A. Operating Results This operating and financial review should be read together with the section captioned “Part I, Item 4, Information on the Company—B. Business Overview” and our consolidated financial statements and the related notes to those statements prepared in accordance with U.S. GAAP and included elsewhere in this Annual Report. Among other things, those financial statements include more detailed information regarding the basis of preparation for the following information. For discussion related to our financial condition, changes in financial condition, and the results of operations for 2024 compared to 2023, refer to PartI, Item 5. Operating and Financial Review and Prospects, in our Annual Report on Form 20-F for the fiscal year ended December 31, 2024, which was filed with the U.S. Securities and Exchange Commission on February 26, 2025 and which is hereby incorporated by reference. This discussion contains forward-looking statements that involve risks and uncertainties. As a result of many factors, such as those set forth under “Part I, Item 3.D. Risk Factors” and elsewhere in this Annual Report, our actual results may differ materially from those anticipated in these forward-looking statements. Please see “Special Note About Forward-Looking Statements and Risk Factor Summary” in this Annual Report. Overview Valens is the high-performance connectivity company, providing chipsets that allow for the wired distribution of large amounts of data over long distances. Operating in a fabless model, Valens has two main business units. The first is the Cross-Industry Business Unit, which encompasses Professional Audio-Video (verticals include Video Conferencing, Education, Digital Signage, Entertainment), Industrial Vision (verticals include Machine Vision and Embedded Vision) and Medical. The second is the Automotive Business Unit (verticals include In-Cabin, ADAS, and Long Vehicles). In professional audio-video, Valens is the incumbent provider of chipsets that comply with the HDBaseT standard. Backed by the HDBaseT Alliance, which is co-managed by Valens, LG, Samsung and Sony Pictures, HDBaseT gained the Company a leadership position in the market. As of December 2025, Valens has sold tens of millions of HDBaseT chipsets, with a customer base comprised of almost all of the world’s major consumer electronics companies. Valens is also leveraging its core technology to expand into new markets that have vast business potential, including industrial vision and medical endoscopes. In the automotive industry, Valens is the leading provider of chipsets that comply with MIPI A-PHY, a connectivity standard that is gaining traction as an enabler for Advanced Driver-Assistance Systems (“ADAS”) and Automated Driving Systems (“ADS”). Valens is the first in the industry to offer A-PHY-compliant chipsets, and the first to achieve design wins with global OEMs. Valens’ first generation of automotive connectivity chipsets is the solution powering the Mercedes-Benz MBUX infotainment system, across all Mercedes-Benz passenger car models. Revenues from this engagement began in 2021 and continued since. Key Factors and Trends Affecting Our Performance We believe that our performance and future success depend on several factors that present significant opportunities for us but also pose risks and challenges, including those discussed below and in the section entitled “Risk Factors.” Design Wins with New and Existing Customers Valens’ technology is a key enabling technology for both audio-video applications and the automotive market. Since our solutions are sold as part of a broader platform developed by the OEMs and system vendors, it is critical that we achieve a deep level of cooperation, partnership, and joint planning by technical and strategic teams to win designs with these customers. Our customers are continuously developing new products in existing and new application areas, and we work closely with them to understand their product roadmaps and strategies. 46 The time required to achieve design wins varies based on the market and application. The design cycle in the automotive market tends to be substantially longer and more onerous than in most of the verticals comprising our Cross-Industry Business. The design win cycle is typically divided to three stages: in the first stage, the customer evaluates our chipsets and decides whether to embed them into its own new product. In Professional Audio Video, this stage can take around six months. In Industrial Vision, this stage can take longer, i.e., between six to twelve months. In the Automotive segment, this stage can take between twelve to eighteen months. In the second stage, the customer develops the new product, in which our chipset is embedded. In Professional Audio Video, this stage can take around six to nine months. In Industrial Vision, this stage may take longer - between nine to twelve months. In Automotive, this stage is the longest - between twenty-four and thirty months. During the first and second stages, Valens does not generate any meaningful revenues. However, as of the completion of the development of the product by the customer and its gradual transit into mass production, Valens generates revenues from the sales of the chipset that was embedded inside the customer’s product, which usually has a life cycle of three to five years in Professional Audio Video or five to seven years in Industrial Vision and Automotive. As a result, our future revenue is highly dependent on our continued investment in new products and our success at winning design awards from our customers. The process is typically lengthy and may require us to incur significant design and development expenditures in pursuit of a design win, with no assurance that our solutions will be selected. As a result, the loss of any key design win or any significant delay in the ramp-up of volume production of the customers’ products into which our chipset is embedded could adversely affect our business. In addition, volume production is contingent upon the successful market introduction and acceptance of our customers’ end products, which may be affected by several factors beyond our control. Continuing to Acquire New Customers Our operating results and growth opportunity depend, in part, on our ability to attract new customers. We currently have strong base of paying customers, and we continue to focus our efforts on increasing the number of customers that use our products. We continuously seek to improve the connectivity solutions we offer, at higher bandwidth, zero latency, and lower costs. We believe this creates significant opportunities for our Company. For ADAS and autonomous driving, OEMs are incorporating a growing number of sensors, cameras and displays inside their vehicles, as the industry shifts toward centralized computing, sensor fusion, zonal architecture, and software-defined vehicles. The volume of data that must be transported and processed across the vehicle is increasing dramatically, resulting in massive bandwidth requirements that we expect to continue growing in the coming years. This is driving an unprecedented demand for high-performance in-vehicle connectivity. In addition, as safety remains a top priority for automotive OEMs, there is a growing proliferation of ADAS systems across vehicle models, many of which combine cameras with radars and lidars. Valens is agnostic to the types of sensors being deployed in cars, since they all require long-reach, zero latency, and high-speed connectivity in order to detect and act upon safety events within micro-seconds. Customer Demand, Orders and Forecasts In 2025 we experienced an increase in demand for our semiconductor products in our Cross Industry Business segment. Our customers entered into 2024 with high inventory levels and were more careful with their inventory building in light of the shorter lead-times that were back to normal levels after a period of a shortage of semiconductor products, and the high-interest rate economic environment. This was in addition to a slow inventory digestion by our Cross-Industry Business customers, mainly in the Professional Audio-Video vertical. 