# Silvaco Group, Inc. (SVCO) FY 2024 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Silvaco Group, Inc.'s 10-K for fiscal year 2024.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1943289/000162828025010567/svco-20241231.htm
Accession: 0001628280-25-010567
Filing date: 2025-03-05
Report date: 2024-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Published MD&A gate trimmed front/tail over-capture.
Confidence: high

Company profile: /company/SVCO/
All MD&A years: /company/SVCO/mda/
Next year: /company/SVCO/mda/fy2025/ (FY 2025)

Item 7. 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 and the related notes included in Part II, Item 8 of this Annual Report on Form 10-K. This discussion and other parts of this report contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that involve risks, uncertainties and assumptions. 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 under Part I, Item 1A. Risk Factors of this Annual Report on Form 10-K. 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.

Overview

We are 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. 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 system-on-a-chip (“SoC”) and integrated circuits (“ICs”), and SIP management tools to enable team collaborations on complex SoC designs. Our customers include semiconductor manufacturers, original equipment manufacturers (“OEMs”) and design teams who deploy our solutions in production flows across our target markets, including display, power devices, automotive, memory, high performance computing (“HPC”), internet of things (“IoT”) and 5G/6G mobile markets.

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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 73% of our revenue for the years ended December 31, 2024 and 2023, respectively, and associated maintenance and services accounted for 26% and 27% of our revenue for the years ended December 31, 2024 and 2023, respectively. For the years ended December 31, 2024 and 2023, approximately 90% and 81% of our bookings came from existing customers and 10% and 19% came from new customers, respectively. See “—Key Operating Indicators and Non-GAAP Financial Measures—Bookings” for a description of how we define bookings.

Similar to trends observed across the semiconductor industry, we saw a decline in orders from Asia during the year ended December 31, 2024 primarily driven by economic challenges and the ongoing strain in U.S.-China trade relations. Despite these challenges, fiscal year 2024 includes record results for bookings and revenue, driven by sustained demand for our digital twin modeling platform and growth in key semiconductor markets. During the year ended December 31, 2024, our bookings were $65.8 million as compared to $58.1 million for the year ended December 31, 2023. Our revenue was $59.7 million for the year ended December 31, 2024 as compared to $54.2 million for the year ended December 31, 2023.

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 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. The growth of our business and our future success are also subject to uncertainties and risks as described in Part I, Item 1A., Risk Factors of this Annual Report on Form 10-K.

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 that also instruct fabrication facility managers and the next generation of chip designers 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/or 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 (“AI”), -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.

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Our Ability to Expand into New Markets and Applications and Expansion of our Existing Markets

We believe that trends in the global EDA software market, including 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, 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 35% and 24% of revenue for the years ended December 31, 2024 and 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 acquisitions 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 mergers and acquisitions, 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. 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. We have also incurred a significant increase in stock-based compensation expense. 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.

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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 developed in partnership with NXP Semiconductors Netherlands B.V. (“NXP”) (the “NXP IP”). 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 the NXP IP, we generally act as a principal to the transaction because we have a license to sell, and therefore control the NXP IP that we deliver to the customer. Consistent with our role as the principal, we recognize SIP revenue of the NXP IP on a gross basis. Any royalty fees based upon unit sales, revenue or flat fees which were paid to NXP were reported in cost of revenue upon delivery pursuant to the terms and conditions of our contractual obligations with the customers.

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 (“PCS”), which includes unspecified technical enhancements and customer support. PCS is classified as maintenance and service 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 years ended December 31, 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, amortization of acquired intangible assets, and royalties related to the recognized revenue. Historically, we have not recognized stock-based compensation expense, but after the consummation of the IPO during the year ended December 31, 2024, we recognized $3.0 million of stock-based compensation expense in cost of revenue. We also recognized $0.7 million of amortization associated with our acquired intangible assets in cost of revenue during the year ended December 31, 2024. See Note 11 and Note 6 of our consolidated financial statements in Item 8 in this Annual Report on Form 10-K for further discussion. Gross profit represents revenue less cost of revenue.

