Valens Semiconductor .(VLN) - 2022 Q4 - Annual Report

Introductory Note This section clarifies company references and notes that the report contains estimates and projections subject to uncertainties Company Reference and Industry Information Defines terms for Valens Semiconductor Ltd. and highlights the inherent uncertainties in industry estimates and projections - The terms 'Company,' 'the registrant,' 'our company,' 'the company,' 'we,' 'us,' 'our,' 'ours,' and 'Valens' refer to Valens Semiconductor Ltd., an Israeli company[10] - The report includes estimates, projections, and market data concerning the industry and business, which are subject to uncertainties and risks, as detailed in 'Special Note Regarding Forward-Looking Statements' and 'Item 3.D. Risk Factors'[11] Presentation of Financial and Other Information The company's financial statements adhere to U.S. GAAP, are presented in U.S. dollars, and follow a December 31st fiscal year end Financial Reporting Standards and Fiscal Year Financial statements are prepared under U.S. GAAP in U.S. dollars, with a fiscal year ending December 31st - Financial statements are prepared in accordance with U.S. Generally Accepted Accounting Principles (GAAP) and presented in U.S. dollars[13] - The fiscal year ends on December 31st of each year[14] - References to 'Israeli currency' and 'NIS' refer to New Israeli Shekels[15] Trademarks Valens Semiconductor Ltd. holds proprietary rights to its trademarks, trade names, and service marks, many of which are registered Proprietary Rights and Usage Valens Semiconductor Ltd. owns registered trademarks and trade names, and the report's use of other marks does not imply endorsement - Valens Semiconductor Ltd. has proprietary rights to trademarks, trade names, and service marks, many of which are registered[17] - The use or display of other companies' trademarks, trade names, or service marks in the report does not imply a relationship with, or endorsement or sponsorship by, those companies[17] Market Information Industry and market data, including sizing and growth projections, are management's estimates based on industry sources and experience Industry and Market Data Basis Industry and market data, including growth projections, are management's estimates derived from industry sources and experience - Industry and market data, including market sizing estimates and growth projections, are prepared by management based on industry sources and their knowledge and experience[19] Special Note About Forward-Looking Statements and Risk Factor Summary The report contains forward-looking statements subject to significant risks and uncertainties, including industry cyclicality and competition Nature and Risks of Forward-Looking Statements Forward-looking statements in the report are subject to risks like industry cyclicality, health epidemics, and supply chain issues - The report contains 'forward-looking statements' concerning Valens' future expectations, hopes, beliefs, intentions, or strategies, identifiable by words like 'anticipate,' 'believe,' 'expect,' 'plan,' 'project,' and similar expressions[21] - Forward-looking statements involve risks, uncertainties, and assumptions, and actual results may differ materially. Key factors include semiconductor industry cyclicality, health epidemics (e.g., COVID-19), competition, supply chain management, customer relationships, manufacturing issues, intellectual property, and cyber-attacks[21][23] - Readers should not rely on forward-looking statements as predictions of future events, and the company undertakes no obligation to update them publicly after the report date, except as required by law[22][24] PART I This section covers key information, including directors, offer statistics, selected financial data, and a comprehensive overview of risk factors Item 1. Identity of Directors, Senior Management and Advisers Information regarding the identity of directors, senior management, and advisers is not applicable for this report - Information for Directors and Senior Management is 'Not applicable'[26] - Information for Advisers is 'Not applicable'[27] - Information for Auditors is 'Not applicable'[28] Item 2. Offer Statistics and Expected Timetable Information regarding offer statistics and expected timetable is not applicable - Offer Statistics and Expected Timetable is 'Not applicable'[29] Item 3. Key Information This section covers selected financial data, capitalization, reasons for the offer, use of proceeds, and a comprehensive overview of risk factors A. Selected Financial Data Selected financial data is not applicable for this report - Selected Financial Data is 'Not applicable'[30] B. Capitalization and Indebtedness Information regarding capitalization and indebtedness is not applicable - Capitalization and Indebtedness is 'Not applicable'[31] C. Reasons for the Offer and Use of Proceeds Reasons for the offer and use of proceeds are not applicable - Reasons for the Offer and Use of Proceeds is 'Not applicable'[32] D. Risk Factors Investing in Valens' securities involves high risk due to industry cyclicality, global uncertainties, competition, and regulatory challenges - Investment in Valens' securities involves a high degree of risk, potentially leading to a decline in trading price and loss of investment[33] - Principal risks include the cyclicality of the semiconductor industry, effects of health epidemics (e.g., COVID-19), intense competition, supply chain management failures, disruptions with key customers, difficulties in product adoption, dependence on winning selection processes, manufacturing delays, intellectual property protection issues, and cyber-attacks[33][34] Risks Related to Our Business and Industry The semiconductor industry's cyclical nature, global economic uncertainties, and intense competition pose significant risks to Valens' business - The semiconductor industry is highly cyclical, with significant downturns (e.g., 2008, 2019-2021) and upturns, leading to fluctuations in demand, supply, pricing, and inventory levels[35][36][38] - Global political and economic uncertainty, including trade disputes, currency risks, inflation, and the COVID-19 pandemic, can adversely impact international operations, sales, gross margin, and liquidity[40][41][43] - Downturns in the automotive (18% of 