2025 was characterized by a recovery of the market and an increased demand for our products, mainly in the Professional Audio-Video vertical. In the Automotive segment, the demand for our products is affected by the demand for Mercedes-Benz cars, which in turn, can be affected by changes in tariff rates. 2025 was characterized by a continuation of decline in the number of product units sold by us for installation in Mercedes-Benz cars, coupled with an erosion in the average selling price (ASP). Although we often receive a 12-month forecast from our customers, these forecasts, are generally not binding and may be unreliable. Our sales are typically made based on purchase orders with fixed volumes and according to our then applicable lead times. These purchase orders are usually non-cancellable, although we provide our customers with restricted rescheduling options. 47 Product and Research & Development We view research and development expenditures as investments that enable us to grow our business over time. These investments consist primarily of costs incurred in performing research and development activities including compensation, pre-production engineering mask costs, engineering services, development tools cost, third parties’ intellectual property (IP) license fees, depreciation of equipment, prototype wafers, packaging, test costs as well as overhead costs. Development of a product is deemed complete when it is qualified through reviews and tests for performance and reliability. Post qualification product costs are included in the cost of goods sold. Cyclical Nature of the Semiconductor Industry The semiconductor industry is cyclical in nature and characterized by fluctuating manufacturing capacity, increasingly rapid technological change, product obsolescence, competitive pricing pressures, evolving standards, short product life cycles and fluctuations in product supply and demand. New technology may result in sudden changes in system designs or platform changes that may render some of our audio-video and automotive connectivity products obsolete and require us to devote significant research and development resources to compete effectively. Periods of rapid growth and capacity expansion are occasionally followed by significant market corrections in which sales decline, inventories accumulate, and facilities go underutilized. During periods of expansion, our margins generally improve as fixed costs are spread over higher manufacturing volumes and unit sales. 2025 was generally characterized by a recovery trend that resulted in higher demand for our products, following the down-cycle in 2024 that was caused by a slow pace of inventory digestion. The cyclical nature of the semiconductor industry may have material adverse effect on our overall business, financial condition, and results of operations as more broadly set forth in this Annual Report under “Part I, Item 3, D. Risk Factors.” Manufacturing Costs and Product Mix Gross margins have been, and will continue to be, affected by a variety of factors, including ASPs of our products, product mix in a given period (which is composed of the product mix between our audio-video products and automotive chips and the mix of different product generations within the audio-video segment), material costs, yields, manufacturing costs and efficiency. We believe the primary driver of gross margin is the ASP negotiated between us and our customers relative to material costs and yields. To maintain the competitiveness of our products, we are required from time to time to adjust our products’ ASPs. We continually monitor and work to reduce the cost of our products and improve the potential value of the solutions provided to our customers, as we target new design win opportunities and manage the product life cycles of our existing customer designs. We maintain a close relationship with our suppliers and subcontractors to improve quality, increase yields and lower manufacturing costs. Our gross margin may fluctuate on a quarterly basis, due to changes in ASPs, product mix, new product introductions, transition ramp-up of manufacturing, customer demand and other manufacturing costs. For more on the cyclical nature of the semiconductor industry, which in turn can have a material adverse effect on the manufacturing costs and overall business, financial condition, and results of operations see “Part I, Item 3, D. Risk Factors” of this Annual Report. Key Financial and Operating Metrics We regularly monitor several financial and operating metrics in order to measure our current performance and project our future performance. These metrics for the years ended December 31, 2025, 2024 and 2023 aid us in developing and refining our growth strategies and making strategic decisions. Year Ended December 31, 2025 2024 2023 (dollars in thousands) Revenues 70,625 57,859 84,161 Gross profit 44,085 34,277 52,592 % Gross margin 62.4 % 59.2 % 62.5 % Net loss (31,583 ) (36,583 ) (19,661 ) Net loss margin (44.7 )% (63.2 )% (23.4 )% Working capital 95,724 133,577 158,763 Cash, cash equivalents and short-term deposits 92,596 130,955 142,020 Net cash provided by (used in) operating activities (12,718 ) 1,019 (6,359 ) Non-GAAP Financial Data: Adjusted EBITDA loss (1) (16,915 ) (21,063 ) (10,259 ) Adjusted EBITDA Margin (1) (24.0 )% (36.4 )% (12.2 )% Book to bill 0.99 0.99 0.64 (1) Non-GAAP measure. Refer to “Non-GAAP Financial Measures”. See below for an explanation and reconciliation to closest equivalent GAAP metrics. 48 Revenues See “—Components of Our Results of Operations—Revenues.” Gross Margin See “—Components of Our Results of Operations—Gross Profit.” Net income (loss) Net income (loss) is calculated as presented on our consolidated statement of operations and comprehensive income (loss) for the periods presented. Net income (loss) margin Net income (loss) margin is net income (loss) divided by our revenues. Working Capital Working capital is calculated as Total Current Assets, less Total Current Liabilities, as of the last day of the period. Cash, cash equivalents and short-term deposits Cash, cash equivalents and short-term deposits is as of the last day of the period. Cash and Cash Equivalents and Short-term Deposits Cash equivalents are short-term highly liquid investments that are readily convertible to cash with original maturities of three months or less. Short-term deposits are bank deposits with maturities over three months and up to one year. As of December 31, 2025, and 2024, short-term deposits denominated in U.S. dollars and New Israeli Shekel (NIS), bore average interest rate of 4.3% and 5.0%, respectively. Short-term deposits are presented on the balance sheet at their cost, including accrued interest. Restricted Short-term Deposit Restricted bank deposit is a cash amount related to a bank guarantee in connection with hedging activity. Such a deposit is stated at cost including accrued interest, which approximates market value. Non-GAAP Financial Measures We are presenting the following non-GAAP financial measures because we use them, among other things, as key measures for our management and board of directors in managing our business and evaluating our performance. We believe they also provide supplemental information that may be useful to investors. These non-GAAP measures are subject to significant limitations, including those identified below. In addition, other companies may use similarly titled measures but calculate them differently, which reduces their usefulness