Operating Expenses

Our operating expenses consist of research and development, selling and marketing, general and administrative, and estimated litigation claim. Related 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 during the year ended December 31, 2024, we recognized an aggregate of $23.9 million of stock-based compensation expense in operating expenses. Of the aggregate stock-based compensation expense recorded, we recognized $14.5 million, $5.1 million, and $4.3 million in general and administrative expense, research and development expense, and selling and marketing expense, respectively, during the year ended December 31, 2024. See Note 11 of our consolidated financial statements in Item 8 in this Annual Report on Form 10-K for further discussion.

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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 expenses 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 covenant of good faith and fair dealing, and court and litigation related costs and certain expert expenses subject to the Nangate Parties establishing the legal right to them and to be determined by the court (the “Contract Damages”). The jury also awarded damages for certain of the fraudulent and negligent misrepresentation claims of $6.6 million to the Nangate Parties and incremental punitive damages, including $17.0 million payable by the Company (the “Fraud Damages”). 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. We and the Co-Defendants may appeal the judgement, which will require us to collateralize and post an appellate bond of up to $35.4 million on or before March 24, 2025. We recorded a charge to estimated litigation claim and accrued expenses and other current liabilities of $11.3 million during the year ended December 31, 2024. See Note 14 of our consolidated financial statements in Item 8 in this Annual Report on Form 10-K for further discussion.

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 cash equivalents 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.

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Results of Operations

The following table sets forth our results of operations for the years ended December 31, 2024 and 2023:

[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

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The following table summarizes our results of operations as a percentage of total revenue for the years ended December 31, 2024 and 2023:

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2024","","2023"],["Revenue:"],["Software license revenue","74","%","","73","%"],["Maintenance and service","26","%","","27","%"],["Total revenue","100","%","","100","%"],["Cost of revenue","20","%","","17","%"],["Gross profit","80","%","","83","%"],["Operating expenses:"],["Research and development","35","%","","24","%"],["Selling and marketing","31","%","","23","%"],["General and administrative","63","%","","33","%"],["Estimated litigation claim","19","%","","\u2014","%"],["Total operating expenses","147","%","","81","%"],["Operating (loss) income","(67)","%","","2","%"],["Loss on debt extinguishment","(1)","%","","\u2014","%"],["Interest income","5","%","","\u2014","%"],["Interest and other expense, net","(2)","%","","(1)","%"],["(Loss) income before income tax provision","(65)","%","","1","%"],["Income tax provision","1","%","","2","%"],["Net loss","(66)","%","","(1)","%"]]
[[/GREPCENT_TABLE]]

Comparison of the Years Ended December 31, 2024 and 2023

Revenue

[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

Despite economic challenges in Asia including the impact of the ongoing strain in U.S.-China trade relations, total revenue increased by $5.4 million, or 10%, to $59.7 million for the year ended December 31, 2024 from $54.2 million for the year ended December 31, 2023. Revenue associated with our TCAD and EDA tools increased by $8.1 million and $0.6 million, respectively, and revenue derived from IP sales decreased by $3.2 million. Software license revenue increased by $4.7 million, or 12%, to $44.0 million for the year ended December 31, 2024 from $39.3 million for the year ended December 31, 2023. Maintenance and service revenue increased by $0.8 million, or 5%, to $15.7 million for the year ended December, 2024 from $14.9 million for the year ended December 31, 2023.

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Gross Profit and Cost of Revenue

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2024","","2023"],["","(in thousands)"],["Total revenue","$","59,680","","","$","54,246"],["Cost of revenue","12,042","","","9,354"],["Gross profit","$","47,638","","","$","44,892"],["Gross profit margin","80","%","","83","%"]]
[[/GREPCENT_TABLE]]

Gross profit increased by $2.7 million, or 6%, to $47.6 million for the year ended December 31, 2024 from $44.9 million for the year ended December 31, 2023. Gross profit margin decreased to 80% for the year ended December 31, 2024 from 83% for the year ended December 31, 2023. The decrease was attributable to $3.0 million in stock-based compensation expense recorded upon the consummation of the IPO and $0.7 million of amortization associated with our acquired intangible assets.

Operating Expenses

[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

Research and Development Expenses

Research and development expenses were $20.7 million and $13.2 million for the years ended December 31, 2024 and 2023, respectively. The increase of $7.6 million, or 57%, was primarily due to $5.1 million of stock-based compensation expense recorded as a result of the consummation of the IPO, $1.0 million increase in salary and benefits expenses, primarily related to increased headcount and merit increases, a $0.9 million increase in software maintenance expense, and a $0.6 million increase in engineering support expenses.

