares of common stock in the IPO at a price to the public of $19.00 per share. The gross proceeds from the IPO were $114.0 million, with $106.0 million funded to us after deducting underwriting discounts and commissions of $8.0 million.
We believe our cash and marketable securities balances, which include the proceeds received in connection with the IPO and the $5.0 million received in connection with the Micron Note 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. We currently have no other committed sources of capital.
As of June 30, 2024, $8.8 million, or 26%, of our cash and cash equivalents was maintained with one financial institution, where our current deposits are in excess of federally insured limits. Past macroeconomic conditions have resulted in the actual or perceived financial distress of many financial institutions, including the recent failures of Silicon Valley Bank, Signature Bank and First Republic Bank and the UBS takeover of Credit Suisse. If the financial institutions with whom we do business were to become distressed or placed into receivership, we may be unable to access the cash we have on deposit with such institutions. If we are unable to access our cash as needed, our financial position and ability to operate our business could be adversely affected.
Cash Flows
The following table summarizes changes in our cash flows for the periods indicated.
| Six Months Ended June 30, | |||||||||||
| 2024 | 2023 | ||||||||||
| (in thousands) | |||||||||||
| Cash provided by (used in): | |||||||||||
| Operating activities | $ | (8,794) | $ | 2,166 | |||||||
| Investing activities | (67,865) | (202) | |||||||||
| Financing activities | 106,424 | (921) | |||||||||
| Effect of exchange rate fluctuations on cash and cash equivalents | 88 | (173) | |||||||||
| Net change in cash | $ | 29,853 | $ | 870 | |||||||
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 collections and payments. Our ongoing cash outflows from operating activities primarily relate to personnel related costs, payments for professional services, office leases and related facilities costs, and software supporting our company infrastructure, among others. Our primary source of cash inflows is collections of our accounts receivable. The timing of invoices to our customers and subsequent collection is based on agreements executed and payment terms that can vary by customer.
Net cash used by operating activities for the six months ended June 30, 2024 was $8.8 million compared to $2.2 million of net cash provided by operating activities for the six months ended June 30, 2023. The $11.0 million decrease in net cash provided by operating activities was primarily due to a $10.4 million decline in net working capital mainly driven by changes in contract assets and accounts receivable during the six months ended June 30, 2024, and the payment of litigation-related expenses incurred in connection with our acquisitions.
Investing Activities
Net cash used for investing activities for the six months ended June 30, 2024 and 2023 was $67.9 million and $0.2 million, respectively. During the six months ended June 30, 2024, we used cash of $67.8 million for purchases of marketable securities and $0.1 million on purchases of property and equipment. During the six months ended June 30, 2023, we used $0.2 million of cash to purchase property and equipment.
Financing Activities
Net cash provided by financing activities for the six months ended June 30, 2024, was $106.4 million. We received $106.0 million in net proceeds from the IPO, $4.9 million in net proceeds from the Micron Note, and $4.3 million from our drawdown on the East West Bank Loan, partially offset by the $4.3 million repayment of the East West Bank Loan, payment of $2.1 million related to deferred transaction costs incurred in connection with the IPO, the $2.0 million repayment of the 2022 Line of Credit and $0.3 million of payments for our vendor financing obligation. Net cash used in financing activities for the six months ended June 30, 2023 was $0.9 million due to contingent consideration paid in connection with our Nangate and PolytEDA acquisitions.
Effects of Exchange Rate Fluctuations on Cash and Cash Equivalents
The effects of exchange rate fluctuations on cash were $88,000 and $0.2 million for the six months ended June 30, 2024 and June 30, 2023, respectively.
Contractual Obligations
Following the consummation of the IPO, our financial commitments for contractual obligations include our operating lease commitments, our vendor financing obligation, and contingent consideration. Refer to Note 4, Leases, Note 7, Debt and Financing Obligations, and Note 12, Fair Value of Financial Instruments, of our condensed consolidated financial statements for further discussion.
Critical Accounting Policies and Significant Judgments and Estimates
There have not been any material changes during the three and six months ended June 30, 2024 to the methodology applied by management for critical accounting policies previously disclosed in our audited financial statements set forth in our Registration Statement. For further discussion of our critical accounting policies and estimates, please refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates” in our Registration Statement.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the rules and forms of the SEC. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to our management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, regardless of how well they were designed and are operating, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were not effective at the reasonable assurance level due a material weakness in connection with the preparation of our consolidated financial statements, related to a lack of formalized accounting processes over internal control over financial reporting (“ICFR”) and an insufficient complement of personnel possessing the technical accounting and financial reporting knowledge and experience to support a timely and accurate close and financial statement reporting process.