as comparative measures. Non-GAAP measures should not be considered in isolation or as a substitute for GAAP measures. They should be considered as supplementary information in addition to GAAP operating and financial performance measures. We believe excluding items that neither relate to the ordinary course of business nor reflect our underlying business performance, such as the amortization of intangible assets, change in earnout liability and certain batch production incident expenses (income), enables management and our investors to compare our underlying business performance from period-to-period. Accordingly, we believe these adjustments facilitate a useful evaluation of our current operating performance and comparison to our past operating performance and provide investors with additional means to evaluate cost and expense trends. In addition, we also believe these adjustments enhance comparability of our financial performance against those of other technology companies. Our non-GAAP financial measures reflect adjustments for amortization expenses for our acquisition-related intangible assets. We exclude amortization expenses for our acquisition-related intangible assets for purposes of calculating certain non-GAAP measures, although revenue is generated, in part, by these intangible assets, to eliminate the impact of these non-cash charges that are inconsistent in size and are significantly impacted by the timing and valuation of our acquisitions. 49 Adjusted EBITDA We believe that Adjusted EBITDA is useful because it allows us and others to measure our performance without regard to items such as share-based compensation expense, depreciation, amortization and financial income, net and income taxes, as well as other items that can vary substantially depending on our financing and capital structure, and the method by which assets are acquired. We use Adjusted EBITDA and GAAP financial measures for planning purposes, including the preparation of our annual operating budget, as a measure of performance and the effectiveness of our business strategies, and in communications with our board of directors. We also use Adjusted EBITDA as a metric for determining payment of cash or other incentive compensation. Limitations on the use of Adjusted EBITDA include the following: ● Although depreciation expense is a non-cash charge, the assets being depreciated may have to be replaced in the future, and Adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements; ● Adjusted EBITDA excludes share-based compensation expense, which has been, and will continue to be for the foreseeable future, a significant recurring expense for our business and an important part of our compensation strategy; ● Adjusted EBITDA does not reflect, to the extent applicable for a period presented: (1) changes in, or cash requirements for, our working capital needs; (2) interest expense, or the cash requirements necessary to service interest or if applicable principal payments on debt, which reduces cash available to us; or (3) tax payments that may represent a reduction in cash available to us; and the expenses and other items that we exclude in our calculation of Adjusted EBITDA may differ from the expenses and other items, if any, that other companies may exclude from Adjusted EBITDA when they report their operating results. We calculate Adjusted EBITDA as net loss before net financial expense, income tax expenses and depreciation and amortization, further adjusted to exclude share-based compensation, the change in fair value of earnout liability to the shareholders of Acroname and expenses (income) recorded in connection with a certain batch production incident. The following table provides a reconciliation of net loss to Adjusted EBITDA. Year Ended December 31, (dollars in thousands) 2025 2024 2023 Net loss (31,583 ) (36,583 ) (19,661 ) Adjusted to exclude the following: Financial income, net (2,620 ) (4,795 ) (5,637 ) Change in fair value of Forfeiture Shares (1 ) (37 ) (1,713 ) Change in earnout liability (169 ) 377 - Income Taxes 158 96 112 Equity in earnings of investee (9 ) (23 ) (18 ) Certain batch production incident expenses (income) (2,211 ) 2,238 - Depreciation and amortization 2,980 2,546 1,632 Stock-based compensation expenses 16,540 15,118 15,026 Adjusted EBITDA loss (16,915 ) (21,063 ) (10,259 ) Components of Our Results of Operations Revenues The vast majority of our revenues are generated from selling products, mainly semiconductor products (chips). Revenues from product sales are recognized when our customers (which include our distributors) obtain control over our product, typically upon shipment to such customers. Taxes collected from customers relating to product sales and remitted to governmental authorities are excluded from revenues. Cost of Revenues Our cost of revenue includes the cost of materials, such as the cost of wafers, costs associated with packaging and assembly, testing costs as well as shipping cost, depreciation cost of production equipment, amortization cost of intangible assets of technology, cost of personnel (including stock-based compensation), cost of logistics and quality assurance and other expenses associated with manufacturing support. In addition, we incur royalty payment expenses for certain third-party IP embedded in our chips, which represent between 0.25% and 3.5% of revenue earned per chip, plus up to $0.10 per chip depending on the chip. 50 Gross Profit and Margin Gross profit, calculated as revenues less cost of revenues, has been, and will continue to be, together with the gross margin, affected by the following factors: balance and product mix between our Cross Industry segment products and Automotive products; the mix of products with different pricing models; and the balance of direct customers versus indirect sales through distributors. The gross margin of our cross-industry products is higher than the gross margin of our automotive products. Hence, as our product mix shifts towards a higher percentage of automotive revenue, we expect to experience some erosion in our gross margin. Adjusted EBITDA Margin We calculate Adjusted EBITDA Margin as Adjusted EBITDA divided by revenues. Operating Expenses Research and development expenses Research and development expenses consist primarily of personnel costs, including salaries, bonuses, share-based compensation and employee benefits costs, allocated facilities costs, professional services, IP and development tools licenses, and depreciation. In 2024 and 2025, our research and development expenses derived, in part, from activities to enhance existing products with additional feature sets, as well as the investment in the development of our next-generation chipset family, targeting the ProAV market, which is designed to extend multiple high-speed interfaces like video, audio and USB3 in a single chip, which will support the growing need for high bandwidth connectivity over standard cabling and will enable our customers to build innovative products to connect between cameras and other video and audio sources with display or compute products. In addition, we continued our joint development with Acroname to develop a USBExt3c, a 3-port switchable hub with dedicated point-to-point USB3 and USB2 extension, combined with advanced PoE and USB-C power delivery. This product leverages both Valens’ HDBaseT and Acroname’s BrainStem technologies, allowing AV installers and OEM product manufacturers to control, manage and extend USB devices, streamlining product deployment for industries such as machine vision, corporate, and education. Sales and marketing expenses Sales and marketing expenses consist of sales commissions, advertising costs, travel costs, overhead expenses, payroll, and other personnel related costs, including salaries, share-based compensation, and