Selling and Marketing Expenses

Selling and marketing expenses were $18.3 million and $12.7 million for the years ended December 31, 2024 and 2023, respectively. The increase of $5.6 million, or 44%, was primarily due to $4.3 million of stock-based compensation expense recorded as a result of the consummation of the IPO, a $1.0 million increase in salary and benefits expenses, primarily related to increased headcount and merit increases, and a $0.3 million increase in sales and marketing related travel, conferences, trade shows and advertising.

General and Administrative Expenses

General and administrative expenses were $37.6 million and $17.9 million for the years ended December 31, 2024 and 2023, respectively. The increase of $19.7 million, or 110%, was primarily due to $14.5 million of stock-based compensation expense recorded as a result of the consummation of the IPO, a $3.5 million increase in legal, professional and audit fees, a $0.6 million increase in corporate insurance, a $0.5 million increase in salary and benefits expenses, primarily related to increased headcount and merit increases, and $0.6 million of severance expenses.

Estimated Litigation Claim

Estimated litigation claim was $11.3 million for the year ended December 31, 2024. The estimated litigation claim for the year ended December 31, 2024 consists of a $11.3 million charge recorded due to a jury’s verdict to award the Nangate Parties damages under breach of contract related claims (the “Nangate Litigation”). We and the Co-Defendants may appeal the judgement, which will require us to collateralize and post an appellate bond of up to $35.4 million on or before March 24, 2025. See Note 14 of our consolidated financial statements in Item 8 in this Annual Report on Form 10-K for further discussion.

Loss on debt extinguishment

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On May 13, 2024, the senior subordinated convertible promissory note (the “Micron Note”) between us and Micron Technology, Inc. (“Micron”) 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 year ended December 31, 2024. We also recognized a loss on debt extinguishment of $0.1 million associated with the settlement of our loan facility with East West Bank (the “East West Bank Loan”) during the year ended December 31, 2024. See Note 10 of our consolidated financial statements in Item 8 in this Annual Report on Form 10-K 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 expense of $0.9 million and $0.6 million for the years ended December 31, 2024 and 2023, respectively. The change in interest and other expense, net, for the year ended December 31, 2024 was primarily due to an increase in the amount of interest associated with our vendor financing obligation during the current year. The Company does not have any interest-bearing debt outstanding as of December 31, 2024.

Income Tax Provision

Income tax provision was $0.5 million and $0.8 million for the years ended December 31, 2024 and 2023, respectively. See Note 12 of our consolidated financial statements in Item 8 in this Annual Report on Form 10-K 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 our revenue recognition is based on the satisfaction of our customer obligations, and not of the successful execution of a booking at the time of sale. Reported bookings may be subject to adjustments and potential cancellations prior to the satisfaction of our customer obligations. For the years ended December 31, 2024 and 2023, we recorded $65.8 million and $58.1 million in bookings, respectively.

The following table sets forth our bookings for each of the quarterly periods during the years ended December 31, 2024 and 2023.

[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

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 facilitate 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.

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We define non-GAAP operating income as our GAAP operating (loss) income adjusted to exclude certain costs, including IPO preparation costs, acquisition-related estimated litigation claim and legal costs, stock-based compensation expense, amortization of acquired intangible assets, payroll taxes from the restricted stock unit (“RSU”) lockup release, and executive severance costs. We define non-GAAP net income as our GAAP net loss adjusted to exclude certain costs, including IPO preparation costs, acquisition-related estimated litigation claim and legal costs, stock-based compensation expense, amortization of acquired intangible assets, payroll taxes from the RSU lockup release, 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 and non-GAAP net income 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 and non-GAAP net income because these items are non-cash in nature or management believes they are not indicative of our core operating performance and render comparisons with prior periods and competitors less meaningful. We adjust GAAP operating (loss) income and net loss for these items to arrive at non-GAAP operating income and non-GAAP net income 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 items that may not be indicative of our recurring core operating results, we believe that non-GAAP operating income and non-GAAP net income provide meaningful supplemental information regarding our performance.

The following table reconciles GAAP operating (loss) income to non-GAAP operating income.