2022 net sales) and audio-video (82% of 2022 net sales) markets could significantly harm financial results, as these markets are sensitive to economic conditions and consumer preferences[51][54] - The company faces intense competition and risks from rapid technological change, short product life cycles, and significant price erosion, requiring continuous and timely introduction of new, cost-effective products[52][53][56] - Failure to accurately estimate customer demand or adjust supply chain volume can lead to excess inventory charges or insufficient supply, resulting in lost revenue and damaged customer relationships[61][63][64] - Disruptions with key customers (top three customers accounted for 32% of 2022 revenues) or failure to secure design wins can adversely affect business, especially in the automotive market with its long design cycles[65][68][77] - Sustained yield problems or other manufacturing delays can lead to lost sales and damaged customer relationships due to the complex nature of semiconductor production[88] - The company's ability to raise future capital may be limited, potentially hindering growth strategies and requiring additional financing through equity or debt, which could dilute shareholders or impose restrictive covenants[89][90] - Exposure to financial risks including currency fluctuations (NIS vs. USD), interest rate changes, liquidity risk, commodity price risk, and credit risk can adversely affect financial results[91] - Difficulty attracting, motivating, and retaining skilled personnel, particularly engineers, poses a risk to product development and market success, exacerbated by intense competition and wage inflation in Israel[93][94][96] - Inability to adequately obtain, maintain, protect, defend, or enforce intellectual property rights, or commercialize products without infringing others' IP, could harm competitive position and lead to significant litigation costs[98][103][104] - Cyber-attacks or breaches of information technology systems could damage reputation, expose the company to liability, disrupt operations, and materially affect financial results[110][114] Risks Related to Laws and Regulation Global operations expose Valens to diverse and evolving laws, including environmental, privacy, and tax regulations, with non-compliance risks - Global operations necessitate compliance with diverse laws (environmental, labor, health, safety, anti-corruption, tax, corporate governance, imports/exports) in Israel, the U.S., and other jurisdictions, with non-compliance potentially leading to fines or sanctions[120][122] - The company is subject to evolving privacy, data protection, and information security regulations (e.g., CCPA, CPRA, GDPR, Israeli PPL) across its markets, with potential for enforcement actions, litigation, fines, and reputational harm for non-compliance[123][125][126][127][130] - Failure to comply with anti-corruption laws (e.g., FCPA) and trade control regulations could result in investigations, significant costs, fines, profit disgorgement, and reputational damage[131][132] - Environmental, health, and safety (EHS) laws and regulations expose the company to liability, requiring costly equipment or process changes, and increasing compliance costs, potentially harming business[133][135][136][137][138] - The IRS may challenge Valens' status as a non-U.S. corporation for U.S. federal income tax purposes under Section 7874 of the Code, which could lead to significant adverse tax consequences, including a higher effective corporate income tax rate[140][142][144] - U.S. investors who are former PTK securityholders face significant legal uncertainties regarding whether the Business Combination qualified as a tax-free reorganization[146] - Changes to tax laws or regulations in Israel, the U.S., and other jurisdictions, or in their interpretation, could significantly increase the effective tax rate and reduce cash flow[148][150] - Transfer pricing rules in multiple jurisdictions could lead to challenges from tax authorities, potentially resulting in additional corporate income tax, penalties, and interest[151] - Changes in government trade policies, including tariffs and export restrictions (e.g., between the U.S. and China), could limit sales, increase costs, and adversely affect results of operations[152] - Non-compliance with applicable export control laws and regulations could lead to government investigations, penalties, and reputational harm, affecting international and domestic revenues[153] - Changing foreign exchange rates, particularly between the NIS and USD, can adversely affect financial results due to remeasurement of foreign currency assets, liabilities, revenue, and expenses[154] Risks Related to Being a Public Company Operating as a public company incurs increased costs, market volatility, and regulatory compliance challenges, including potential PFIC classification - Valens incurs increased costs and management time for compliance as a public company, subject to SEC and NYSE reporting requirements[155] - The market price and trading volume of Valens' ordinary shares and warrants may be volatile and could decline significantly due to factors like financial results, market conditions, analyst coverage, and geopolitical events[156][157][158][186][187][189][190] - Failure to meet NYSE continued listing requirements could result in delisting, negatively affecting security price and liquidity[159][190] - Valens' internal controls over financial reporting may not be effective, and the independent auditor may not attest to their effectiveness, potentially impacting business and reputation[161][162][164][165] - As an 'emerging growth company,' Valens benefits from exemptions from certain disclosure requirements, which could make its securities less attractive to some investors and impact comparability with other public companies[191][192][193][194] - As a 'foreign private issuer,' Valens is exempt from certain U.S. proxy rules and has less frequent reporting obligations, potentially offering less protection to shareholders compared to U.S. domestic issuers[195][197] - There is a risk that Valens could be classified as a Passive Foreign Investment Company (PFIC) for U.S. federal income tax purposes, leading to adverse tax consequences for U.S. investors[198][199][200] - U.S. investors