employee benefits. In the future, we expect to increase sales and marketing expenses to support the overall growth of our business. General and administrative expenses General and administrative expenses consist of payroll and other personnel-related costs, including salaries, share-based compensation, employee benefits and expenses for executive management insurance and other expenses. In addition, general and administrative expenses include fees for professional services and occupancy costs. The 2025 general and administrative expenses were lower than our 2024 expenses. The decrease in general and administrative expenses was primarily driven by a $0.7 million reversal of provision and the $1.5 million recognition of an insurance recovery asset, both recorded in connection with a certain batch production incident, compared to $2.2 million of expenses related to the recognition of the provision in 2024. On the other hand, payroll expenses increased by approximately $2.5 million dollars due to several factors: the impact of the USD/ILS currency, the full consolidation of Acroname and, an increase in the stock-based compensation expenses. Change in earnout liability The Company recorded earnout liability in connection with earnout payments of up to $7.2 million to Acroname’s former shareholders. The earnout liability was recorded at fair value on the acquisition date, by performing a Monte-Carlo simulation. At each reporting period thereafter, the Company revalues the earnout liability and records the changes in their fair value in the consolidated statements of operations and comprehensive loss. As of December 31, 2025, part of the future earnout payment was reclassified into the other current liabilities. Additional information on this purchase and earnout payments is available in Note 10 of the financial statements located elsewhere in this Annual Report on Form 20-F. 51 Financial income, net Financial income, net, primarily consists of interest income from deposits and gains/losses from foreign exchange fluctuations. In 2025, due to a decrease in interest rates and in the cash, cash equivalents and short terms deposits balances, we have seen a decrease in our financial income, net. Change in fair value of Forfeiture Shares Reflects expenses or income related to costs attributed to the change in fair value of Forfeiture Shares. The Company classifies these Forfeiture Shares as liabilities which are presented at their fair value. This liability is subject to re-measurement at each balance sheet date until the contingency settlement, and any change in fair value is recognized in the Company’s statement of operations. In 2025, these shares were forfeited, and the liability was eliminated. Income taxes The statutory corporate tax rate in Israel is 23% for fiscal years 2025 and 2024. For the years ended December 31, 2025, and 2024, Valens operated at a loss position and therefore had no corporate tax liability other than current tax payments due to non-deductible expenses. As of December 31, 2025, Valens had a net operating loss carry forward of approximately $124 million, compared to $107 million as of December 31, 2024. As of 2024, the Company files its tax returns in U.S. dollars. Equity in earnings of investee In March 2010, the Company incorporated, together with LG Electronics, Samsung Electronics and Sony Pictures Technologies Inc., the HDBaseT Licensing LLC (the “LLC”) in Oregon, USA. The Company holds a 25% stake in the LLC. The LLC’s purposes are (i) to hold, obtain, license and/or acquire rights to certain IP associated with or connected to or related to technical specifications developed by the HDBaseT Alliance, an Oregon nonprofit mutual benefit corporation (hereafter the “Alliance”), to enter into licensing arrangements for such intellectual property as required by the IP rights policy of the Alliance. Investment in which the Company exercises significant influence, and which is not considered a subsidiary is accounted for using the equity method, whereby the Company recognizes its proportionate share of the investee’s net income or loss after the date of investment. Segment reporting The chief operating decision maker (“CODM”) is the Company’s Chief Executive Officer, who makes resource allocation decisions and assesses performance based on financial information prepared on a consolidated basis, accompanied by disaggregated information about revenues, gross profit and operating profit (loss) by the two identified reportable segments. The Company’s business includes two operating segments, based on the two markets the Company serves: ● Cross Industry Business (previously named “Audio Video” segment): The Company’s long range wired connectivity solutions deliver superior, plug-and-play convergence and distribution of different interfaces, through a single long-distance category cable. The products sold to enterprise, education, industrial, digital signage and medical markets. ● Automotive: Valens Automotive products enable safe and resilient high-speed in-vehicle wired connectivity for advanced car architectures, realizing the vision of connected and autonomous cars. For the purpose of evaluating financial performance and allocating resources, the CODM reviews financial information presented on a consolidated basis accompanied by disaggregated information on revenues, gross profit and operating loss by the two identified reportable segments, to make decisions about resources to be allocated to the segments and assess their performance. Revenues and cost of revenues are directly associated with the activities of a specific segment. Operating expenses directly, including general and administrative expenses, associated with the activities of a specific segment are charged to that segment. General and administrative expenses that cannot be attributed directly are allocated evenly between segments. Other operating expenses are allocated to segments based on a headcount ratio. 52 Results of Operations The following table provides our consolidated statements of operations for the years ended December 31, 2025, and 2024. For further discussion regarding our consolidated statements of operations for the years ended December 31, 2024, including a year-to-year comparison between 2024 and 2023, and a discussion of our liquidity and capital resources for the year ended December 31, 2024, refer to “Item 5. Operating and Financial Review and Prospectus” in our Annual Report on Form 20-F for the year ended December 31, 2024. Year Ended December 31, $ % 2025 2024 Change Change (dollars in thousands) Revenues Cross Industry Business 51,655 36,291 15,364 42.3 Automotive 18,970 21,568 (2,598 ) (12.0 ) Consolidated 70,625 57,859 12,766 22.1 Cost of revenues Cross Industry Business (16,493 ) (10,536 ) (5,957 ) 56.5 Automotive (10,047 ) (13,046 ) 2,999 (23.0 ) Consolidated (26,540 ) (23,582 ) (2,958 ) 12.5 Gross profit Cross Industry Business 35,162 25,755 9,407 36.5 Automotive 8,923 8,522 401 4.7 Consolidated 44,085 34,277 9,808 28.6 Operating expenses Research and development expenses: Cross Industry Business (28,634 ) (23,795 ) (4,839 ) 20.3 Automotive (14,021 ) (16,680 ) 2,659 (15.9 ) Consolidated (42,655 ) (40,475 ) (2,180 ) 5.4 Sales and marketing expenses Cross Industry Business (12,025 ) (8,936 ) (3,089 ) 34.6 Automotive (9,365 ) (9,366 ) 1 0.0 Consolidated (21,390 ) (18,302 ) (3,088 ) 16.9 General and administrative expenses: Cross Industry Business (8,911 ) (7,922 ) (989 ) 12.5 Automotive (5,353 ) (8,543 ) 3,190 (37.3 ) Consolidated (14,264 ) (16,465 ) 2,201 13.4 Change in earnout liability: Cross Industry Business 169 (377 ) 546 (144.8 ) Automotive - - - Consolidated 169 (377 ) 546 (144.8 ) Total operating expenses (78,140 ) (75,619 ) (2,521 ) 3.3 Operating loss before financial income, net Cross Industry Business (14,239 ) (15,275 ) 1,036 (6.8 ) Automotive (19,816 ) (26,067 ) 6,251 (24.0 ) Consolidated (34,055 ) (41,342 ) 7,287 (17.6 ) Change in fair value of Forfeiture Shares 1 37 (36 ) (97.3 ) Financial income, net 2,620 4,795 (2,175 ) (45.4 ) Loss before income taxes (31,434 ) (36,510 ) 5,076 (13.9 ) Income taxes (158 ) (96 ) (62 ) 64.6 Loss after income taxes (31,592 ) (36,606 ) 5,014 (13.7 ) Equity in earnings of investee 9 23 (14 ) (60.9 ) Net loss (31,583 ) (36,583 ) 5,000 (13.7 ) Revenues Revenues increased by $12.8 million, or 22.1%, for the year ended December 31, 2025, compared to the year ended December 31, 2024. This increase is mainly driven by the recovery in the Cross Industry Business. Cross Industry Business revenues increased by $15.4 million, or 42.3%, for the year ended December 31, 2025, compared to the year ended December 31, 2024. This increase derived from the recovery trend in the Audio Video market, that resulted in higher demand for our products, following the down-cycle in 2024 that was caused by a slow pace of inventory digestion. Automotive revenues decreased by $2.6 million, or 12%, for the year ended December 31, 2025, compared to the year ended December 31, 2024. This decrease derived from both a continuation of decline in the number of product units sold by us for installation in Mercedes-Benz cars, as well as the erosion in the average selling price (ASP). 53 Cost of revenues Cost of revenues increased by $3.0 million, or 12.5%, for the year ended December 31, 2025, compared to the year ended December 31, 2024. The increase mainly represents the increase in the revenues, resulting from the recovery in the Cross Industry Business. Cross Industry Business cost of revenues increased by $6.0 million, or 56.5%, for the year ended December 31, 2025, compared to the year ended December 31, 2024. The increase was primarily driven by the increase in units sold to our Cross Industry Business customers. At the same time, the Automotive cost of revenues decreased by $3.0 million, or 23.0%, for the year ended December 31, 2025, compared to the year ended December 31, 2024, due to product cost optimization. Gross profit and gross margin Gross profit was $ 44.1 million, or 62.4% of revenues, for the year ended December 31, 2025, compared to $34.3 million, or 59.2% of revenues, for the year ended December 31, 2024. The increase in gross profit mainly resulted from the increase in the portion of the Cross Industry Business revenue, compared to the portion of revenues from the Automotive segment, which incurs lower gross margins. In 2025, the Automotive segment contributed 27% of the total revenues, compared to 37.3% of the total 2024 revenues, and 20.2% and 24.9% of the 2025 and 2024 gross margin, respectively. Gross profit for Cross Industry Business was $35.2 million, or 68.1% of Cross Industry Business revenues, for the year ended December 31, 2025, compared to $25.8 million, or 71.0% of Cross Industry Business revenues, for the year ended December 31, 2024. The increase in Gross profit for Cross Industry Business derives from an increased product demand, while the decrease in gross margines is mainly attributed to a product mix shift. Gross profit for Automotive was $8.9 million, or 47.0% of automotive revenues, for the year ended December 31, 2025, up from a gross profit of $8.5 million, or 39.5% of automotive revenues, for the year ended December 31, 2024. The increase in gross profit in the Automotive segment was due to product cost optimization. Operating expenses Research and development expenses Research and development expenses increased by $2.2 million, or 5.4%, for the year ended December 31, 2025, compared to the year ended December 31, 2024. Cross Industry Business research and development expenses increased by $4.8 million, or 20.3%, and Automotive research and development expenses decreased by $2.7 million, or 15.9%, for the year ended December 31, 2025, compared to the year ended December 31, 2024. The increase in Cross Industry Business research and development expenses is mainly driven by an increase in payroll expenses, due to the USD/ILS currency impact, as well as the acquisition of Acroname in May 2024, that fully manifested in 2025. The decrease in the Automotive research and development expenses was mainly due to the production maturity of our VA7000 chipset family that required less qualification effort, as well as the decreased need in external labs and service providers in connection with electromagnetic interference R&D activities due to the development of in-house infrastructure. Sales and marketing expenses Sales and marketing expenses increased by $3.1 million, or 16.9%, for the year ended December 31, 2025, compared to the year ended December 31, 2024. Sales and marketing expenses for Cross Industry Business increased by $3.1 million, or 34.6%, for the year ended December 31, 2025, compared to the year ended December 31, 2024. Sales and marketing expenses for automotive for the year ended December 31, 2025, remained unchanged compared to the year ended December 31, 2024. The increase in sales and marketing expenses in 2025, was primarily due to an increase in payroll expenses, due to the impact of the USD/ILS currency and the full consolidation of Acroname 54 General and administrative expenses General and administrative expenses decreased by $2.2 million for the year ended December 31, 2025, compared to the year ended December 31, 2024, reflecting a decrease of 13.4%. General and administrative expenses for Cross Industry Business increased by $1.0 million, or 12.5% and General and administrative expenses for automotive decreased by $3.2 million, or 37.3%, respectively for the year ended December 31, 2025, compared to the year ended December 31, 2024. The decrease in general and administrative expenses was mainly driven by a $0.7 million reversal of provision and the $1.5 million recognition of an insurance recovery asset, both recorded in connection with a certain batch production incident, compared to $2.2 million of expenses in 2024. On the other hand, payroll expenses increased by approximately $2.5 million due to several factors: the impact of the USD/ILS currency, the full consolidation of Acroname and an increase in the stock-based compensation expenses. Financial income, net Finance income, net for the year ended December 31, 2025, was $2.6 million compared to finance income of $4.8 million for the year ended December 31, 2024, reflecting a decrease of $2.2 million, or 45.4%, for the year ended December 31, 2025, compared to the year ended December 31, 2024. This decrease is due to a decrease in the interest income from short-term deposits, due to both a reduction in the interest rates (an average interest rate of 4.3% in 2025 compared to average interest rate of 5.0% in 2024), as well as the decrease in the short-term deposits’ balance, due to expenses made in connection with two share repurchase programs in the overall amount of approximately $24 million. For more details on the share repurchase programs see “Part II, Item 16, E. Purchases of Equity Securities by the Issuer and Affiliated purchasers” of this Annual Report Loss before income taxes Loss before income taxes decreased by $5.1 million, or 13.9%, for the year ended December 31, 2025, compared to the year ended December 31, 2024. The decrease in loss was primarily driven by the following factors: ● the increase of $9.8 million in gross profit; ● the increase of $2.5 million in operating expenses; and ● the decrease of $2.2 million in financial income. Income taxes Income taxes increased by $0.06 thousand, or 64.6%, for the year ended December 31, 2025, compared to the year ended December 31, 2024. B. Liquidity and Capital Resources As of December 31, 2025, we reported an accumulated shareholders’ equity in the amount of $105.0 million, compared to $142.7 million on December 31, 2024. The decrease in shareholders’ equity during 2025 is mainly driven by the net loss in the amount of $31.6 million and the repurchase of shares in the amount of $23.4 million, offset by an increase of the additional paid-in capital, due to stock-based compensation expenses of $16.5 million. Our primary cash needs are for working capital, contractual obligations, and other commitments. During the year 2025 the net cash outflow used for our operating activities totaled at $12.7 million. In 2024, the net cash inflow from our operating activities totaled $1.0 million. Our working capital balance as of December 31, 2025, and December 31, 2024, were $95.7 million and $133.6 million respectively, of which our cash, cash equivalents and short-term deposits balance as of December 31, 2025, and December 31, 2024, were $92.6 million and $131.0 million, respectively. The cash balances are deposited mainly in major Israeli and US financially sound institutions. Valens is focused on organic growth across industries, however, we may seek opportunities for inorganic growth, by pursuing target companies that, together with Valens, will be characterized by synergistic value creation. We believe the cash, cash equivalents and short-term deposits as of December 31, 2025, which totaled $92.6 million are sufficient to support the working capital needs of the Company for at least the 12-month period from the date of this Annual Report. Our future capital requirements and the adequacy of available funds will depend on many factors, including those set forth under “Part I, Item 3, D. Risk Factors” of this Annual Report. 55 Cash Flows The following table summarizes our cash flow for the periods indicated: Year Ended December 31, (dollars in thousands) 2025 2024 Cash Flow Data: Net cash provided by (used in) operating activities (12,718 ) 1,019 Net cash provided by investing activities 28,028 17,781 Net cash used in financing activities (23,087 ) (155 ) Effect of exchange rate changed on cash and cash equivalents 217 (483 ) Net increase (decrease) in cash and cash equivalents (7,560 ) 18,162 Operating Activities During the year ended December 31, 2025, the net cash used in operating activities was $12.7 million, primarily resulting from a net loss of $31.6 million, offset by adjustments to reconcile net loss to net cash used in operating activities, in the amount of $18.9 million (which includes mainly an increase in the trade accounts receivable due to higher revenues, an increase in the accrued compensation and non-cash expenses of depreciation and amortization and stock-based compensation). During the year ended December 31, 2024, the net cash provided by operating activities was $1.0 million, primarily resulting from a net loss of $36.6 million, offset by adjustments to reconcile net loss to net cash used in operating activities, in the amount of $37.6 million (which includes mainly a decrease in trade accounts receivable and in inventories and non-cash expenses of depreciation and amortization and stock-based compensation). The inventory balance, as of December 31, 2024, totaled to $10.2 million, compared to $13.8 million, as of December 31, 2023. Investing Activities During the year ended December 31, 2025, net cash provided by investing activities was $28.0 million, consisting of $30.4 million, net, generated from short term deposits, $1.1 million used for purchases of property and equipment and $1.3 million invested in derivative instruments of non-designated hedges. During the year ended December 31, 2024, net cash provided by investing activities was $17.8 million, consisting of $28.6 million, net, generated from short term deposits, $7.8 million used for the acquisition of Acroname, $1.9 million used for purchases of property and equipment and $1.1 million invested in a restricted short-term deposit. Financing Activities During the year ended December 31, 2025, net cash used in financing activities was $23.1 million, due to an amount of $24.0 million used for the purchase of Ordinary Shares, offset by proceeds received from stock options exercised by grantees in the amount of $0.9 million. During the year ended December 31, 2024, net cash used in financing activities was $0.2 million, due to proceeds received from stock options exercised by grantees in the amount of $0.8 million, offset by an amount of $1.0 million used for the purchase of Ordinary Shares. Contractual Obligations The following table discloses aggregate information about material contractual obligations and the periods in which they are due, as of December 31, 2025. Future events could cause actual payments to differ from these estimates (figures in the table are dollars in thousands). 2026 2027 2028 Thereafter Operating Leases $ 1,544 $ 1,564 $ 1,479 $ 454 Non-cancellable purchase obligations: To supply chain vendors $ 5,333 $ - $ - $ - To intellectual property vendors (including development tools) $ 2,984 $ 2,031 $ - $ - Total contractual obligations $ 9,861 $ 3,595 $ 1,479 $ 454 The commitment amounts in the table above are associated with contracts and/or outstanding purchase orders to certain vendors of the Company that are enforceable and legally binding and that specify all significant terms, including fixed or minimum services to be used, fixed, minimum, or variable price provisions, and the approximate timing of the actions under such contracts. The table does not include obligations under purchase orders that we can cancel without a significant penalty or royalty payments based on sales volumes. The table above does not include future rental payments of future extension periods of $3,201 thousand for the years ended on December 31, 2029 and thereafter. 56 Off-Balance Sheet Arrangements During the periods presented, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K, such as the use of unconsolidated subsidiaries, structured finance, special purpose entities or variable interest entities. C. Research and Development, Patents and Licenses, Etc. See “Item 4. Information on the Company – B. Business overview” and “Item 5. Operating and financial review and prospects –A. Operating results – results of operations.” D. Trend Information See “Item 5. Operating and financial review and prospects – A. Operating results.” E. Critical Accounting Policies and Estimates Our discussion and analysis of the financial condition results of operations are based upon our consolidated financial statements included elsewhere in this Annual Report. The preparation of our consolidated financial statements in accordance with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. We base our estimates on past experience and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis. Actual results may differ from those estimates. Our critical accounting policies are those that materially affect our consolidated financial statements and involve difficult, subjective or complex judgments by management. A thorough understanding of these critical accounting policies is essential when reviewing our consolidated financial statements. We believe that the critical accounting policies listed below involve the most difficult management decisions because they require the use of significant estimates and assumptions as described above. In prior year periods, there were no material differences between management’s estimates and actual results, reflecting management’s long-term experience in leading semiconductor operations and in accurately estimating the Company’s performance. See Note 2 to our audited consolidated financial statements included elsewhere in this Annual Report for more information. Revenue Recognition We apply ASC 606, “Revenue from Contracts with Customers” (“ASC 606”). Under ASC 606, we recognize revenue when a customer obtains control of promised goods or services, in