[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

The following table reconciles net loss to non-GAAP net income.

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","2024","","2023"],["Net loss","","$","(39,404)","","","$","(316)"],["Add:"],["Stock-based compensation expense","","26,915","","","\u2014"],["Acquisition-related estimated litigation claim and legal costs(1)","","15,935","","","1,707"],["Amortization of acquired intangible assets(2)","","953","","","339"],["IPO preparation costs(3)","","873","","","1,221"],["Payroll taxes from RSU lockup release(4)","","725","","","\u2014"],["Executive Severance(5)","","415","","","\u2014"],["Change in fair value of contingent consideration(6)","","(27)","","","325"],["Foreign exchange loss","","404","","","335"],["Loss on debt extinguishment(7)","","718","","","\u2014"],["Income tax effect of non-GAAP adjustments(8)","","(831)","","","(169)"],["Non-GAAP net income","","$","6,676","","","$","3,442"]]
[[/GREPCENT_TABLE]]

(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 and the NXP IP.

(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.

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(4)Reflects payroll taxes related to the release of vested RSUs which had been subject to lock-up agreements in connection with the Company’s IPO under the Company’s 2014 Plan.

(5)Reflects executive severance which occurred in connection with management changes.

(6)Reflects the change in fair value of contingent consideration recorded in connection with our acquisitions.

(7)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.

(8)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 December 31, 2024, we had $19.6 million in cash and cash equivalents, of which $4.5 million was held by our foreign subsidiaries, and $63.1 million in current 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 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%). We drew $4.3 million on the East West Bank Loan during the year ended December 31, 2024. In May 2024, the East West Bank Loan was repaid in full and terminated.

On April 11, 2024, we amended and restated our license agreement with NXP, pursuant to which we recorded an associated vendor financing obligation. The vendor financing obligation was $4.4 million as of December 31, 2024. 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, a customer of the Company, pursuant to which we issued the Micron Note in the principal amount of $5.0 million. 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 cash equivalents and marketable securities balances, which include 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 committed sources of capital.

If our cash and cash equivalents and marketable securities including cash generated from operating activities are not sufficient to satisfy our liquidity requirements, we may be required to seek additional financing. If we raise additional funds by issuing equity securities or convertible debt securities, our stockholders will experience dilution. Debt financing, if available, may contain covenants that significantly restrict our operations or our ability to obtain additional debt financing in the future. Any additional financing that we raise may contain terms that are not favorable to us or our stockholders. We cannot assure you that we would be able to obtain additional financing on terms favorable to us or our existing stockholders, or at all. See “Risk Factors—Risks Related to Our Business and Industry—Our ability to raise additional capital in the future may be limited and could prevent us from executing our growth strategy” in Item 1A in Part 1 in this Annual Report on Form 10-K for further discussion

As of December 31, 2024, $2.4 million, or 12%, 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 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.

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Cash Flows

The following table summarizes changes in our cash flows for the periods indicated.

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","2024","","2023"],["","","(in thousands)"],["Cash provided by (used in):"],["Net cash (used in) provided by operating activities","","$","(19,774)","","","$","1,180"],["Net cash used in investing activities","","(66,535)","","","(339)"],["Net cash provided by (used in) financing activities","","101,301","","","(1,652)"],["Effect of exchange rate changes","","193","","","(246)"],["Net increase (decrease) in cash","","$","15,185","","","$","(1,057)"]]
[[/GREPCENT_TABLE]]

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 executed agreements and payment terms that can vary by customer.

Net cash used in operating activities for the year ended December 31, 2024, was $19.8 million compared to $1.2 million of net cash provided by operating activities for the year ended December 31, 2023. The $21.0 million decrease in net cash provided by operating activities reflects a $1.4 million increase in net loss, after excluding the non-cash effects of stock-based compensation expense, provision for credit losses, estimated litigation claim, loss on debt extinguishment, change in fair value of contingent consideration, depreciation and amortization, and the accretion of discount on marketable securities, and a $19.6 million increase in net working capital, primarily due to changes in contract assets, accounts receivable, deferred revenue and the payment of accrued operating expenses in connection with our IPO and accrued royalties for licensed technology sold in our product lines during the year ended December 31, 2024.