owning at least 10% of Valens' ordinary shares may be subject to adverse U.S. federal income tax consequences if Valens or its non-U.S. subsidiaries are treated as 'controlled foreign corporations'[201][202] Risks Relating to Our Incorporation and Location in Israel Valens' Israeli incorporation exposes it to regional instability, unique legal frameworks, and restrictions on government-granted R&D technology - Political, economic, and geopolitical instability in Israel, including regional conflicts and domestic political changes (e.g., judicial system reforms), could adversely affect Valens' business[168][169][170] - Shareholder rights and responsibilities are governed by Israeli law, which differs from U.S. and other non-Israeli corporate laws, potentially imposing additional obligations on shareholders[172] - Provisions of Israeli law and Valens' articles of association, such as regulations on mergers, special approvals for related-party transactions, and staggered board terms, may delay, prevent, or make undesirable an acquisition of the company[173][174] - Valens has received Israeli government grants for R&D, which impose restrictions under the Innovation Law on transferring or licensing know-how, technology, or manufacturing rights outside Israel without prior IIA approval, potentially requiring payments to the IIA[177][178][179] - Certain tax benefits available to Valens under Israeli law (e.g., 'Preferred Technological Enterprises') require meeting various conditions and may be terminated or reduced, increasing costs and taxes[180] - Enforcing a U.S. judgment against Valens, its officers, and directors in Israel or asserting U.S. securities laws claims in Israel may be difficult due to differences in legal systems and asset locations[181][182] Risks Related to Ownership of Our Shares and Warrants Ownership of Valens' securities faces risks from Israeli takeover laws, dividend policies, market volatility, and adverse U.S. tax implications - Israeli law and Valens' articles of association could prevent a takeover that shareholders consider favorable and potentially reduce the market price of ordinary shares[183] - Valens has never declared or paid cash dividends and does not intend to do so in the foreseeable future, retaining funds for business operations[184] - The market price and trading volume of Valens' ordinary shares and warrants may be volatile and could decline significantly due to various factors, including financial performance, market conditions, and analyst coverage[186][187][188][189] - The company's amended and restated articles of association designate specific exclusive forums for disputes, which may limit shareholders' ability to choose a judicial forum and could increase litigation costs[175][176] - There is a risk that Valens will be a Passive Foreign Investment Company (PFIC) for U.S. federal income tax purposes, which could result in adverse U.S. federal income tax consequences to U.S. investors[198][199][200] - U.S. investors owning at least 10% of Valens' ordinary shares may be subject to adverse U.S. federal income tax consequences if Valens or its non-U.S. subsidiaries are treated as 'controlled foreign corporations'[201][202] Item 4. Information on the Company This section provides comprehensive information about Valens Semiconductor Ltd., including its history, business overview, and organizational structure - Valens' mission is to be a leading global provider of semiconductor solutions for resilient long-reach, high-speed connectivity over simple, low-cost wiring infrastructure in automotive, audio-video, and adjacent markets[208] - Valens is a leading provider of semiconductor products for automotive and audio-video industries, with tens of millions of chipsets deployed globally[209] - Valens' HDBaseT technology is the incumbent standard for wired high-speed audio-video connectivity, co-managed by the HDBaseT Alliance (Valens, LG, Samsung, Sony Pictures)[209][212][213] - Valens Automotive chipsets are key enablers for ADAS and autonomous driving, with its underlying technology selected as the MIPI A-PHY industry standard in 2020 and adopted by IEEE in 2021[209][220][221] - The VA7000 chipset family, the first A-PHY compliant chipsets, shipped engineering samples to leading automotive OEMs and Tier 1s in late 2021, and its ecosystem continued to evolve in 2022[209][210][221] - Valens operates a fabless model, outsourcing manufacturing to third-party foundries (primarily TSMC for wafers), assembly, and testing facilities (e.g., Advanced Semiconductor Engineering, UTAC, STMicroelectronics)[248] - The company manages inventory proactively, based on demand assessments and forecasts, and secured production capacity with vendors through longer-term purchase orders to mitigate supply constraints[250] - Sales channels include a direct sales force, distributors, and independent sales representatives, with approximately 50% of net sales in fiscal year 2022 made to distributors[249] - Valens' intellectual property portfolio includes approximately 116 issued patents and 7 pending applications as of February 1, 2023, covering multi-data type convergence and robust operation under electromagnetic interference[256] - As of December 31, 2022, Valens had 313 employees and contractors, primarily based in Israel, with a focus on engineering and R&D[269] A. History and Development of the Company Valens Semiconductor Ltd. was incorporated in Israel in 2006 and completed a Business Combination with PTK Acquisition Corp. in 2021 - Valens Semiconductor Ltd. was incorporated in Israel on October 26, 2006[204] - On May 25, 2021, Valens entered into a Business Combination Agreement with PTK Acquisition Corp. and Merger Sub, which closed on September 29, 2021, making PTK a wholly-owned subsidiary of Valens[206] Capital Expenditures (2020-2022) | Fiscal Year Ended December 31 | Capital Expenditures (in millions USD) | | :---------------------------- | :----------------------------------- | | 2022 | 1.1 | | 2021 | 1.4 | | 2020 | 0.9 | B. Business Overview Valens is a leading semiconductor provider for automotive and audio-video, leveraging HDBaseT and A-PHY technologies with a fabless model Our Mission Valens aims to be a global leader in semiconductor solutions for resilient, long-reach, high-speed connectivity across