an amount that reflects the consideration that we expect to receive in exchange for those goods or services. To determine revenue recognition for arrangements that we determine are within the scope of ASC 606, we perform the following five steps: (i) Identify the contract(s) with a customer; (ii) Identify the performance obligations in the contract; (iii) Determine the transaction price; (iv) Allocate the transaction price to the performance obligations in the contract; (v) Recognize revenue when (or as) the performance obligation is satisfied. We use the following practical expedients that are permitted under the rules: ● We recognize the incremental costs of obtaining contracts as an expense when incurred if the amortization period of the assets that we otherwise would have recognized is one year or less. These costs are included in sales and marketing expenses. ● When a contract with a customer includes a material right to acquire future goods or services that are similar to the original goods or services in the contract and are provided in accordance with the terms of the original contract, we allocate the transaction price to the optional goods or services by reference to the goods or services expected to be provided and the corresponding expected consideration. ● We apply the practical expedient of allowing us to disregard the effects of a financing component if the period between when we transfer the promised services to the customer and when the customer pays for the services will be one year or less. 57 We generate revenues from selling products, mainly semiconductor products (or “chips”) and USB hubs. Revenues are recognized when the customer (which includes distributors) obtains control over our product, typically upon shipment to the customer. Taxes collected from our customers relating to product sales and remitted to governmental authorities are excluded from revenues. We generally provides its customers a limited warranty assurance that the sold products are in compliance with the applicable specifications at the time of delivery. Under the Company’s standard terms and conditions of sale, liability for certain failures of product during a stated warranty period is usually limited to repair or replacement of defective items. To the extent the Company sells extended warranty, the recognition of such revenue is deferred until such warranty is in effect. Stock-Based Compensation We account for stock-based compensation in accordance with ASC 718-10. Under ASC 718-10, stock-based awards, including stock options and restricted stock units (“RSU”), are recorded at fair value as of the grant date and recognized to expense over the employee’s, directors, and consultants’ requisite service period (generally the vesting period) which we have elected to amortize on a straight-line basis. ASC 718-10 also requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. We use historical data as well as trends in the employment market to estimate pre-vesting option forfeitures. We use the Black-Scholes option-pricing model to determine the fair value of stock options using the following assumptions: Year Ended December 31, 2025 2024 Volatility 59.6%-66.0 % 57.5%-58.6% Risk-free interest 3.62%-4.36 % 3.55%-3.92% Dividend yield 0% 0% Expected Term (in years) 4-5 4-5 Portion of Forfeited Options (based on management estimations) 1.0% 3.5% Fair Value of Valens Ordinary Shares. Valens’ Ordinary Shares and warrants are publicly traded. We calculate the fair market value of granted stock options based on a Black-Scholes valuation method, at an exercise price per share equal to the average stock market price of the 30-trading day period preceding the date of the grant. Risk-Free Interest Rate. The risk-free interest rate for the expected term of the options is based on the Black-Scholes option-pricing model on the yields of U.S. Treasury securities with maturities appropriate for the expected term of employee share option awards. Expected Term. The expected term is calculated using the simplified method, as we have concluded that our historical share option exercise experience does not provide a reasonable basis to estimate the expected option term. Expected Volatility. We estimate the volatility of our Ordinary Shares by using the volatility rates of our peer companies. Expected Dividend Yield. We do not anticipate paying any cash dividends in the foreseeable future and therefore use an expected dividend yield of zero in our option-pricing models. Restricted Share Units (“RSU”) We recognize compensation expense for time-based RSUs using the straight-line amortization method based on the fair value of RSUs on the date of grant. The fair value of RSUs is the closing market price of Valens’ Ordinary Shares on the date of grant. 58 Inventories Inventories are comprised of finished goods as well as work in process that is planned to be sold to our customers and is presented at the lower of cost or net realizable value, based on the “first-in, first-out” basis. Most inventories are stored at the last production sites and are distributed from these locations. Inventories are reduced for write-downs based on periodic reviews for evidence of slow-moving or obsolete parts. Once written down, inventories write-downs are not reversed until the inventories are sold or scrapped unless incurred in the same fiscal period. The determination of the valuation of our inventories involve consideration by the management of the Company with respect to: (1) quantities of finished goods and work in process required for the fulfillment of customers’ demand. (2) the date of manufacturing of the inventories (“date code”) and the Company’s ability to sell such inventories prior to their expiry date, as well as their applicable net realizable value. In 2025 the inventory write-down totaled $0.1 million (representing 0.4% of the cost of revenues), and in 2024 inventory write-down totaled to $0.9 million (representing 3.7% of the cost of revenues). (3) potential schedule delays by customers may affect inventories valuation. Derivatives and hedging Derivatives are recognized at fair value as either assets or liabilities in the consolidated balance sheets in accordance with ASC Topic 815, “Derivatives and Hedging.” The gain or loss of derivatives which are designated and qualify as hedging instruments in a cash flow hedge, is recorded under accumulated other comprehensive income (loss) and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Derivatives are classified within Level 2 of the fair value hierarchy as the valuation inputs are based on quoted prices and market observable data of similar instruments. The Company entered into foreign currency cash flow hedges using forward contracts to hedge certain forecasted payroll payments denominated in NIS, to hedge against exchange rate fluctuations of the U.S. dollar. The cash flows associated with these derivatives are classified in the consolidated statements of cash flows within cash flows from investing activities. The Company hedges its foreign currency monetary assets primarily resulting from foreign currency denominated short-term deposits with foreign exchange forward contracts to reduce the risk that the Company’s earnings and cash flows will be adversely affected by changes in foreign currency exchange rates. These contracts have maturities of up to approximately 12 months. Generally, The Company does not designate these foreign currency forward contracts as hedges for accounting purposes and changes in the fair value of these instruments are recognized immediately in earnings. Any gains or losses on the underlying foreign-denominated balance are offset by the losses or gains on the forward contract. Derivative instruments are recorded as other current assets or other current liabilities. Goodwill Goodwill reflects the