Investing Activities

Net cash used in investing activities for the years ended December 31, 2024 and 2023 was $66.5 million and $0.3 million, respectively. Use of cash during the year ended December 31, 2024 includes $99.6 million in purchases of marketable securities and $0.5 million in purchases of property and equipment, partially offset by $33.6 million of maturities in marketable securities. During the year ended December 31, 2023, we used $0.3 million of cash to purchase property and equipment.

Financing Activities

Net cash provided by financing activities for the year ended December 31, 2024, was $101.3 million. We received $106.0 million in net proceeds from the IPO, $4.9 million in proceeds from the Micron Note, net of debt issuance costs, $4.3 million from our drawdown on the East West Bank Loan, and $0.3 million in proceeds from the issuance of common stock through our employee stock purchase plan partially offset by $4.6 million of cash in payment of employee withholding taxes upon vesting of RSUs, $4.3 million repayment of the East West Bank Loan, $2.6 million of payments related to deferred transaction costs incurred in connection with the IPO, the $2.0 million repayment of the 2022 Line of Credit, $0.6 million of payments for our vendor financing obligation and $0.1 million of contingent consideration paid. Net cash used by financing activities for the year ended December 31, 2023, was $1.7 million and reflects $1.0 million of contingent consideration paid in connection with our Nangate and PolytEDA acquisitions, $1.0 million repaid on the 2022 Credit Line, and $0.7 million of transaction costs incurred in connection with the IPO; partially offset by $1.0 million of proceeds from the 2022 Credit Line.

Effects of Exchange Rate Fluctuations on Cash

The effects of exchange rate fluctuations on cash were $0.2 million and $(0.2) million for the years ended December 31, 2024 and 2023, respectively.

Contractual Obligations

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Our financial commitments for contractual obligations as of December 31, 2024, include our operating leases and our vendor financing obligation. As noted in Note 4, Leases, of our consolidated financial statements in Item 8 on this Annual Report on Form 10-K, we have a current obligation of $0.7 million and a non-current obligation of $0.9 million. Our vendor financing obligation, as noted in Note 10. Debt and Financing Obligations of our consolidated financial statements in Item 8 on this Annual Report on Form 10-K, includes a current obligation of $1.5 million and a non-current obligation of $2.9 million.

Estimated Litigation Claim

In addition to our financial commitments for contractual obligations as of December 31, 2024, we recorded a charge to estimated litigation claim and accrued expenses and other current liabilities of $11.3 million during the year ended December 31, 2024 in connection with the Nangate Litigation. We and the Co-Defendants may appeal the judgement, which will require us to collateralize and post an appellate bond of up $35.4 million on or before March 24, 2025. See Note 14 of our consolidated financial statements in Item 8 on this Annual Report on Form 10-K for further discussion.

Off-Balance Sheet Arrangements

As of December 31, 2024, we did not have any off-balance sheet arrangements. As of December 31, 2023, we were guarantor to an outstanding loan held by Gu-Guide, LP. We were released from the guarantee when the loan was repaid in full in July of 2024. See Note 8 and Note 14 of our consolidated financial statements in Item 8 on this Annual Report on Form 10-K for further discussion.

Critical Accounting Policies and Significant Judgments and Estimates

Our consolidated financial statements have been prepared in accordance with GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. We evaluate our estimates and assumptions on an ongoing basis. Actual results may differ from these estimates. To the extent that there are material differences between these estimates and our actual results, our future financial statements will be affected.

The critical accounting policies requiring estimates, assumptions, and judgments that we believe have the most significant impact on our consolidated financial statements are described below. See Note 2 of our consolidated financial statements in Item 8 on this Annual Report on Form 10-K for a description of our other significant accounting policies.

Revenue Recognition

Our revenue is derived principally from software licensing and related maintenance and service. We enter into agreements that include combinations of software and maintenance and services, which are accounted for as separate performance obligations with differing revenue recognition patterns. We recognize revenue pursuant to ASC Topic 606, Revenue from Contracts with Customers. The core principle of this guidance is that an entity should recognize revenue to depict the delivery of software or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for such software or services. To achieve this objective we apply a five-step approach: (1) identify the contract(s) with a customer, (2) identify the performance obligations within the contract, (3) determine the transaction price, (4) allocate the transaction price to the separate performance obligations and (5) recognize revenue when, or as, each performance obligation is satisfied.