various markets - Valens' mission is to be a leading global provider of semiconductor solutions for resilient long-reach, high-speed connectivity over simple, low-cost wiring infrastructure[208] - The company aims to enable cutting-edge innovation in the automotive, audio-video, and other adjacent markets[208] Our Company Valens provides high-speed video and data distribution for automotive and audio-video, with HDBaseT and A-PHY as industry standards - Valens is a leading provider of semiconductor products, enabling resilient long-reach, high-speed video and data distribution for automotive and audio-video industries[209] - Tens of millions of Valens chipsets are deployed in millions of audio-video applications globally[209] - Valens is the incumbent provider for wired high-speed audio-video connectivity products, compliant with the HDBaseT standard, co-managed by the HDBaseT Alliance[209] - Valens Automotive chipsets support ADAS and autonomous driving, with its technology selected as the MIPI A-PHY industry standard in 2020 and adopted by IEEE in 2021[209] Audio-Video Valens' HDBaseT technology is the standard for long-range wired audio-video connectivity, supporting ultra-HD content with zero latency - Valens' HDBaseT technology is the standard for long-range wired connectivity in the audio-video market, used by key manufacturers like Crestron, EPSON, Extron, LG Electronics, Logitech, NEC, Panasonic, Samsung, Siemens, and Sony[212] - HDBaseT enables simultaneous delivery of ultra-high-definition digital video and audio, Ethernet, USB, control signals, and power through a single low-cost, long-reach cable (up to 328 feet/100 meters) with Zero Latency[213][214] - Demand for Valens' audio-video solutions is growing due to trends like work-from-home, hybrid education, and remote healthcare, particularly in corporate (videoconferencing), education (video collaboration systems), and medical (medical imaging devices) verticals[214][215][216][217][218] Automotive Valens has penetrated the automotive market with Mercedes-Benz and its A-PHY standard chipsets for ADAS and autonomous driving - Valens entered the automotive market through engagement with Mercedes-Benz, providing data connectivity for in-vehicle infotainment and telematics systems, with revenues increasing substantially in 2021 and 2022[219] - Valens' technology was selected as the baseline for the MIPI A-PHY standard for high-speed in-vehicle video connectivity in 2020, and adopted by the IEEE Standards Association in 2021[220][221] - The VA7000 chipset family, the first A-PHY compliant chipsets, were shipped as engineering samples to leading automotive OEMs and Tier 1s in late 2021, with a growing ecosystem of partners[221] - Valens' DSP-based technology provides safe, resilient, ultra-high-speed in-vehicle connectivity over standard, low-cost wires, enabling advanced electronics architecture for ADAS, ADS, infotainment, and telematics[222][223][224] - Valens partnered with Mercedes-Benz to power infotainment and telematics systems in S, C, and E-class models (including EVs) and with Stoneridge to enhance tractor-trailer safety through advanced connectivity and vision solutions[225][226] Our Technology Valens' HDBaseT and MIPI A-PHY technologies provide resilient, high-speed, error-free video and data distribution in challenging EMC environments - Valens invented HDBaseT connectivity technology and co-founded the HDBaseT Alliance, establishing it as a global standard for converged ultra-HD video & audio, Ethernet, control, USB, and power over a single cable[227][230] - Valens' technology is specifically designed for high-speed video and data distribution in challenging EMC environments, crucial for the automotive industry[231] - In 2020, Valens' asymmetric technology was selected as the baseline for the MIPI A-PHY standard for high-speed video connectivity in cars, featuring 'on-line' error correction, adaptive equalization, and real-time noise cancelers[232] - Key technological differentiators include validation as a baseline for connectivity standards, multi-gigabit bandwidth of uncompressed content with Zero Latency and error-free links, superior PHY mechanisms for safety and resilience in EMC environments, robustness to automotive challenges, and flexibility to support various protocols[234][235] Our Strengths Valens' strengths include industry standard leadership, disruptive DSP-based solutions, high product quality, and strong customer relationships - Valens is an industry standard leader in both audio-video (HDBaseT) and automotive (MIPI A-PHY) markets, with its VA7000 A-PHY compliant chipsets being the first to ship to leading automotive OEMs and Tier 1s[237] - The company offers disruptive DSP-based technological solutions that provide safe, resilient, high-speed in-vehicle connectivity over low-cost wiring, enabling advanced electronic architectures like software-defined vehicles[237] - Valens maintains high product quality, meeting automotive industry standards (AEC-Q100, ISO-26262) and passing OEM/Tier 1 quality audits, with subcontractors also required to meet applicable standards[237] - A key strength is the ability to leverage technologies and products across audio-video and automotive business units, expanding offerings to new verticals (industrial, medical) with relatively low R&D investment[237] - Valens has strong relationships with major automotive (Mercedes-Benz, through Tier 1s like Bosch, Continental) and audio-video customers (Crestron, EPSON, LG Electronics), and is building a strong ecosystem for A-PHY adoption in automotive[237] Our Growth Opportunities/Strategies Valens plans to grow by enriching market offerings, expanding addressable markets through technology adoption, and increasing global presence - Valens plans to enrich its audio-video and automotive market offerings, including advanced USB generations (USB 3.2) and new interfaces for audio-video, and a wide range of industry-standard compliant solutions for automotive ADAS/AD systems[238] - Strategies include expanding the addressable market by introducing technology, creating de facto choices, attracting dominant industry players, and fostering broad ecosystems[240] - The company intends to increase its global presence by strengthening relationships with existing customers and