Changes in Internal Control Over Financial Reporting
There were no changes in our ICFR identified in connection with the evaluation required by Rule 13a-15(f)or 15d-15(f) of the Exchange Act during the period covered by this Quarterly Report, that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
The effectiveness of any system of ICFR is subject to inherent limitations, including the exercise of judgment in designing, implementing, operating, and evaluating the controls and procedures, and the inability to eliminate misconduct completely. Accordingly, any system of internal control over financial reporting can only provide reasonable, not absolute, assurances that its objectives will be met. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. We intend to continue to monitor and upgrade our internal controls as necessary or appropriate for our business, but we cannot assure that such improvements will be sufficient to provide us with effective ICFR.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
From time to time, we may be subject to legal proceedings in the ordinary course of our business. We are not currently a party to any proceedings that we believe are estimable or will have, individually or in the aggregate, a material effect on our core operations of providing TCAD, EDA software and SIP solutions. Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors. For more information regarding our current legal proceedings, refer to note 11 of our unaudited condensed consolidated financial statements for the three and six months ended June 30, 2024 for further information.
ITEM 1A. RISK FACTORS.
A description of the risks and uncertainties associated with our business is set forth below. You should carefully consider the risks and uncertainties described below, together with all of the other information in this Quarterly Report on Form 10-Q, including the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our unaudited condensed consolidated financial statements and related notes. Our business, results of operations, financial condition, and prospects could also be harmed by risks and uncertainties not currently known to us or that we currently do not believe to be material. If any of the risks actually occur, our business, results of operations, financial condition and prospects could be harmed. In that event, the market price of our common stock could decline, and you could lose part or all of your investment.
Risks Related to Our Business and Industry
We face significant competition from larger companies as well as from third-party providers who may deploy their resources to develop IP solutions internally.
We are engaged in a competitive segment of the global semiconductor and photonics industries. Our competitive landscape is characterized by competition from companies that have greater resources than us. A variety of factors could adversely impact our ability to compete, including rapid technological change in our software solution design, customers that make purchase decisions based on a mix of factors of varying importance and continuous declines in average selling prices of our software solutions. We compete principally on the basis of technology, license quality and features, license terms, compatibility, reliability, interoperability among products and price and payment terms.
We compete against larger companies including Synopsys, Inc., Coventor, Inc., a Lam Research company, Cadence Design Systems, Inc., Siemens EDA, Ansys, Inc., Arm Limited, and CEVA, Inc. Such companies have greater name recognition than us and possess substantial financial, technical, research and development and engineering resources that can be deployed so they can develop competing TCAD, EDA and SIP solutions. Varying combinations of these resources provide advantages to these competitors that enable them to influence industry trends and the pace at which industries adapt to these trends. A strong competitive response from one or more of our competitors to our marketplace efforts, or a shift in customer preferences to competitors’ products, could result in increased pressure to lower our prices more rapidly than anticipated, increased selling and marketing expense, and/or market share loss. The consolidation of our competitors or collaboration among our competitors to deliver more comprehensive offerings than they could prior to consolidation may also impact our ability to compete effectively. To the extent our revenue is negatively impacted by competitive pressures and reduced pricing, our business could be harmed.
In addition, our ability to compete in our market is subject to a variety of factors, many of which are beyond our control. In particular, any of the below factors could significantly affect our ability to compete and could harm our business:
■Our ability to anticipate and lead critical software solution development cycles and technological shifts as driven by our target markets, to innovate rapidly and efficiently and to improve our existing solutions;
■Decisions by semiconductor companies and/or OEMs to develop IP internally, rather than license IP from outside vendors due to strategic changes, enhanced internal capability, budget constraints or excess engineering capacity;
■Our ability to maintain and improve upon our current research and development collaboration agreements;
■Whether any competitor substantially increases its engineering and marketing resources to compete with our software solutions;
■The challenges of developing, or acquiring externally developed, technology solutions that are adequate and competitive in meeting the rapidly evolving requirements of next-generation design challenges;
■Our ability to expand into established market segments;
■Our ability to compete on the basis of payment terms; and
■The potential effects of geopolitical conflicts, such as the ongoing trade disputes between the United States and China and Russia’s invasion of Ukraine, including retaliatory and regulatory actions, on purchasing, development, sales and innovation responses and trends in response to such conflicts.