excess of the consideration transferred at the business combination date over the fair values of the identifiable net assets acquired. Goodwill is an asset representing the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized. The Company allocated the goodwill to a reporting unit that is expected to benefit from the business combination. The primary items that generate goodwill include the value of the synergies between the acquired company and the Company and the acquired assembled workforce, neither of which qualifies for recognition as an intangible asset. ASC 350 allows an entity to first assess qualitative factors to determine whether a quantitative goodwill impairment test is necessary. Further testing is only required if the entity determines, based on the qualitative assessment, that it is more likely than not that a reporting unit’s fair value is less than its carrying amount. Otherwise, no further impairment testing is required. Examples of events or circumstances that may be indicative of impairment include but are not limited to: macroeconomic and industry conditions, overall financial performance and adverse changes in legal, regulatory, market share and other relevant entity specific events. An entity has the option to bypass the qualitative assessment for its reporting unit in any period and proceed directly to the quantitative goodwill impairment test. This would not preclude the entity from performing the qualitative assessment in any subsequent period. The quantitative assessment compares the fair value of the reporting unit to its carrying value, including goodwill. 59 The Company determines the fair value of its reporting unit using a discounted cash flow model, which utilizes key assumptions such as projected revenues, cost of revenues and operating expenses (Level 3 measurement). These assumptions are determined by the Company’s management utilizing its internal operating plan, growth rates for revenues and operating expenses and margin assumptions. An additional key assumption under this approach is the discount rate, based on the weighted average cost of capital, which is adjusted for current risk-free rates of capital, current market interest rates, and the evaluation of a risk premium relevant to the reporting unit. If the Company’s assumptions relative to revenue growth rates, cost of revenues and operating expenses were to change, the Company’s fair value calculation may change, which could result in impairment. If the Company’s assumptions relative to the discount rate and the evaluation of risk premium growth rates were to change, the Company’s fair value calculation may change, which could result in impairment. The Company uses the income approach to determine the fair value of the reporting units because it considers the anticipated future financial performance of the reporting unit. Accordingly, changes in the assumptions described above could impact the Company’s consolidated results of operations and comprehensive loss. The Company’s goodwill is tested for impairment in the fourth quarter of each year and whenever events or changes in circumstances indicate the carrying value of a reporting unit may not be recoverable. When necessary, the Company records charges for impairments of goodwill for the amount by which the carrying amount of the respective reporting unit exceeds its fair value. However, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The reporting unit to which the goodwill, identified in Acroname’s acquisition, was assigned, is part of the CIB segment. The goodwill is deductible for tax purposes for a period of 15 years. As of December 31, 2025, the Company completed a quantitative goodwill impairment test. The fair value of the reporting unit exceeded its carrying amount and no impairment loss was recorded. Although the headroom between the fair value of the reporting unit and the carrying amount was not substantially in excess, the Company assumes that a change in one of the assumptions will not have a material impact on its consolidated results of operations and comprehensive loss, as the goodwill amount is not significant. No goodwill impairment was recorded for the year ended December 31, 2025. Other Intangible Assets Definite life intangible assets are amortized using the straight-line method over their estimated period of useful life. Amortization of core technology is recorded under cost of revenues. Amortization of customer relationships is recorded under sales and marketing expenses. Recent Accounting Pronouncements See the section titled “Summary of Significant Accounting Policies” in note 2 of the notes to our consolidated financial statements as of December 31, 2025. Quantitative and Qualitative Disclosures about Market Risk Market risk represents the risk of loss that may impact on our financial position because of adverse changes in financial market prices and rates. Our market risk exposure is primarily a result of exposure resulting from potential changes in inflation, exchange rates or interest rates. We do not hold financial instruments for trading purposes. Foreign Currency Exchange Risk The U.S. dollar is our functional currency. All our revenues were denominated in U.S. dollars for the years ended December 31, 2025, and 2024, however certain operating expenses were denominated in the New Israeli Shekel (NIS), mainly payroll to the team that works in the Company headquarters in Israel. Future increases or decreases of the NIS, which is the main non-U.S. dollar currency that is primarily used to pay the Israeli payroll, as well as some of the overhead expenses in Israel (e.g., office leases and municipal taxes), against the U.S. dollar may have significant impact on the Consolidated Statements of Operations and Comprehensive Loss. Interest Rate Risk Interest rate risk is the risk that the value or yield of fixed-income investments may decline if interest rates change. Fluctuations in interest rates may impact the level of interest expense recorded on future borrowings, as well as interest income from short-term deposits. We do not enter into derivative financial instruments, including interest rate swaps, for hedging or speculative purposes. 60 Credit Risk Credit risk with respect to accounts receivable is generally not significant, as we routinely assess the credit worthiness of our partners and customers. We have not experienced any losses related to receivables from customers during the years ended December 31, 2025 and 2024. We do ask our customers to provide us with any collateral against their account receivable. Due to these factors, no additional credit risk is believed by management to be probable in our accounts receivable as of December 31, 2025. As of December 31, 2025, we maintained, in banks, primarily in the United States and Israel, cash balances and other short term, highly liquid investments with original maturities of less than one year at the time of purchase. In the United States, our funds are maintained with a commercial bank, which is insured by the U.S. Federal Deposit Insurance Corporation, or FDIC (currently up to a maximum of $250,000). In Israel, commercial banks do not have government-sponsored deposit insurance. At various times, we have deposits in excess of the maximum amounts insured by the FDIC. Historically we have not experienced losses related to these balances and believe our credit risk in this area is minimal. Emerging Growth Company Status We are an emerging growth company, as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. We have elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date that it is no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, our financial statements may not be comparable to companies that comply with the new or revised accounting pronouncements as of public company effective dates.