distributors and enabling channel partners for demand creation and fulfillment[240] - In audio-video, Valens will continue expanding offerings in corporate, education, industrial, medical, and signage markets, leveraging VS3000, VS6320 (USB3.2 Gen1 extension), and VA7000 (multi-camera solution) chipsets[240] - In automotive, the MIPI A-PHY standard, largely based on Valens technology, is optimized for high-bandwidth in-vehicle connectivity, reducing wiring cost and weight, and serving as the foundation for software-defined vehicle architectures[242] - Valens' VA7000 product family is the first on the market to comply with MIPI A-PHY, positioning the company to capture opportunities in ADAS, ADS, and surround-sensor applications (cameras, radars, LiDARs)[242] - In 2022, Valens shipped VA7000 evaluation kits and engineering samples to over 30 potential customers and partners, receiving RFIs from OEMs, and successfully completed EMC testing with JASPAR[242] Company Products Valens offers over 20 high-performance semiconductor products across audio-video and automotive markets - Valens' product portfolio includes over 20 high-performance semiconductors for various technological applications[243] Valens Product Families and Use Cases | Product Family | Market | Key Features/Use Cases | | :--------------- | :----- | :--------------------- | | VS100™ family | Audio-Video | First HDBaseT chipsets, uncompressed ultra-HD video, audio, control, power over single LAN cable, near-zero latency (Spec 1.0) | | VS2000™ family | Audio-Video | Second generation HDBaseT (Spec 2.0), supports ultra-HD video & audio, Ethernet, controls, USB 2.0, power over LAN or fiber, near-zero latency, point-to-point, daisy-chaining, multi-streaming | | VS3000™ family | Audio-Video | First ASIC for long-distance uncompressed 4K@60Hz 4:4:4, HDMI 2.0 (18Gbps), HDCP, 1Gbps Ethernet, USB 2.0, controls, power over Cat 6A, Zero Latency (Spec 3.0) | | VA6000™ family | Audio-Video (adapted) | Small-form factor, cost-effective, flexible solution for convergence of audio (I2S, S/PDIF), Ethernet, USB 2.0, controls with Zero Latency over single UTP cable (leveraged from automotive) | | VA7000™ family | Audio-Video (adapted) | Low-power, small-form factor chipset for camera serial interface (CSI) extension over low-cost cable, ideal for multiple cameras in Industrial, Medical, videoconferencing | | Valens USB and Power Extender | Audio-Video | Plug-and-play solution to extend USB and power over single standard category cable up to 328ft/100m | | VA6000™ family | Automotive | First chipsets for Automotive, highest bandwidth long-reach symmetric solution deployed in vehicles, aggregates multiple interfaces for infotainment and telematics, resilient, multi-gig connectivity over simple wiring. VA6003 derivative offers significant power reduction | | VA7000™ family | Automotive | Asymmetric automotive chipsets, supports CSI-2-based cameras, radars, LiDARs, sensors, link speeds up to 8Gbps over standard in-vehicle wires (up to 15 meters), first MIPI A-PHY compliant, supports multi-gig over low-cost unshielded cables | Sales, Marketing and Customer Support Valens sells globally through direct sales and distributors, providing technical support and marketing to build brand awareness - Valens sells products worldwide through direct sales, distributors, and independent sales representatives[249] - Approximately 50% of net sales in fiscal year 2022 were made to distributors (54% in 2021)[249] - Direct sales force and applications engineers provide specialized technical support to customers, fostering relationships and understanding future product needs[251] - The internal marketing organization focuses on brand awareness, market research, and demand generation through website management, articles, advertisements, and industry events[252] Customers Valens serves over 100 customers, including major audio-video manufacturers and automotive OEMs/Tier 1 suppliers, with top three customers representing 32% of 2022 revenue - Valens has over 100 paying customers, including major audio-video manufacturers and automotive OEMs/Tier 1 suppliers[253] - In 2022, the top three customers collectively represented approximately 32% of total revenue (30% in 2021, 39% in 2020)[253] - In the automotive space, Valens promotes products to OEMs (final decision-makers) and Tier 2 suppliers, with actual sales made to Tier 1s, typically based on short-term purchase orders[254] Competition The semiconductor industry is highly competitive, requiring continuous innovation, advanced manufacturing, and cost-effectiveness for success - The semiconductor industry is highly competitive, marked by constant and rapid technological change[255] - Competitors range from large international companies to smaller specialists, with a trend towards consolidation[255] - Valens' ability to compete relies on identifying market trends, introducing innovative products, implementing advanced manufacturing, maintaining product performance and quality, and cost-effective manufacturing[255] Intellectual Property Valens' IP portfolio, including 116 issued patents, is a key competitive advantage, protected by various legal mechanisms - Valens' intellectual property portfolio is a significant competitive advantage, protected by patents, trade secrets, trademarks, copyrights, and non-disclosure agreements[256] - As of February 1, 2023, the company owned approximately 116 issued patents and 7 pending patent applications in key regions (USA, China, Japan, South Korea, EPO), covering multi-data type convergence and robust operation under electromagnetic interference[256] - Proprietary, internally developed know-how and hardware-based solutions (integrated circuits with binary code software) are difficult for competitors to duplicate[257] - Risks include the possibility that pending patent applications may not be granted, existing IP may be challenged or circumvented, and future litigation over IP rights may occur[258] Regulation Valens' global operations are subject to diverse environmental, labor, safety, export control, and data privacy regulations, with non-compliance risks - Valens' operations are subject to environmental, labor, health, safety, export control, and other laws in Israel, the U.S., and other jurisdictions[261] - Non-compliance with these