Software license revenue is recognized upfront upon delivery of the licensed software. Typically, our software solutions are licensed with PCS which includes unspecified technical enhancements and customer support. The PCS is classified as maintenance and service revenue and is recognized ratably over the term of the maintenance period, as we satisfy the PCS performance obligation over time.

We also offer standard SIP licenses, developed both in house and in partnership with industry-recognized firms. 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 re-invent similar design methodology. SIP licenses offered by us are generally ready to use upon delivery. No modification is required in order for the customer to obtain value for use in their integrated circuit designs. We do not license SIP without support.

Revenue associated with the license of our SIP is classified as software license revenue and recognized as revenue upon delivery of the licensed SIP. Under certain SIP license agreements, we also derive revenue through royalties from customers who agree to pay usage-based fees to embed our SIP into their own SoCs. Royalties are generally recognized as revenue during the period in which the customer sells its solutions which incorporate our SIP. The PCS is classified as maintenance and service revenue and is recognized ratably over the term of the contract, as we satisfy the PCS performance obligation over time.

In connection with our SIP which was developed in partnership with a third party vendor, we have entered into various renewable license agreements under which we have the right to sell the technology we license from the third party vendor. When we license these particular SIP to a customer, we generally act as a principal to the transaction because we control the promised SIP that we deliver to the customer. Consistent with our role as a principal, we recognize SIP revenue on a gross basis. Royalty costs are reported in cost of revenue upon delivery pursuant to the terms and conditions of our contractual obligations with the licensors.

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We also recognized an immaterial portion of our revenue from device characterization and modeling services for the years ended December 31, 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.

Payment terms and conditions vary by contract type, although terms generally include a requirement of payment within 30 days. Invoicing may vary from timing of revenue recognition. In instances where the timing of revenue recognition differs from the timing of invoicing, we have determined our contracts generally do not include a significant financing component.

Non-income related taxes collected from customers and remitted to governmental authorities are recorded on the consolidated balance sheets as accounts receivable and accrued expenses. The collection and payment of these amounts are reported on a net basis in the consolidated statements of loss.

We do not offer a right of return. We warrant to our customers that our software will perform substantially as specified in our current user manuals. We have not experienced significant claims related to software warranties beyond the scope of maintenance support, which we are already obligated to provide. The warranty is not sold, and cannot be purchased, separately. The warranty does not provide any type of additional service to the customer or performance obligation for us.

Our agreements with customers generally require us to indemnify the customer against claims that our software infringes third-party patent, copyright, trademark or other proprietary rights. Such indemnification obligations are generally limited in a variety of industry-standard respects, including by affirming our right to replace an infringing product.

Significant Judgments

Our license agreements enable customers to use our software solutions and to receive certain services. Judgment is required to determine if the promises are separate performance obligations, and if so, to allocate the transaction price to each performance obligation. We use the estimated standalone selling price method to allocate the transaction price for each performance obligation. The estimated standalone selling price is determined using all information reasonably available to us, including market conditions and other observable inputs, historical pricing and the value relationship between our various product and service offerings. The corresponding revenues are recognized as the related performance obligations are satisfied.

Contract Assets and Liabilities

Payment terms and conditions vary by contract type, although terms generally include a requirement of payment within 30 days. The timing of revenue recognition may differ from the timing of invoicing to customers, and these timing differences result in receivables (billed), contract assets (unbilled), or contract liabilities (deferred revenue) on our consolidated balance sheets. We record a contract asset when revenue is recognized prior to the right to invoice, or deferred revenue when revenue is recognized subsequent to invoicing. For time-based software agreements, customers are generally invoiced in equal, quarterly amounts, although some customers are invoiced in single or annual amounts. We record an unbilled receivable when revenue is recognized and we have an unconditional right to invoice and receive payment.

Financing

We are required to adjust promised amounts of consideration for the effects of the time value of money if the timing of the payments provides the customer or us with a significant financing benefit. We consider various factors in assessing whether a financing component exists, including the duration of the contract, market interest rates and the timing of payments. Our contracts do not include a significant financing component requiring adjustment to the transaction price.