regulations can result in significant fines, civil/criminal costs, property damage claims, or suspension of operating permits[261] - The company collects personal information and is subject to various privacy, data protection, and information security laws globally, including CCPA, CPRA, GDPR, and Israeli PPL[262][263][264][265] - Failure to comply with data privacy laws could lead to enforcement actions, litigation, fines, sanctions, damage to reputation, and increased compliance obligations[266][267] Human Capital Valens' success depends on attracting and retaining skilled engineering personnel in a competitive Israeli market, with 313 employees as of 2022 - Valens' success depends on attracting, motivating, and retaining its workforce, especially engineering and technical personnel, in a highly competitive market in Israel[268] - As of December 31, 2022, the company had 313 employees and contractors, primarily based in Israel[269] - The R&D team has diverse backgrounds and strong capabilities in engineering, analog mix signal, DSP, VLSI, and software[269] - Valens fosters an entrepreneurial culture and measures employee engagement through voluntary attrition rate and feedback[269] Facilities Valens' principal executive office is in Hod Hasharon, Israel, with additional leased offices globally, all deemed adequate - Valens' principal executive office is located in Hod Hasharon, Israel[270] - The company also has offices in the northern part of Israel, the United States, Asia, and Europe[270] - All offices are leased, and current facilities are considered adequate for immediate needs[270] Legal Proceedings Valens is not currently involved in any legal proceedings that would materially adversely affect its business or financial condition - Valens may become a party to various litigation matters incidental to its business from time to time[271] - Currently, there are no legal proceedings whose resolution would have a material adverse effect on the company's business, prospects, financial condition, liquidity, results of operation, cash flows, or capital levels[271] C. Organizational Structure Valens Semiconductor Ltd. operates with wholly-owned subsidiaries in the U.S., China, Germany, and Japan Valens Semiconductor Ltd. Subsidiaries (as of December 31, 2022) | Name of Subsidiary | Jurisdiction of Organization | | :----------------------------- | :--------------------------- | | Valens Semiconductor Inc. | U.S. (Delaware) | | Valens Merger Sub Inc. | U.S. (Delaware) | | Valens Trading (Shanghai) Co. Ltd. | China | | Valens Semiconductor GmbH | Germany | | Valens Japan Ltd. | Japan | - All listed subsidiaries are 100% owned by Valens Semiconductor Ltd[272] D. Property, Plants and Equipment Valens' headquarters in Israel and other global offices are leased, with current facilities considered adequate for immediate needs - Corporate headquarters in Hod Hasharon, Israel, occupies approximately 59,201 square feet (5,500 square meters) under a lease expiring in February 2024, with an option to extend until February 2025[273] - Additional offices are located in Texas, USA (1,760 sq ft, lease expires Dec 2024), Tokyo, Japan (280 sq ft, lease expires Nov 2023), and Shenzhen, China (2,152 sq ft, lease expires Oct 2024)[274] - Offices outside Israel support sales, marketing, services, and research and development functions[274] E. Unresolved Staff Comments There are no unresolved staff comments - Unresolved Staff Comments is 'Not applicable'[275] Item 5. Operating and Financial Review and Prospects This section discusses Valens' operating results, liquidity, and capital resources, highlighting revenue growth, gross margin trends, and key accounting policies A. Operating Results Valens achieved significant revenue growth in 2022, driven by both audio-video and automotive segments, despite a slight gross margin decrease - Valens is a leading provider of semiconductor products for resilient long-reach, high-speed video and data distribution in the automotive and audio-video industries[277] - The company's HDBaseT technology is a standard in the audio-video market, enabling plug-and-play digital connectivity for various verticals, with growing demand from remote communication trends[278][279][282] - Valens has made significant inroads in the automotive market, with its high-speed symmetric connectivity solution deployed in Mercedes-Benz models and its MIPI A-PHY based VA7000 chipsets gaining momentum for ADAS and autonomous driving[283][284][285][286][287][288][289][290][291][292][293][294][295] - Future revenue is highly dependent on continued investment in new products and success in winning design awards from customers, with automotive design cycles being substantially longer[297] - Valens achieved major design wins for its VS3000 product family in audio-video, supporting uncompressed 4K60@4:4:4 video distribution, and is in mass production with Mercedes-Benz for automotive infotainment[299][301] - The company is focused on achieving design wins for its new VA7000 chipset family, which is also suitable for audio-video applications like medical, industrial, and IoT[303] - The semiconductor industry is cyclical, characterized by rapid technological change, product obsolescence, and competitive pricing pressures, which can lead to significant market corrections[311][312][313][314] - Gross margin is affected by ASPs, product mix (audio-video vs. automotive, and product generations), material costs, yields, and manufacturing efficiencies. A shift towards automotive revenue is expected to erode gross margin[315][338] Key Financial and Operating Metrics (2020-2022) | Metric | 2022 (in thousands USD) | 2021 (in thousands USD) | 2020 (in thousands USD) | | :-------------------------------------- | :---------------------- | :---------------------- | :---------------------- | | Revenues | 90,715 | 70,684 | 56,910 | | Gross profit | 63,390 | 50,579 | 43,478 | | % Gross margin | 69.9% | 71.6% | 76.4% | | Net loss | (27,667) | (26,534) | (19,635) | | Net loss margin | (30.5)% | (37.5)% | (34.5)% | | Working capital | 163,721 | 183,332 | 65,213 | | Cash, cash equivalents and short-term deposits | 148,387 | 174,359 | 61,570 | | Net cash used in operating activities | (22,095) | (21,609) | (19,606) | | Adjusted EBITDA loss (Non-GAAP) | (14,903) | (16,098) | (16,366) | | Adjusted EBITDA Margin (Non-GAAP) | (16.4)% | (22.8)% | (28.8)% | | Book to bill | 0.84 | 1.69 | 1.1 | Consolidated Statements of Operations (2021 vs. 2022) | Metric (in thousands USD) | 2022 | 2021 | Change | % Change | | :------------------------ | :------- | :------- | :------- | :------- | | Revenues | 90,715 | 70,684 | 20,031 | 28.3% | | Cost of revenue | (27,325) | (20,105) | (7,220) | 35.9% | | Gross profit | 63,390 | 50,579 | 12,811 | 25.3% | | Operating expenses | (91,759) | (77,645) | (14,114) | 18.2% | | Operating loss | (28,369) | (27,066) | (1,303) | 4.8% | | Net loss | (27,667) | (26,534) | (1,133) | 4.3% | - Total revenues increased by $20.0 million (28.3%) in 2022 compared to 2021, driven by increased chip sales and product price updates implemented in late 2021[353] - Audio-video revenues increased by $11.7 million (18.7%) in 2022, primarily due to market recovery from COVID-19 and high demand in corporate, education, and medical verticals, supported by the successful adoption of the VS3000 product family[356][357] - Automotive revenues increased by $8.3 million (105.2%) in 2022, mainly due to increased units sold for the Mercedes-Benz project and expansion into additional car models[358] - Cost of revenues increased by $7.2 million (35.9%) in 2022, attributed to higher chip sales volume and increased product costs from supply-chain vendors[359] - Gross profit increased to $63.4 million in 2022, but gross margin decreased to 69.9% (from 71.6% in 2021) due to increased supply-chain costs (partially offset by price increases) and a higher percentage of lower-margin automotive revenue (17.8% of total revenue in 2022 vs. 11.1% in 2021)[360] - Automotive gross profit increased to $5.0 million (30.7% margin) in 2022 from $1.7 million (21.2% margin) in 2021, driven by higher volumes, improved production yield, and stable fixed costs[363] - Research and development expenses increased by $11.3 million (24.2%) in 2022, primarily due to accelerated development of VS6320, VA7000 (including $4.2 million for mask-sets), and the next-gen VA7100, requiring more resources and increased payroll expenses[365][366] - Sales and marketing expenses increased by $2.7 million (19.3%) in 2022, mainly due to higher payroll expenses from increased headcount to support VS3000 and VA7000 promotion, stock-based compensation, and resumed travel/exhibition expenses[368][369][370][371] - General and administrative expenses remained similar in 2022 ($16.6 million) compared to 2021, despite increased payroll and professional services costs, partially offset by a reduced D&O insurance premium towards year-end[372][373][374][375][376] - Financial expenses, net, increased by $2.9 million in 2022, primarily due to a $4.3 million financial expense from foreign currency exchange differences (NIS devaluation against USD) and higher interest income ($2.3 million) from deposits[377] - Net loss increased by $1.1 million (4.3%) in 2022, driven by increased operating expenses and financial expenses, partially offset by higher gross profit and a $3.1 million gain from the change in fair value of Forfeiture Shares[377][378] B. Liquidity and Capital Resources Valens reported $167.4 million in shareholders' equity and $148.4 million in cash as of December 31, 2022, deemed sufficient for the next 12 months - As of December 31, 2022, accumulated shareholders' equity was $167.4 million, down from $182.2 million in 2021, mainly due to a $27.7 million net loss, partially offset by $12.1 million in stock-based compensation and $0.8 million from stock option exercises[379][380] - Working capital was $163.7 million as of December 31, 2022 ($183.3 million in 2021), with cash, cash equivalents, and short-term deposits totaling $148.4 million ($174.4 million in 2021)[382] - The company believes its cash, cash equivalents, and short-term deposits are sufficient to support working capital needs for at least the next 12 months[384] Cash Flows Summary (2021-2022) | Cash Flow Data (in thousands USD) | 2022 | 2021 | | :-------------------------------- | :------- | :------- | | Net cash used in operating activities | (22,095) | (21,609) | | Net cash (used in) investing activities | (11,729) | (84,163) | | Net cash provided by financing activities | 822 | 135,431 | | Effect of exchange rate changed on cash and cash equivalents | (3,765) | 816 | | Net increase (decrease) in cash and cash equivalents | (37,767) | 30,475 | - Net cash used in operating activities was $22.1 million in 2022, primarily from a $27.7 million net loss, offset by non-cash expenses and an increase in inventories to $23.8 million (from $9.3 million in 2021) to support anticipated automotive revenue growth[389][390] - Net cash used in investing activities was $11.7 million in 2022, mainly for net investments in short-term deposits ($10.6 million) and property/equipment purchases ($1.1 million)[392] - Net cash provided by financing activities was $0.8 million in 2022, solely from proceeds from stock options exercised by grantees[394] Contractual Obligations (as of December 31, 2022) | Obligation Type | 2023 (in thousands USD) | 2024 (in thousands USD) | 2025 (in thousands USD) | Thereafter (in thousands USD) | | :---------------------------------- | :---------------------- | :---------------------- | :---------------------- | :---------------------------- | | Operating Leases | 1,599 | 318 | 84 | - | | Non-cancellable purchase obligations: | | | | | | To supply chain vendors | 19,418 | - | - | - | | To intellectual property vendors (including development tools) | 2,522 | 162 | 98 | - | | Total contractual obligations | 23,539 | 480 | 182 | - | - The company had no off-balance sheet arrangements during the periods presented[399] C. Research and Development, Patents and Licenses, etc. This section cross-references other parts of the report for details on research and development, patents, and licenses - Information on research and development, patents, and licenses is cross-referenced to 'Item 4. Information on the Company – B. Business overview' and 'Item 5. Operating and financial review and prospects – A. Operating results – results of operations'[400] D. Trend Information This section cross-references 'Item 5. Operating and financial review and prospects – A. Operating results' for trend information - Trend information is cross-referenced to 'Item 5. Operating and financial review and prospects – A. Operating results'[400] E. Critical Accounting Policies and Estimates Valens' financial statements rely on critical accounting policies and estimates for revenue, stock-based compensation, and inventory valuation - Critical accounting policies and estimates materially affect consolidated financial statements and involve difficult, subjective, or complex judgments by management[401] - Revenue is recognized when a customer obtains control of promised goods or services, typically upon shipment. Material rights for free or discounted products are accounted for as separate performance obligations[404][405][406] - Stock-based compensation (options and RSUs) is recorded at fair value on the grant date and expensed over the vesting period, using the Black-Scholes model for options with assumptions for volatility, risk-free interest, dividend yield, and expected term[408][409][417][418][419] - Forfeiture Shares are classified as a Level 3 liability and re-measured at fair value at each balance sheet date, with changes recognized in the statement of operations, using the Monte Carlo method for valuation[424][425] - Inventories are presented at the lower of cost or net realizable value (FIFO basis) and are reduced for write-downs based on periodic reviews for slow-moving or obsolete parts[426] - Valens adopted ASU No. 2016-02, Leases ('Topic 842'), on January 1, 2022, recognizing operating lease right-of-use (ROU) assets and corresponding lease liabilities on the balance sheet[436] Item 6. Directors, Senior Management and Employees This section details Valens' executive officers, board of directors, compensation arrangements, equity incentive plans, and corporate governance practices A. Directors and Senior Management Valens' executive officers and board of directors are listed, with no family relationships or special election arrangements Valens Executive Officers and Directors (as of December 31, 2022) | Name | Age | Position | | :--------------- | :-- | :------------------------------------- | | Executive Officers | | | | Gideon Ben Zvi | 62 | Chief Executive Officer and Director | | Dror Heldenberg | 54 | Chief Financial Officer | | Gabi Shriki | 53 | SVP, Head of Audio Video Business | | Gideon Kedem | 62 | SVP, Head of Automotive Business | | David Chairman | 53 | SVP, R&D | | Directors | | | | Peter Mertens | 61 | Chairman of the Board | | Yahal Zilka | 65 | Director | | Dr. Eyal Kishon | 63 | Director | | Dror Jerushalmi | 61 | Director | | Moshe Lichtman | 64 | Director | | Michael Linse | 48 | Director | | Ker Zhang | 60 | Director | | Adi Toledano Yarel | 48 | Director | - There are no family relationships between any executive officers and directors[452] - There are no arrangements or understandings with major shareholders or others for the selection of executive officers or directors[453] B. Compensation Director and executive compensation, totaling $7.0 million in 2022, is subject to Israeli law approvals and includes equity incentive plans - Compensation for public company directors and executive officers requires approval from the compensation committee, board of directors, and shareholders under Israeli law, with special majority votes for arrangements inconsistent with the compensation policy[454][455][457] - The aggregate compensation expensed for directors and executive officers in 2022 was $7.0 million, including base salary, bonuses, share-based compensation, and benefits[459] Summary Compensation Table for Five Most Highly Compensated Covered Officers (2022) | Name and Principal Position | Base salary (thousands USD) | Benefits and perquisites (thousands USD) | Bonus payments (thousands USD) | Equity-based compensation (thousands USD) | Total (thousands USD) | | :-------------------------- | :-------------------------- | :--------------------------------------- | :----------------------------- | :---------------------------------------- | :-------------------- | | Gideon Ben Zvi, CEO | 352 | 67 | 188 | 1,437 | 2,044 | | Dror Heldenberg, CFO | 277 | 57 | 138 | 554 | 1,026 | | Gideon Kedem, SVP, Head of Automotive Business | 235 | 50 | 52 | 458 | 795 | | David Chairman, SVP, R&D | 220 | 49 | 71 | 333 | 673 | | Gabi Shriki, SVP, Head of Audio-Video Business | 242 | 52 | 84 | 212 | 590 | - As of December 31, 2022, options to purchase 6,725,657 Ordinary Shares (weighted average exercise price $0.97) and 442,209 Restricted Stock Units (RSUs) were outstanding for executive officers and directors as a group[460] - Non-employee directors receive annual cash payments ($40,000, or $96,000 for the Chairperson) and annual equity awards (RSUs and options) to vest over one to three years[466] - Valens maintains the 2007, 2012, and 2021 Share Option Plans, and the 2021 Employee Share Purchase Plan (ESPP) to grant equity-based incentive awards to employees, directors, officers, and consultants[469][484][500][519] - As of December 31, 2022, 13,948,149 options (weighted average exercise price $0.85) and 3,779,716 RSUs (weighted average grant date fair value $6.08) were outstanding[902][908] - Unrecognized compensation costs for unvested stock options totaled $8.116 million (expected to be expensed over 1.89 years), and for unvested RSUs totaled $16.516 million (expected over 3.08 years)[906][908] C. Board Practices Valens, as an Israeli foreign private issuer, follows Israeli corporate governance practices, including a staggered board and independent committees - Valens, as an Israeli company and 'foreign private issuer,' opts out of certain Companies Law requirements (e.g., external directors) and NYSE corporate governance rules (e.g., quorum, shareholder approval), following Israeli practices[529][530][531] - The board of directors consists of no less than three and no more than eleven directors, divided into three classes with staggered three-year terms[534][538] - The board has determined that Yahal Zilka, Moshe Lichtman, Michael Linse, Peter Mertens, Eyal Kishon, Ker Zhang, and Adi Toledano Yarel are 'independent directors' under NYSE listing standards and SEC rules[542] - The Audit Committee consists of Adi Yarel-Toledano (chairperson), Peter Mertens, and Ker Zhang, all meeting independence and financial literacy requirements[54