Goodwill and Other Intangible Assets

Goodwill represents the excess of the fair value of consideration transferred over the fair value of net identifiable assets acquired. Other intangible assets consist of customer relationships, developed technology, noncompete agreements, and licensed IP which are amortized over their useful lives of five years. Intangible assets are reviewed for impairment whenever events or changes in circumstances indicate an asset’s carrying value may not be recoverable.

Goodwill is not amortized but is tested annually for impairment and more often if there is an indicator of impairment that would more likely than not reduce the fair value of our single reporting unit below its carrying amount. Goodwill is considered impaired if the carrying value of the reporting unit exceeds its fair value.

No indicators of impairment or impairments charges were identified or recorded to goodwill or other intangible assets during the fiscal years ended December 31, 2024 and 2023.

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Stock-Based Compensation

We account for stock-based payments in accordance with the authoritative guidance issued by the FASB on stock-based compensation, which establishes the accounting for transactions in which an entity exchanges its equity instruments for goods or services. Under the provisions of the authoritative guidance, stock-based compensation expense is measured at the grant date, based on the fair value of the award, and is recognized as an expense over the requisite employee service period (generally the vesting period), net of actual forfeitures. For stock-based payment awards that contain performance criteria, stock-based compensation expense is recorded when the achievement of the performance condition is considered probable of achievement and is recorded on a straight-line basis over the requisite service period. If such performance criteria are not met, no compensation expense is recognized and any recognized compensation expense is reversed. For awards with market and service conditions, we recognize stock-based compensation on a straight-line basis for all awards for which the service conditions are met, regardless of whether the market condition is achieved.

Prior to the IPO, we had not recorded stock-based compensation expense, as the RSUs granted under the 2014 Plan carry both a “time-based vesting requirement” and a “liquidity event vesting requirement,” with the satisfaction of the “liquidity event vesting requirement”, an improbable contingency as of December 31, 2023. See Note 11 to our consolidated financial statements in Item 8 on this Annual Report on Form 10-K for additional information.

Prior to January 1, 2024, we valued the awards granted using historical estimates of the fair value of our common stock. These third-party valuations were performed in accordance with the guidance outlined in the American Institute of Certified Public Accountants Accounting and Valuation Guide, Valuation of Privately-Held Company Equity Securities Issued as Compensation. Commencing January 1, 2024 and prior to the IPO, the grant date fair value of the awards was derived from an interpolation based on the contemplated listing price of our anticipated IPO. For RSUs granted after the IPO, we used the closing stock price as reported on Nasdaq on the grant date as the grant date fair value.

The assumptions underlying pre-IPO valuations represented management’s best estimates, which involved inherent uncertainties and the application of management’s judgment. As a result, if we had used significantly different assumptions or estimates, the fair value of our common stock and our stock-based compensation expense could have been materially different.

Emerging Growth Company Status and Extended Transition Period Election

We qualify as an “emerging growth company” pursuant to the provisions of the JOBS Act. For as long as we are an “emerging growth company,” we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies,” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404(b), reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, exemptions from the requirements of holding advisory “say-on-pay” votes on executive compensation, and stockholder advisory votes on golden parachute compensation.

The JOBS Act also permits an emerging growth company like us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. We have elected to “opt-in” to this extended transition period for complying with new or revised accounting standards and, therefore, we will not be subject to the same new or revised accounting standards as other public companies that comply with such new or revised accounting standards on a non-delayed basis.

We are a “smaller reporting company” as defined under the federal securities laws, and will continue to be a smaller reporting company until such time as (i) the market value of our common stock held by non-affiliates is more than $250.0 million or (ii) our annual revenue is more than $100.0 million during the most recently completed fiscal year and the market value of our common stock held by non-affiliates is more than $700.0 million. If we are a smaller reporting company at the time we cease to be an emerging growth company, we may continue to rely on exemptions from certain disclosure requirements that are available to smaller reporting companies. Specifically, as a smaller reporting company we may choose to present only the two most recent fiscal years of audited financial statements in our Annual Report on Form 10-K, we are not required to comply with the auditor attestation requirements of Section 404 and, similar to emerging growth companies, smaller reporting companies have reduced disclosure obligations regarding executive compensation.

Recently Adopted Accounting Pronouncements

See Note 2 to our consolidated financial statements in Item 8 on this Annual Report on Form 10-K for information regarding recently issued accounting pronouncements.